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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1998 Commission File Number 0-17249
AURA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4106894
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2335 ALASKA AVE.
EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 643-5300
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 13, 1998
----- ----------------------------
Common Stock, par value 81,060,253 Shares
$.005 per share
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AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 1
Condensed Consolidated Balance Sheets as of
May 31, 1998 and February 28, 1998 2
Condensed Consolidated Statement of Operations for
the three Months Ended May 31, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended May 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 6. Exhibits and reports on Form 8-K 11
SIGNATURES 12
</TABLE>
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
QUARTER ENDED MAY 31, 1998
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared by Aura Systems,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC
under Rule 10-01 of Regulation S-X, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended February 28, 1998 as filed with the SEC (file number 0-17249).
1
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AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 6,457,457 $ 6,079,411
Receivables-net 54,589,996 54,418,141
Inventories and contract in process 63,369,507 58,713,875
Prepayments and deposits 8,954,177 13,326,789
Other current assets 4,815,564 5,925,642
Prepaid and deferred income taxes 1,728,220 838,000
------------ ------------
TOTAL CURRENT ASSETS 139,914,921 139,301,858
Property and equipment, at cost 71,322,825 66,667,671
Less accumulated depreciation
and amortization (13,453,389) (11,888,586)
------------ ------------
NET PROPERTY AND EQUIPMENT 57,869,436 54,779,085
Joint ventures 6,574,169 6,903,918
Long-Term investments 12,526,007 7,476,299
Long-Term receivables 3,438,094 3,627,098
Patents and trademarks, net 6,319,832 6,410,771
Goodwill, net 6,109,526 6,146,642
Other assets 2,780,130 2,656,958
------------ ------------
Total $235,532,115 $227,302,629
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 38,850,113 $ 31,147,572
Accounts payable 38,969,948 43,995,364
Accrued expenses 3,264,650 3,990,027
------------ ------------
TOTAL CURRENT LIABILITIES 81,084,711 79,132,963
Notes payable and other liabilities 3,204,274 3,282,003
------------ ------------
Convertible notes secured 2,112,900 2,112,900
------------ ------------
Convertible notes-unsecured 23,500,000 15,500,000
------------ ------------
Minority interests in subsidiaries 10,873,892 10,372,895
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock par value $.005 per share paid in
capital. Issued and outstanding 80,051,244
and 80,001,244 shares respectively. 198,879,645 199,100,614
Accumulated deficit (84,123,307) (82,198,746)
------------ ------------
Total stockholders' equity 114,756,338 116,901,868
------------ ------------
Total $235,532,115 $227,302,629
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MAY 31,
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES $32,452,538 $27,415,997
Cost of goods and overhead 24,418,019 20,065,830
----------- -----------
GROSS PROFIT 8,034,519 7,350,167
----------- -----------
EXPENSES
General and administrative 7,097,481 5,422,254
Research and development 296,346 878,914
----------- -----------
Total costs and expenses 7,393,827 6,301,168
----------- -----------
INCOME FROM OPERATIONS 640,692 1,048,999
----------- -----------
OTHER (INCOME) AND EXPENSE
Equity in losses of unconsolidated joint
ventures 325,000 --
Other income (1,569,823) --
Interest income (58,394) (19,884)
Interest expense 2,739,473 885,933
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS (795,564) 182,950
Provision for taxes 628,000 --
Minority interests in income of consolidated
subsidiaries 500,997 --
----------- -----------
NET INCOME (LOSS) $(1,924,561) $ 182,950
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE-BASIC $ (.02) $ .002
=========== ===========
WEIGHTED AVERAGE SHARES USED
TO COMPUTE NET INCOME PER SHARE 80,026,516 77,089,293
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET CASH (USED) IN OPERATIONS $(4,656,612) $(7,514,069)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in stock (5,000,000) --
Purchase of property and equipment (4,655,154) (4,928,099)
----------- -----------
NET CASH PROVIDED BY (USED) IN INVESTING
ACTIVITIES (9,655,154) (4,928,099)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from borrowings 6,767,541 (3,456,324)
Proceeds from issuance of convertible
notes payable 8,000,000 15,000,000
Repayment of debt (77,729) (2,834,262)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES: 14,689,812 8,709,414
----------- -----------
NET INCREASE (DECREASE) IN CASH 378,046 (3,732,754)
Cash and cash equivalents at beginning of year 6,079,411 7,112,354
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,457,457 $ 3,379,600
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 1,611,137 $ 760,123
Income Tax 635,200 6,400
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
1) MANAGEMENT OPINION
The condensed consolidated financial statements include the accounts of
Aura Systems, Inc. ("the Company" or "Aura") and subsidiaries from the dates of
acquisition. All material inter-company balances and inter-company transactions
have been eliminated.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) and reclassifications for comparability necessary to
present fairly the financial position and results of operations as of and for
the three months ended May 31, 1998.
2) CAPITAL
In the quarter ended May 31, 1997, $3,652,800 of convertible notes were
converted into common stock of the Company.
3) SIGNIFICANT CUSTOMERS
The Company sold sound related products and computer related products to
five significant customers during the fiscal quarter ended May 31, 1998. Sales
of speakers to a major electronics retailer accounted for approximately $2.7
million in the fiscal quarter ended May 31, 1998 as compared to approximately
$4.5 million in the prior year comparable quarter. Sales of communication and
multimedia products to four major mass merchandisers accounted for approximately
$17.7 million in the fiscal quarter ended May 31, 1998 as compared to
approximately $7.0 million in the prior year fiscal quarter ended May 31, 1997.
None of the above customers are related or affiliated with the Company or
any other customers of the Company. Although there can be no assurances, the
Company has no reason to believe that sales to any of the current year customers
will not continue.
4) CONTINGENCIES
The Company is engaged in various legal actions listed below. In the case
of a judgment or settlement, appropriate provisions have been made in the
financial statements.
SHAREHOLDER LITIGATION
BAROVICH/CHIAU V. AURA
In May, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former officer as defendants, were filed in the United
States District Court for the Central District of California, Barovich v. Aura
Systems, Inc. et al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et
al. (Case No. CV 95-3296), before the Honorable Manuel Real. The complaints
purported to be securities class actions on behalf of all persons who purchased
common stock of Aura during the period from May 28, 1993 through January 17,
1995, inclusive. The Complaints alleged that as a result of false and misleading
information disseminated by the defendants, the market price of Aura's common
stock was artificially inflated during the class period. The complaints were
consolidated as Barovich v. Aura Systems, Inc., et. al.
5
<PAGE>
On February 16, 1996, the Company filed a 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. The Plaintiffs filed an appeal in the
United States Court of Appeals for the Ninth Circuit and on January 9, 1998, the
Ninth Circuit issued a memorandum decision reversing the judgment and remanding
the case back to the District Court. On remand, the District Court set a new
summary judgment hearing date for April 13, 1998. The Company filed a renewed
motion for summary judgement on March 20, 1998, and soon thereafter the parties
entered into a letter agreement of settlement, in which Aura agreed to pay $1
million to settle the case. This amount was recorded as an expense in Fiscal
1998. Aura's insurance carrier agreed to pay an additional $2 million towards
the settlement. The insurance carrier reserved its right to seek recovery from
Aura for the $2 million paid for Aura's account. The insurance carrier's claim
will be determined in a separate proceeding filed by the carrier in the same
court (Evanston Insurance Co. v. Aura Systems Inc. et. al. (Case No. CV-98-
0908)) alleging that Barovich claims are not covered by the insurance policy.
Aura has filed an answer with the court denying these allegations.
The settlement documents for Barovich have now been finalized by the
parties and a hearing for preliminary approval of the settlement is scheduled
for July 20, 1998. In addition, in July 1998 the company reached an agreement-
in-principle with the insurance carrier to settle its dispute with the Company
on terms which will not have a material impact on the Company. Although the
Company anticipates concluding these proceeding in the near future, until final
court approval there can be no assurances that they will be so concluded.
MORGANSTEIN V. AURA.
On April 28, 1997, a lawsuit naming Aura, certain of its directors and
officers, and the Company's independent accounting firm was filed in the United
States District Court for the Central District of California Morganstein v. Aura
Systems, Inc., et al. (Case No. CV 97-3103), before the Honorable Steven Wilson.
A follow-on complaint, Ratner v. Aura Systems, Inc., et al. (Case No. CV 97-
3944), was also filed and later consolidated with the Morganstein complaint. The
consolidated amended complaint purports to be a securities class action on
behalf of all persons who purchased common stock of Aura during the period from
January 18, 1995 to April 25, 1997, inclusive. The complaint alleges that as a
result of false and misleading information disseminated by the defendants, the
market price of Aura's common stock was artificially inflated during the Class
Period. The complaint contains allegations which assert that the company
violated federal securities laws by selling Aura Common stock at discounts to
the prevailing U.S. market price under Regulation S without informing Aura's
shareholders or the public at large.
On August 25, 1997, the Company filed a motion to dismiss the complaint for
failure to state a claim. The District Court denied the motion on November 24,
1997, set a summary judgment hearing date for May 4, 1998 and set a trial date
for November 3, 1998. The Company filed an answer on December 16, 1997, denying
the allegations of the amended consolidated complaint. On April 13, 1998, the
Company filed a motion for summary judgment. Plaintiff responded by requesting
an extension of time to respond, which the Court granted, setting July 13, 1998
as the date for plaintiffs to file a judgment hearing for August 10, 1998. On
April 28, 1998, the District Court certified the case as a class action, with
the class including all persons who purchased common stock of Aura from January
18, 1995 to April 25, 1997, inclusive. Although there can be no assurances of
an agreement the parties are currently negotiating the terms of settlement of
this case.
In June 1998 the court entered an order staying further discovery in order
to facilitate successful completion of settlement discussions between the
parties, which are currently underway. However, there are no assurances that a
settlement will be reached in this manner.
6
<PAGE>
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. In the opinion of
management, based upon the advice of counsel, the ultimate resolution of these
matters will not have a material adverse effect.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended May 31, 1998, the Company lost $1,924,561 on net
revenue of $32,452,538 as compared to earnings of $182,950 on net revenue of
$27,415,997 in the comparable prior year period. The increase in revenue is
attributable primarily to an increase in sales from the Company's majority owned
subsidiary, NewCom, Inc. ("NewCom") as a result of its expanding customer base
which includes the major electronics retailers such as Circuit City, Best Buy,
Computer City and others. Sales of communication and multimedia products by
NewCom to four major mass merchandisers accounted for approximately $17.7
million or 54.5% in the fiscal quarter ended May 31, 1998 as compared to $7.0
million or 25.5% in the prior year quarter
Sales of speakers by the company's wholly owned subsidiary, AuraSound, Inc.
to a major electronics retailer accounted for approximately $2.7 million or 8.3%
of net revenues in the fiscal quarter ended May 31, 1998 as compared to
approximately $4.5 million or 16.4% of net revenues in the prior year comparable
quarter.
None of the above customers are related or affiliated with the Company or
any other customers of the Company. Although there can be no assurances, the
Company has no reason to believe that sales to any of the current year customers
will not continue.
Cost of goods and overhead increased by $4.3 million to $24.4 million or
75.4% of net revenues for the three months ended May 31, 1998 as compared to
$20.1 million or 73.2% of net revenues for the three months ended May 31, 1997.
This increase is attributed primarily to the increased sales level from NewCom,
and the associated cost of goods.
The increase in general and administrative expenses of $1.7 million to $7.1
million or 19.8% of revenues in the fiscal quarter ended May 31, 1998 as
compared to $5.4 million or 19.7% of revenues in the comparable fiscal quarter
in the prior year, resulted primarily from an increase in personnel and an
increased level of advertising support for the distributors and retail customers
of the Company's NewCom subsidiary. Of the total increase of $1.7 million $1.5
million is attributed to NewCom.
Research and development expense decreased by $582,568 to $296,346 in the
three months ended May 31, 1998, as the Company focused its resources on
marketing and manufacturing of its products under development, such as the
AuraGen.
In the fiscal quarter ended May 31, 1998, the Company recorded a gain on
the sale of stock in its majority owned subsidiary NewCom of approximately $1.4
million. No such sales occurred in the prior year fiscal quarter ended May 31,
1997.
Interest expense increased by $1,853,540 to $2,739,473 in the fiscal
quarter ended May 31, 1998 from $885,933 in the prior year fiscal quarter ended
May 31, 1997 due to higher levels of borrowing and the quarterly fee being
charged to interest expense on the note that was renegotiated in September 1997
from a convertible note to straight debt.
LIQUIDITY AND CAPITAL RESOURCES
In the fiscal quarter ended May 31, 1998, the level of cash increased to
$6,457,457 from $6,079,411 at February 28, 1998. Inventories increased by
$4,655,632 as the Company ordered inventory to prepare for initial shipments of
the Company's AuraGen, and increased shipments of speakers, Bass Shakers,
multimedia kits, modems and sound cards from the Company's AuraSound subsidiary
and NewCom.
Cash flows used in operations decreased by $2,857,457 as compared to the
fiscal quarter ended May 31, 1997. The Company's working capital decreased by
$1,338,685 in the fiscal
8
<PAGE>
quarter ended May 31, 1998 to $58,830,210 from the fiscal year ended February
28, 1998, while the current ratio declined slightly to 1.73:1 at May 31, 1998
from 1.76:1 at February 28, 1998.
In the fiscal quarter ended May 31, 1998, the Company received proceeds of
$8,000,000 from the issuance of convertible notes payable. During the fiscal
quarter ended May 31, 1997, the Company received proceeds of $15,000,000 from
the issuance of convertible notes payable. The Company also redeemed $2,400,000
of previously issued convertible notes in the fiscal quarter ended May 31, 1997.
Subsequent to the fiscal quarter ended May 31, 1998 the Company received
proceeds of $2,522,522 from the exercise of warrants.
In the past, the Company's cash flow generated from operations has not been
sufficient to completely fund its working capital needs. Accordingly, the
Company has also relied upon external sources of financing to maintain its
liquidity, principally private and bank indebtedness and equity financing. No
assurances can be provided that these funding sources will be available in the
future. The Company expects that, with the start of shipments of the Company's
AuraGen and increasing shipments of Bass Shakers, speakers, multimedia kits,
modems and sound cards, cash flows and results of operations should be favorably
impacted in the future.
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 actual consolidated results for the first
quarter of Fiscal 1999, and beyond, to differ materially from those expressed in
any forward-looking statements made by, or on behalf of 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 prices 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
another 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.
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
increased bad debt or 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.
9
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PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
For information regarding pending legal proceedings, see Note 4 to the
Company's Condensed Consolidated Financial Statements appearing elsewhere
herein.
ITEM 2 Changes In Securities
On March 30, 1998, the Company sold $8 million of Convertible Debentures
to a single institutional investor for cash. The Debentures bear
interest at the rate of 7% per annum, with the entire principal amount
due and payable on March 30, 2003, subject to prior redemption or
conversion. The Debentures are convertible, at the option of the holder,
into Common Stock at a fixed conversion price of $3.13 per share. As
part of the financing, the investor received warrants to purchase up to
2,415,094 shares exercisable at $3.64 per share.
On July 13, 1998, the Company entered into an agreement with the investor
to reduce the exercise price of Warrants for 2,415,094 shares from $3.64
to $1.91 which is the closing bid price of the Common Stock on July 12,
1998 (the "July 1998 market price") and the investor agreed to fully
exercise the Warrants on such date, resulting in proceeds to the company
of $4,603,773. The Company agreed that if 101% of the average bid price
for the five trading days ending October 30, 1998 is less than the July
1998 market price, the Company would further reduce the exercise price
retroactively to 101% of the October 1998 market price by issuing to the
investor additional shares to reflect the difference between the July
1998 market price and 101% of the October 1998 market price. The Company
further agreed that if 101% of the average bid price for the five trading
days ending April 30, 1999 is less than the July 1998 exercise price or
the adjusted October 1998 exercise price, the Company would further
reduce the exercise price retroactively to 101% of the April 1998 market
price by issuing to the investor additional shares to reflect the
difference between the July 1998 or October 1998 exercise price and the
adjusted exercise price in April 1999.
In addition, on July 13, 1998 the company issued to the investor a new
five year Warrant (the "July 1998 Warrant") exercisable for 2,415,094
shares of Common Stock at an initial exercise price equal to 110% of the
July 1998 market price, or $2.10 per share. The exercise price of the
July 1998 Warrant is subject to reduction on or after October 30, 1998
and April 30, 1999 to 101% of the October 1998 market price and 101% of
the April 1999 market price, respectively, if at either time such price
would be lower than the initial exercise price of $2.10. The Company
further agreed that if the exercise price of the July 1998 Warrant, as
adjusted from time to time, was less than the exercise price for any
other warrants held by this investor, then the exercise price of the
other warrants would be reduced to equal the exercise price of the July
1998 Warrant. These other warrants include warrants exercisable for:
3,619,910 shares at $2.85 per share; 757,757 share at $3.50 per share;
and 1,009,009 shares at $2.52 per share.
All of the foregoing sales were made by the Company in a private
placement in reliance upon Section 4(2) of the Securities Act of 1933.
10
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ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits:
See Exhibit Index
b) Reports On Form 8-K:
On April 9, 1998, the Company filed a report on Form 8-K relating to
completion of a private placement of convertible notes and warrants.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AURA SYSTEMS, INC.
----------------------------------------
(Registrant)
Date: JULY 15, 1998 By: /s/Steven C. Veen
---------------------- -----------------------------------------
STEVEN C. VEEN
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
<C> <S>
10.19 Form of Employment Agreement effective March 5, 1998,
between the company and the individuals identified in
Schedule 1 thereto.
10.20 Aura Systems, Inc. Severance Pay Plan
10.21 Form of Tier I Severance Agreement effective March 5,
1998, entered into by the Company with Zvi (Harry)
Kurtzman, Arthur J. Schwartz, Cipora Kurtzman Lavut, and
Neal B. Kaufman.
10.22 Form of Tier II Severance Agreement effective
March 5, 1998, entered into by the Company with
Gerald S. Papazian, Steven C. Veen and Michael I. Froch
27 Article 5, Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective this 5th day of
March, 1998 (the "Effective Date"), is entered into by and between
_________________ ("Executive") and Aura Systems, Inc., a Delaware corporation
(the "Company").
WHEREAS, Executive is a founder of the Company and has been employed
by the Company for several years in the capacity of________________; and
WHEREAS, the Company desires to establish its right to the continued
services of Executive, in the capacity described below, on the terms and
conditions hereinafter set forth, and Executive is willing to continue such
employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT. The Company does hereby employ Executive and
----------
Executive does hereby accept employment as _____________________ of the Company.
Executive shall do and perform all services and acts necessary or advisable to
fulfill the duties and responsibilities of his position and shall render such
services on the terms set forth herein and shall report to the Company's Board
of Directors. In addition, Executive shall have such other executive and
managerial powers and duties with respect to the Company and its subsidiaries as
may reasonably be assigned to him by the Company's Board of Directors, to the
extent consistent with his positions and status as set forth above. Executive
agrees to devote to the Company and its subsidiaries such time as shall be
necessary for the effective conduct of his duties hereunder.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
-----------------
commence on the Effective Date and shall continue for a period of three (3)
years; provided, however, that on the first anniversary of the Effective Date
-------- -------
(and on each succeeding anniversary of the Effective Date during the Term), the
Term shall automatically be extended by an additional year (unless Executive or
the Company shall give the other at least ninety (90) days' prior written notice
to the contrary).
1
<PAGE>
3. LOCATION. In connection with Executive's employment by the
--------
Company, Executive shall be based at the headquarters of the Company in El
Segundo, California, except for required travel on the Company's business to an
extent substantially consistent with present business travel obligations.
4. COMPENSATION.
------------
(a) BASE SALARY. The Company shall pay Executive an initial annual
-----------
base salary at the rate of $____________ per year (the "Base Salary"), payable
in equal biweekly installments or at such other time or times as Executive and
the Company shall agree. The Base Salary shall be effective December 19, 1997,
and is subject to increase as recommended by the Compensation Committee and
approved by a majority of the disinterested directors of the Board of Directors.
The Base Salary shall be adjusted on or prior to each anniversary of the
Effective Date pursuant to the normal historical business practices of the
Company; provided, however, that the Base Salary shall be no less than the
-------- -------
average salary paid to chief executive officers in comparable companies in the
Los Angeles metropolitan area as determined by the Company's compensation
consultants.
(b) DISCRETIONARY BONUS. As recommended by the Compensation
-------------------
Committee and approved by a majority of the disinterested directors of the Board
of Directors, Executive shall be entitled to receive an annual performance bonus
(the "Discretionary Bonus") from the Company based on such factors as the
Compensation Committee may recommend to the disinterested directors of the Board
of Directors.
(c) TARGET BONUS. Executive shall have the opportunity to earn a
------------
target bonus (the "Target Bonus") up to 50% of Executive's Base Salary based on
the attainment of certain criteria recommended by the Compensation Committee and
approved by a majority of disinterested directors of the Board of directors.
Such criteria may include sales of the Company, earnings per share, stock price,
return on equity, net earnings growth, net earnings, related return ratios, cash
flow, earnings before interest, taxes, depreciation and amortization (EBITDA),
return on assets or total stockholder return, reductions in the company's
overhead ratio, and expense to sales ratios.
2
<PAGE>
(d) LIFE INSURANCE. The Company shall maintain a life insurance
--------------
policy with a face value equal to two times the Executive's Base Salary on
Executive's life (the "Life Insurance Policy"), provided that the annual
premiums for such policy shall not exceed $10,000. The beneficiary of such
policy shall be designated by Executive.
(e) STOCK OPTIONS. Subject to the recommendation of the
-------------
Compensation Committee and approval by a majority of the disinterested members
of the Board of Directors, effective as of the date of this Agreement, the
Company shall make a one-time grant (the "Initial Grant") of stock options (the
"Options") to Executive to purchase up to _____________ shares of Common Stock,
and commencing on the anniversary date of this Agreement and continuing for each
year thereafter during the Term, Executive shall be eligible to receive a grant
of Options (the "Subsequent Grant") to purchase up to ___________ shares of
Common Stock. Such Subsequent Grants shall be made subject to the recommendation
of the Compensation Committee and approval by a majority of the disinterested
directors of the Board of Directors.
The per share exercise price of the Initial Grant Options shall be
equal to $3.31, which amount is equal to 5% over the fair market value of the
Initial Grant Options on the date such Initial Grant Options were granted. The
per share exercise price of the Subsequent Grant Options shall equal the fair
market value of the Subsequent Grant Options on the date such Subsequent Grant
Options are granted. The Options shall vest and become exercisable at the rate
of 20% per year on each of the first five anniversaries of the date of grant and
the Options shall have a term of ten (10) years from the date of grant.
Agreements evidencing such options shall provide that the Options may
be exercised by giving written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment in full of the
aggregate option price by delivery of (i) cash or cash equivalents, (ii) an
executed irrevocable exercise notice to the Company to withhold from the number
of shares to be purchased as set forth in the notice of exercise that number of
shares of Common Stock having a fair market value equal to the aggregate option
price of the number of shares to be purchased. The agreements shall also
provide that, subject to the unanimous approval by the disinterested directors
of the Board of Directors, the Company may make loans available to Executive in
connection with the exercise of outstanding Options. The principal amount of
the loan will be due and payable (i) in a lump sum at the end of the 2-year
period following the exercise date or (ii) upon the earlier sale of the Option
stock on a
3
<PAGE>
pro-rata basis, and will be with recourse against Executive with respect to
principal and interest. The loan will bear interest at the applicable federal
rate.
(f) FRINGE BENEFITS. Executive shall be entitled to participate in
---------------
any fringe, welfare and pension benefit and incentive programs adopted from time
to time by the Company for the benefit of its executive employees, and Executive
shall continue to be entitled to such other fringe and other benefits provided
by the Company to Executive as of the Effective Date.
Without limiting the generality of the foregoing, Executive shall be
entitled to the following benefits:
(1) Participation in Retirement/Welfare Plans. Executive shall
-----------------------------------------
be eligible to participate in all savings, retirement, and welfare plans,
practices, policies and programs applicable generally to senior executive
officers of the Company and its subsidiaries.
(2) Reimbursement for Business Expenses. The Company shall
-----------------------------------
reimburse Executive for all reasonable and necessary expenses incurred by
Executive in performing his duties for the Company and its subsidiaries.
(3) Vacation. Executive shall be entitled to the number of paid
--------
vacation days in accordance with the Company's policy applicable to
executive officers generally. The timing of paid vacations shall be
scheduled in a reasonable manner by Executive.
(4) Automobile. The Company shall provide Executive during the
----------
Term with the use of an automobile in accordance with the Company's
practice as of the Effective Date of this Agreement.
5. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
-------------------------------------
(a) DEATH. In the event Executive's employment hereunder is
-----
terminated by reason of Executive's death, (i) if Executive is survived by his
then spouse, the Company shall within ten (10) days thereof pay to Executive's
estate a lump sum in an amount equal to Executive's then Base Salary, (ii) the
Company shall pay all benefits payable to Executive under the terms of the
Company's compensation and benefit plans, programs or arrangements, and (iii)
all outstanding equity incentive awards (including without limitation stock
options granted under the Stock Plan) shall immediately vest and any then
outstanding stock options or similar awards held by
4
<PAGE>
Executive to the extent exercisable shall remain exercisable through the end of
the stated term thereof.
(b) DISABILITY. If, as a result of Executive's incapacity due to
----------
physical or mental illness ("Disability"), Executive shall have been absent from
the full-time performance of his duties with the Company for a period of six (6)
consecutive months and, within thirty (30) days after written notice is provided
to him by the Company, he shall not have returned to the full-time performance
of his duties, Executive's employment under this Agreement may be terminated by
the Company or Executive for Disability. During any period prior to such
termination during which Executive is absent from the full-time performance of
his duties with the Company due to Disability, the Company shall continue to pay
Executive his Base Salary at the rate in effect at the commencement of such
period of Disability. Upon termination of Executive's employment for
Disability, (i) the Company shall within ten (10) days thereof pay Executive a
lump sum equal to his then Base Salary, the Company shall pay all benefits
payable to Executive under the terms of the Company's compensation and benefit
plans, programs or arrangements, and (iii) all outstanding equity incentive
awards (including without limitation stock options granted under the Stock Plan)
shall immediately vest and any then outstanding stock options or similar awards
held by Executive to the extent exercisable shall remain exercisable through the
end of the stated term thereof.
(c) TERMINATION FOR CAUSE. The Company may terminate Executive's
---------------------
employment under this Agreement for Cause at any time prior to expiration of the
Term. As used herein, termination for "Cause" shall mean termination upon (1)
the willful failure by Executive to materially perform his duties with the
Company or to follow the instructions of the Board (other than any such failure
resulting from his incapacity due to physical or mental illness), (2) the
willful engaging by Executive in conduct that is materially injurious to the
Company, monetarily or otherwise, (3) the conviction of Executive of (or the
pleading by Executive of nolo contendre to) any felony, fraud or embezzlement or
---- ---------
(4) any willful material breach by Executive of the terms of this Agreement,
unless any such breach of this Agreement by Executive that is capable of being
corrected is corrected in all material respects within thirty (30) days
following written notification by the Company to Executive that the Company
intends to terminate the employment of Executive hereunder by reason of a
willful material breach of this Agreement for Cause as specified in such written
notice to Executive.
5
<PAGE>
Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Board of Directors of the Company
(the "Board") at a meeting of the Board (after reasonable notice to Executive
and opportunity for Executive, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, Executive was
guilty of the conduct described herein, and specifying the particulars thereof
in full detail. In the event of termination for Cause, this Agreement shall
terminate without further obligation by the Company, except for (i) payment of
amounts of Base Salary and any fringe benefits accrued through the date of such
termination, and (ii) as otherwise may be provided under the terms of any
outstanding equity incentive award.
(d) TERMINATION BY THE COMPANY OTHER THAN FOR DEATH, DISABILITY OR
--------------------------------------------------------------
CAUSE. If Executive's employment is terminated by the Company for any reason
- -----
other than Executive's death or Disability or for Cause, (i) the Company shall
pay Executive as severance (x) his Base Salary at the rate then in effect
through the then remaining Term (or for a period of six months, if greater)
(either such period, the "Severance Period") as if Executive had remained
employed under this Agreement during the Severance Period, and (y) an annual
Discretionary Bonus in an amount equal to Executive's highest annual
Discretionary Bonus in the three (3) year period immediately preceding such
termination (including annual Discretionary Bonuses received by Executive prior
to the Effective Date) payable at the end of each remaining fiscal year ending
during the Severance Period, with a pro rata Discretionary Bonus payment at the
end of the Term with respect to the period, if any, between the end of the last
fiscal year ending during the Severance Period and the end of the Term, (ii) the
Company shall continue to make payments with respect to premiums on the Life
Insurance Policy through the end of the Severance Period, and (iii) all
outstanding equity incentive awards (including without limitation stock options
granted under the Stock Plan) shall immediately vest and any then outstanding
stock options or similar awards held by Executive to the extent exercisable
shall remain exercisable through the end of the stated term thereof.
(e) NO MITIGATION REQUIRED. Executive shall not be required in any
----------------------
way to mitigate the amount of any payment or benefit provided for under this
Section 5, including, but not limited to, by seeking other employment, nor shall
the amount of any payment or benefit provided for under this Section 5 be
reduced by any compensation earned by Executive as the result of employment with
or services provided to another employer after the date of Executive's
termination of employment
6
<PAGE>
hereunder, or otherwise; provided, however, that in the event Executive shall
-------- -------
breach the provisions of Section 6 hereof, the Company shall have the right, in
addition to any other remedies it may have with respect to such breach, to
offset any amounts payable hereunder or otherwise owing to Executive by the
amount of any compensation earned by Executive as the result of employment with
or other services provided to another employer after the date of Executive's
termination of employment, or otherwise.
6. CONFIDENTIAL INFORMATION AND
-----------------------------
NON-COMPETITION.
---------------
(a) CONFIDENTIALITY. Executive acknowledges that in his employment
---------------
hereunder, and during prior periods of employment with the Company and its
subsidiaries, he has occupied and will continue to occupy a position of trust
and confidence. Executive shall not, except as may be required to perform his
duties hereunder or as required by applicable law, without limitation in time or
until such information shall have become public other than by Executive's
unauthorized disclosure, disclose to others or use, whether directly or
indirectly, any Confidential Information regarding the Company and its
subsidiaries. "Confidential Information" shall mean information about the
Company and its subsidiaries, and their respective clients and customers that is
not disclosed by the Company and its subsidiaries for financial reporting
purposes and that was learned by Executive in the course of his employment by
the Company and its subsidiaries, including (without limitation) any proprietary
knowledge, trade secrets, data, formulae, information and client and customer
lists and all papers, resumes, and records (including computer records) of the
documents containing such Confidential Information. Executive acknowledges that
such Confidential Information is specialized, unique in nature and of great
value to the Company and its subsidiaries, and that such information gives the
Company and its subsidiaries a competitive advantage. Executive agrees to
deliver or return to the Company, at the Company's request at any time or upon
termination or expiration of his employment or as soon thereafter as possible,
all documents, computer tapes and disks, records, lists, data, drawings, prints,
notes and written information (and all copies thereof) furnished by the Company
and its subsidiaries or prepared by Executive during the term of his employment
by the Company and its subsidiaries.
(b) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the period
-------------------------------------------
in which he is employed by the Company (and, in the event Executive's employment
is terminated by the Company for Cause, for a period of one (1) year beyond the
expiration of the Term), Executive shall not, directly or indirectly, influence
or attempt to influence customers or suppliers of the Company or any of
7
<PAGE>
its subsidiaries or affiliates to divert their business to any business,
individual, partner, firm, corporation, or other entity that is then a direct
competitor of the Company or its subsidiaries with respect to electromagnetic
and electro-optical technology (each such competitor a "Competitor of the
Company").
(c) NON-SOLICITATION OF EMPLOYEES. Executive recognizes that he
-----------------------------
possesses and will possess confidential information about other employees of the
Company and its subsidiaries relating to their education, experience, skills,
abilities, compensation and benefits, and inter-personal relationships with
customers of the Company and its subsidiaries. Executive recognizes that the
information he possesses and will possess about these other employees is not
generally known, is of substantial value to the Company and its subsidiaries in
developing its business and in securing and retaining customers, and has been
and will be acquired by him because of his business position with the Company
and its subsidiaries. Executive agrees that, during the period in which he is
employed by the Company (and, in the event Executive's employment is terminated
by the Company for Cause, for a period of one (1) year beyond the expiration of
the Term), he will not, directly or indirectly, solicit or recruit any employee
of the Company or its subsidiaries for the purpose of being employed by him or
by any Competitor of the Company on whose behalf he is acting as an agent,
representative or employee and that he will not convey any such confidential
information or trade secrets about other employees of the Company and its
subsidiaries to any other person.
(d) SURVIVAL OF PROVISIONS. The obligations contained in this
----------------------
Section 6 shall, to the extent provided in this Section 6, survive the
termination or expiration of Executive's employment with the Company and, as
applicable, shall be fully enforceable thereafter in accordance with the terms
of this Agreement. If it is determined by a court of competent jurisdiction in
any state that any restriction in this Section 6 is excessive in duration or
scope or is unreasonable or unenforceable under the laws of that state, it is
the intention of the parties that such restriction may be modified or amended by
the court to render it enforceable to the maximum extent permitted by the law of
that state.
8
<PAGE>
7. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first-class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax to the respective persons named below:
If to Company: Aura Systems
2335 Alaska Avenue
El Segundo, California 90245
Attention: Corporate Secretary
---------
Phone: (310) 643-5300
Fax: (310) 643-8719
If to Executive: ______________________-
Phone:
Fax:
Either party may change such party's address for notices by notice duly given
pursuant hereto.
8. DISPUTE RESOLUTION; ATTORNEYS' FEES. The Company and Executive
-----------------------------------
agree that any dispute arising as to the parties' rights and obligations
hereunder, other than with respect to Section 6, shall be resolved by binding
arbitration in accordance with the rules of the American Arbitration Association
then in effect before a private judge to be determined by mutually agreeable
means. Each party shall have the right, in addition to any other relief granted
by such arbitrator (or by any court with respect to relief granted with respect
to Section 6), to attorneys' fees based on a determination by the arbitrator
(or, with respect to Section 6, the court) of the extent to which each party has
prevailed as to the material issues raised in determination of the dispute.
9. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
-------------------------------
supersedes any and all prior agreements and understandings between the parties
with respect to Executive's employment and compensation by the Company, but only
with respect to the matters expressly addressed herein.
10. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and neither of the parties hereto shall, without the consent of the other,
assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer, or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof, be
binding upon and inure to the benefit of such
9
<PAGE>
successor and such successor shall discharge and perform all the promises,
covenants, duties, and obligations of the Company hereunder.
11. GOVERNING LAW. This Agreement and the legal relations thus
-------------
created between the parties hereto shall be governed by and construed under and
in accordance with the laws of the State of California.
12. WITHHOLDING. The Company shall make such deductions and withhold
-----------
such amounts from each payment made to the Executive hereunder as may be
required from time to time by law, governmental regulation or order.
13. HEADINGS. Section headings in this Agreement are included herein
--------
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
14. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
with any of the terms, covenants, or conditions hereof shall not be deemed a
waiver of such term, covenant, or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
modified in any respect except by a writing executed by each party hereto.
15. SEVERABILITY; POOLING.
---------------------
(a) In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statute or
public policy, only the portions of this Agreement that violate such statute or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
(b) In the event that the Company is party to a transaction which
is otherwise intended to qualify for "pooling of interests" accounting treatment
then (A) this Agreement shall, to the extent practicable, be interpreted so as
to permit such accounting treatment, and (B) to the extent that the application
of clause (A) of this Section 15(b) does not preserve the availability of such
accounting treatment, then, to the extent that any provision of the Agreement
disqualifies the transaction as a "pooling"
10
<PAGE>
transaction (including, if applicable, the entire Agreement), such provision
shall be null and void as of the date hereof. All determinations under this
Section 15(b) shall be made by the accounting firm whose opinion with respect to
"pooling of interests" is required as a condition to the consummation of such
transaction.
16. INDEMNIFICATION. The Company and its subsidiaries shall
---------------
indemnify and hold Executive harmless for acts and omissions in his capacity as
an officer, director or employee of the Company and its subsidiaries to the
maximum extent permitted under applicable law.
17. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto signed
this Agreement, as of the date first above written.
AURA SYSTEMS, INC.
-------------------------------
By: Gerald S. Papazian
Its: President
-------------------------------
-------------------------------
11
<PAGE>
Schedule to Exhibit 10.19
The form of Employment Agreement filed as Exhibit 10.19 to this report
has been entered into between the Company and the individuals identified below.
The terms of these agreements are identical in all material respects except for
the terms identified below.
COMPENSATION AGREEMENTS
<TABLE>
<CAPTION>
NAME TIER SALARY INITIAL GRANT SUBSEQUENT GRANT
OPTIONS OPTIONS
<S> <C> <C> <C> <C>
Zvi (Harry) Kurtzman I $385,000 1,000,000 500,000
Gerald S. Papazian II $210,000 100,000 100,000
Arthur J. Schwartz I $205,000 500,000 250,000
Steven C. Veen II $200,000 100,000 100,000
Cipora Kurtzman Lavut I $195,000 500,000 250,000
Neal B. Kaufman I $195,000 500,000 250,000
Michael I. Froch II $150,000 100,000 100,000
</TABLE>
<PAGE>
EXHIBIT 10.20
AURA SYSTEMS, INC.
SEVERANCE PAY PLAN
ARTICLE 1.
PURPOSE OF THE PLAN
The Plan, as set forth herein, is intended to help retain qualified
employees, maintain a stable work environment and provide economic security to
certain employees of the Company in the event of a Severance of employment under
the enumerated circumstances. The Plan, as a "severance pay arrangement" within
the meaning of Section 3(2)(B)(i) of ERISA, is intended to be excepted from the
definitions of "employee pension benefit plan" and "pension plan" set forth
under Section 3(2) of ERISA, and is intended to meet the descriptive
requirements of a plan constituting a "severance pay plan" within the meaning of
regulations published by the Secretary of Labor at Title 29, Code of Federal
Regulations, (S) 2510.3-2(b).
ARTICLE 2.
ADMINISTRATION
The Plan shall be administered by the Administrator.
The Administrator shall have the exclusive authority and
responsibility for all matters in connection with the operation and
administration of the Plan. The Administrator's powers and duties shall
include, but not be limited to, the following: (i) discretionary authority to
-
interpret and construe the Plan; (ii) discretionary authority to determine
--
eligibility for benefits under the Plan; (iii) authorizing the payment of all
---
benefits under the Plan; (iv) authority to engage such legal, accounting and
--
other professional services as it may deem proper; and (v) responsibility for
-
the compilation and maintenance of all records necessary in connection with the
Plan. Decisions by the Administrator shall be final and binding upon the
Company and each Participant.
1
<PAGE>
ARTICLE 3.
ELIGIBILITY
Participation in the Plan is limited to those individuals who fall
within the definition of a "Participant" as defined in Section 13.16. No other
individual shall be eligible to participate in the Plan.
ARTICLE 4.
ENTITLEMENT TO BENEFITS
Subject to Section 5.5 hereof, if the Participant's employment is
terminated following a Change in Control and during the Term, other than (A) by
the Company for Cause, (B) by reason of death or Disability, or (C) by the
Participant without Good Reason, then the Company shall pay the Participant the
Severance Payments. For purposes of this Plan, the Participant's employment
shall be deemed to have been terminated following a Change in Control by the
Company without Cause or by the Participant with Good Reason, if (i) the
Participant's employment is terminated by the Company without Cause prior to a
Change in Control (whether or not a Change in Control ever occurs) and such
termination was at the request or direction of a Person who has entered into an
agreement with the Company the consummation of which would constitute a Change
in Control, (ii) the Participant terminates his employment for Good Reason prior
to a Change in Control (whether or not a Change in Control ever occurs) and the
circumstance or event which constitutes Good Reason occurs at the request or
direction of such Person, or (iii) the Participant's employment is terminated by
the Company without Cause or by the Participant for Good Reason and such
termination or the circumstance or event which constitutes Good Reason is
otherwise in connection with or in anticipation of a Change in Control (whether
or not a Change in Control ever occurs). For purposes of any determination
regarding the applicability of the immediately preceding sentence, any position
taken by the Participant shall be presumed to be correct unless the Company
establishes to the Board by clear and convincing evidence that such position is
not correct.
2
<PAGE>
ARTICLE 5.
CASH SEVERANCE BENEFITS
Subject to Section 5.5 hereof, each Terminated Participant shall be
entitled to receive the following Severance Payments:
5.1 Lump Sum Payment. In lieu of any further salary payments to the
----------------
Participant for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Participant, the Company shall pay to
the Participant a lump sum severance payment, in cash, equal to the sum of (i)
the Participant's base salary as in effect immediately prior to the Date of
Termination or, if higher, in effect immediately prior to the first occurrence
of an event or circumstance constituting Good Reason, and (ii) the highest
annual bonus earned by the Participant pursuant to any annual bonus or incentive
plan maintained by the Company in respect of any of the three fiscal years
ending immediately prior to the fiscal year in which occurs the Date of
Termination or, if higher, immediately prior to the fiscal year in which occurs
the first event or circumstance constituting Good Reason.
5.2 Continuation of Welfare Benefits. For the twelve (12) month
--------------------------------
period immediately following the Date of Termination, the Company shall arrange
to provide the Participant and his dependents life, disability, accident and
health insurance benefits substantially similar to those provided to the
Participant and his dependents immediately prior to the Date of Termination or,
if more favorable to the Participant, those provided to the Participant and his
dependents immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, at no greater cost to the Participant than the cost to
the Participant immediately prior to such date or occurrence; provided, however,
-------- -------
that, unless the Participant consents to a different method (after taking into
account the effect of such method on the calculation of "parachute payments"
pursuant to Section 5.5 hereof), such health insurance benefits shall be
provided through a third-party insurer. Benefits otherwise receivable by the
Participant pursuant to this Section 5.2 shall be reduced to the extent benefits
of the same type are received by or made available to the Participant during the
twelve (12) month period following the Participant's termination of employment
(and any such benefits received by or made available to the Participant shall be
reported to the Company by the Participant); provided, however, that the Company
-------- -------
shall reimburse the Participant for the excess, if any, of the cost of such
benefits to the Participant over such cost immediately prior to the Date of
Termination or, if more favorable to the Participant, the first occurrence of an
event or circumstance constituting Good Reason. If the Severance Payments
shall be decreased pursuant to Section 5.5 here-
3
<PAGE>
of, and the Section 5.2 benefits which remain payable after the application of
Section 5.5 hereof are thereafter reduced pursuant to the immediately preceding
sentence, the Company shall, no later than five (5) business days following such
reduction, pay to the Participant the least of (a) the amount of the decrease
made in the Severance Payments pursuant to Section 5.5 hereof, (b) the amount of
the subsequent reduction in these Section 5.2 benefits, or (c) the maximum
amount which can be paid to the Participant without being, or causing any other
payment to be, nondeductible by reason of section 280G of the Code.
5.3 Incentive Compensation. Notwithstanding any provision of any
----------------------
annual or long-term incentive plan to the contrary, the Company shall pay to the
Participant a lump sum amount, in cash, equal to the sum of (i) any unpaid
incentive compensation which has been allocated or awarded to the Participant
for a completed fiscal year or other measuring period preceding the Date of
Termination under any such plan and which, as of the Date of Termination, is
contingent only upon the continued employment of the Participant to a subsequent
date, and (ii) a pro rata portion to the Date of Termination of the aggregate
value of all contingent incentive compensation awards to the Participant for all
then uncompleted periods under any such plan, calculated as to each such award
by multiplying the award that the Participant would have earned on the last day
of the performance award period, assuming the achievement, at the target level,
of the individual and corporate performance goals established with respect to
such award, by the fraction obtained by dividing the number of full months and
any fractional portion of a month during such performance award period through
the Date of Termination by the total number of months contained in such
performance award period.
5.4 Accelerated Vesting of Stock Options. All stock options held by
------------------------------------
the Participant under any stock option or incentive plan maintained by the
Company shall immediately vest and become exercisable as of the Date of
Termination, to be exercised in accordance with the terms of the applicable
plan.
5.5 280G Cap. If the Administrator determines that any of the
--------
Severance Payments, when added to any other payment or benefit received or to be
received by any Employee in connection with a Change in Control or the
termination of such Employee's employment, will be subject to the excise tax
imposed by section 4999 of the Code (or any similar tax that may hereafter be
imposed), the Administrator shall reduce the Severance Payments (but not below
zero) to the maximum amount that will result in no portion of the Severance
Payments being subject to such tax.
4
<PAGE>
5.6 Timing of Payments. The payments provided in subsections (5.1)
------------------
and (5.3) of Section 5 hereof shall be made not later than the fifth day
following the Date of Termination; provided, however, that if the amounts of
-------- -------
such payments, and the limitation on such payments set forth in Section 5.5
hereof, cannot be finally determined on or before such day, the Company shall
pay to the Participant on such day an estimate, as determined in good faith by
the Company of the minimum amount of such payments to which the Participant is
clearly entitled and shall pay the remainder of such payments (together with
interest on the unpaid remainder (or on all such payments to the extent the
Company fails to make such payments when due) at 120% of the rate provided in
section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to the Participant, payable on the fifth (5th) business day
after demand by the Company (together with interest at 120% of the rate provided
in section 1274(b)(2)(B) of the Code). At the time that payments are made under
this Plan, the Company shall provide the Participant with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in writing shall be
attached to the statement).
5.7 Legal Fees. The Company also shall pay to the Participant all
----------
legal fees and expenses incurred by the Participant in disputing in good faith
any issue hereunder relating to the termination of the Participant's employment,
in seeking in good faith to obtain or enforce any benefit or right provided by
this Plan or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5)
business days after delivery of the Participant's written requests for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.
ARTICLE 6.
TERMINATION PROCEDURES
6.1 Notice of Termination. After a Change in Control and during the
---------------------
Term, any purported termination of the Participant's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof.
For purposes of this Plan,
5
<PAGE>
a "Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Plan relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Participant's employment under the provision so indicated. Further, a Notice
of Termination for Cause is required to include a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the
entire membership of the Board at a meeting of the Board which was called and
held for the purpose of considering such termination (after reasonable notice to
the Participant and an opportunity for the Participant, together with the
Participant's counsel, to be heard before the Board) finding that, in the good
faith opinion of the Board, the Participant was guilty of conduct set forth in
clause (i) or (ii) of the definition of Cause herein, and specifying the
particulars thereof in detail.
6.2 Date of Termination. "Date of Termination," with respect to any
-------------------
purported termination of the Participant's employment after a Change in Control
and during the Term, shall mean (i) if the Participant's employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that the Participant shall not have returned to the full-time
performance of the Participant's duties during such thirty (30) day period), and
(ii) if the Participant's employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a termination
by the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Participant,
shall not be less than fifteen (15) days nor more than sixty (60) days,
respectively, from the date such Notice of Termination is given).
6.3 Dispute Concerning Termination. If within fifteen (15) days
------------------------------
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 6.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
- -------- -------
dispute given by the Participant only if such notice is given in good faith and
the Participant pursues the resolution of such dispute with reasonable
diligence.
6.4 Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 6.3 hereof, the Company shall continue to
pay the
6
<PAGE>
Participant the full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, salary) and continue the
Participant as a participant in all compensation, benefit and insurance plans in
which the Participant was participating when the notice giving rise to the
dispute was given, until the Date of Termination, as determined in accordance
with Section 6.3 hereof. Amounts paid under this Section 6.4 are in addition to
all other amounts due under this Plan (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Plan.
ARTICLE 7.
AMENDMENT AND TERMINATION
The Plan may be amended by the Board at any time; provided, that the
--------
Plan may not be amended in a manner that adversely affects the interests of
Participants without the written consent of two-thirds of the Participants.
The Plan shall terminate upon expiration of the Term of the Plan;
provided, that the Plan shall continue to be administered in accordance with its
- --------
terms until all benefits accrued hereunder as of such expiration date have been
paid and satisfied.
ARTICLE 8.
TERM OF THE PLAN
The Plan shall commence on the Effective Date and shall continue until
such time as the Board, acting in its sole discretion, elects to modify,
supersede or terminate this Plan as provided in Article 7, provided, however,
-------- -------
that the Plan may not be terminated or otherwise amended in a manner that
adversely affects any Participant for a period of two years following a Change
in Control; and provided further that the expiration of the term of the Plan
shall not adversely affect the rights of any Participant under the Plan which
have accrued prior to the expiration of the term of the Plan.
7
<PAGE>
ARTICLE 9.
NO MITIGATION
The Participant is not required to seek other employment or to attempt
in any way to reduce any amounts payable to the Participant by the Company
pursuant to Section 5 hereof or Section 6.4 hereof. Further, the amount of any
payment or benefit provided for in this Plan (other than Section 5.2 hereof)
shall not be reduced by any compensation earned by the Participant as the result
of employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Participant to the Company, or otherwise.
ARTICLE 10.
NOTICES
For the purpose of this Plan, notices and all other communications
provided for in the Plan shall be in writing and shall be deemed to have been
duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed, if to the Participant, to the
address inserted below the Participant's signature on the final page hereof and,
if to the Company, to the address set forth below, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon actual
receipt:
To the Company:
____________
____________
____________
Attention:
ARTICLE 11.
CLAIMS PROCEDURE
11.1 Claim for Benefits; Written Notice of Denial. A Participant may
--------------------------------------------
file with the Administrator a written claim for benefits under the Plan. The
Administrator shall, within a reasonable time not to exceed ninety (90) days,
unless special circumstances require an extension of time of not more than an
additional ninety (90) days (in which event a Participant will be notified of
the delay during the first ninety (90) day period), provide adequate notice in
writing to any Participant whose claim for benefits
8
<PAGE>
shall have been denied, setting forth the following in a manner calculated to be
understood by the Participant:
(a) the specific reason or reasons for the denial;
(b) specific reference to the provision or provisions of the
Plan on which the denial is based;
(c) a description of any additional material or information
required to perfect the claim, and an explanation of why such material or
information is necessary; and
(d) information as to the steps to be taken in order that the
denial of the claim may be reviewed.
11.2 Failure to Furnish Written Notice of Denial. If written notice
-------------------------------------------
of the denial of a claim has not been furnished to a Participant, and such claim
has not been granted within the time prescribed in Section 11.1 hereof
(including any applicable extension), the claim for benefits shall be deemed
denied as of the end of the prescribed time period.
11.3 Appeal of Denied Claim. A Participant whose claim for benefits
----------------------
shall have been denied in whole or in part, may, within sixty (60) days from
either the date notice is provided of the denial of the claim or the date the
claim is deemed denied (unless the notice of denial grants a longer period
within which to respond), appeal such denial to the Administrator. During the
sixty (60) day appeal period, the Participant may, upon request, review
documents pertinent to his or her claim and may submit written issues and
comments to the Administrator. Failure to file such appeal within the
applicable time period shall be a bar to all further proceedings with respect to
the claim.
11.4 Notice of Determination of Claim upon Appeal. The Administrator
--------------------------------------------
shall notify a Participant of its decision within sixty (60) days after an
appeal is received by the Administrator, unless special circumstances require an
extension of time of not more than an additional sixty (60) days (in which event
a Participant will be notified of the delay during the first sixty (60) day
period). Such decision shall be given in writing in a manner calculated to be
understood by the Participant and shall include the following:
(a) specific reasons for the decision; and
9
<PAGE>
(b) specific reference to the provision or provisions of the
Plan on which the decision is based.
11.5 Arbitration. Any dispute or controversy arising under or in
-----------
connection with the Plan that cannot be settled through the procedures set forth
in Sections 11.1 through 11.4 hereof shall be first submitted to mediation
administered by the American Arbitration Association ("AAA"). In the event the
dispute or controversy cannot be resolved through mediation, it shall be settled
exclusively by arbitration in the location in which the Participant was employed
immediately prior to the Date of Termination by three arbitrators in accordance
with the rules of the AAA in effect at the time of submission to arbitration.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction.
ARTICLE 12.
GENERAL PROVISIONS
12.1 Waiver; Entire Plan. No waiver by the Company, any subsidiary
-------------------
or any Participant at any time of any breach by any other such person of, or of
any lack of compliance with, any condition or provision of the Plan to be
performed by such other person shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. All
other plans, policies and arrangements of the Company or any subsidiary in which
the Participant participates during the Term of the Plan shall be interpreted so
as to avoid the duplication of benefits provided hereunder, and each
Participant's participation in the Plan shall be in lieu of his or her rights
under any other plan of the Company or any subsidiary providing severance
benefits of any kind.
12.2 No Right to Employment. Nothing contained in this Plan or any
----------------------
documents relating to the Plan shall (i) confer upon any Participant any right
to continue in the employ of the Company or any subsidiary or affiliate thereof,
(ii) constitute any contract or agreement of employment, or (iii) interfere in
any way with the right of the Company or any subsidiary to reduce such
Participant's compensation, to change the position held by such Participant, or
terminate the employment of such Participant, with or without Cause.
12.3 No Assignment of Benefits. No right or interest of any
-------------------------
Participant under the Plan shall be assignable or transferable, in whole or in
part, either directly or by operation of law or otherwise, including without
limitation by execution, levy, garnishment, attachment, pledge or in any manner;
no attempted assignment or transfer thereof shall be effective; and no right or
interest of any Participant under the Plan shall be subject
10
<PAGE>
to any obligation or liability of such Participant to any third party. When a
payment is due under the Plan to a Participant who is unable to care for his or
her affairs, payment may be made directly to his or her legal guardian or
personal representative.
12.4 Governing Law. Except to the extent preempted by the Employee
-------------
Retirement Income Security Act of 1974, as amended ("ERISA"), the Plan shall be
governed by, and construed and enforced in accordance with, the laws of the
State of California without reference to the principles of conflicts of law.
12.5 Severability; Validity. In the event that a court of competent
----------------------
jurisdiction determines that any provision of the Plan is in violation of any
statute or public policy, only those provisions of the Plan that violate such
statute or public policy shall be stricken. All provisions of the Plan that do
not violate any statute or public policy shall continue in full force and
effect. Further, any court order striking any provision of the Plan shall
modify the stricken terms as narrowly as possible to give as much effect as
possible to the intentions of the Company in establishing the Plan.
12.6 Pooling. In the event that the Company is party to a
-------
transaction which is otherwise intended to qualify for "pooling of interests"
accounting treatment then (A) this Plan shall, to the extent practicable, be
interpreted so as to permit such accounting treatment, and (B) to the extent
that the application of clause (A) of this Section 12.6 does not preserve the
availability of such accounting treatment, then, to the extent that any
provision of the Plan disqualifies the transaction as a "pooling" transaction
(including, if applicable, the entire Plan), such provision shall be null and
void as of the date hereof. All determinations under this Section 12.6 shall be
made by the accounting firm whose opinion with respect to "pooling of interests"
is required as a condition to the consummation of such transaction.
12.7 Payroll and Withholding Taxes. The Company or a subsidiary, as
-----------------------------
applicable, shall withhold from any amounts payable to a Terminated Participant
hereunder all federal, state, local and other taxes required to be withheld in
connection with the benefits provided hereunder pursuant to any applicable law
or regulation.
12.8 Unfunded Status of the Plan. The Plan shall be unfunded for
---------------------------
purposes of ERISA and the Internal Revenue Code of 1986, as amended. Benefits
under the Plan shall be paid from the general assets of the Company or a
subsidiary, as applicable.
12.9 Construction of the Plan. The titles to Articles and Sections
------------------------
are for general information only and the Plan is not to be construed by
reference thereto. As used
11
<PAGE>
in the Plan, the masculine pronoun includes the feminine and, except as may
otherwise be apparent from the context, the singular form includes the plural.
ARTICLE 13.
DEFINITIONS
13.1 "Administrator" means the committee appointed by the Board to
administer the Plan and to determine benefit eligibility.
13.2 "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
13.3 "Beneficial Owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act.
13.4 "Board" shall mean the Board of Directors of the Company.
13.5 "Cause" means (i) the willful and continued failure by the
Participant to substantially perform the Participant's duties with the Company
(other than any such failure resulting from the Participant's incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Participant pursuant
to Section 9(a) hereof) after a written demand for substantial performance is
delivered to the Participant by the Board, which demand specifically identifies
the manner in which the Board believes that the Participant has not
substantially performed the Participant's duties, or (ii) the willful engaging
by the Participant in conduct which is demonstrably and materially injurious to
the Company or its subsidiaries, monetarily or otherwise. For purposes of
clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the
Participant's part shall be deemed "willful" unless done, or omitted to be done,
by the Participant not in good faith and without reasonable belief that the
Participant's act, or failure to act, was in the best interest of the Company
and (y) in the event of a dispute concerning the application of this provision,
no claim by the Company that Cause exists shall be given effect unless the
Company establishes to the Board by clear and convincing evidence that Cause
exists.
13.6 "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company
12
<PAGE>
or its affiliates) representing 25% or more of the combined voting power of
the Company's then outstanding securities, excluding any Person who becomes
such a Beneficial Owner in connection with a transaction described in
clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by
the Company's stockholders was approved or recommended by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with any other
corporation, other than (i) a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior to such
merger or consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity or any parent thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any subsidiary of the Company, at least 60% of the
combined voting power of the securities of the Company or such surviving
entity or any parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no Person
is or becomes the Beneficial Owner, directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition
by the Company of all or substantially all of the Company's assets to an
entity, at least 60% of the combined voting power of the voting securities
of which are owned by stockholders of the Company in substantially the same
proportions as their ownership of the Company
13
<PAGE>
immediately prior to such sale. Notwithstanding the foregoing, a "Change in
Control" shall not be deemed to have occurred by virtue of the consummation
of any transaction or series of integrated transactions immediately
following which the record holders of the common stock of the Company
immediately prior to such transaction or series of transactions continue to
have substantially the same proportionate ownership in an entity which owns
all or substantially all of the assets of the Company immediately following
such transaction or series of transactions. Notwithstanding the foregoing,
a Change in Control shall not include any event, circumstance or
transaction occurring during the six-month period following a Potential
Change in Control which Potential Change in Control results from the action
of any entity or group which includes, is affiliated with or is wholly or
partly controlled by the Participant (a "Management Group"); provided,
--------
however, that such action shall not be taken into account for this purpose
-------
if it occurs within a six-month period following a Potential Change in
Control resulting from the action of any Person which is not a member of a
Management Group.
Notwithstanding the foregoing, any event or transaction which would
otherwise constitute a Change in Control (a "Transaction") shall not constitute
a Change in Control for purposes of this Plan if, in connection with the
Transaction, the Participant participates as an equity investor in the acquiring
entity or any of its affiliates (the "Acquiror"). For purposes of the preceding
sentence, the Participant shall not be deemed to have participated as an equity
investor in the Acquiror by virtue of (i) obtaining beneficial ownership of any
equity interest in the Acquiror as a result of the grant to the Participant of
an incentive compensation award under one or more incentive plans of the
Acquiror (including, but not limited to, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, or (ii) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other stockholders of the Company.
13.7 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
13.8 "Company" shall mean Aura Systems, Inc. and, except in
determining under Section 13.8 hereof whether or not any Change in Control of
the Company has occurred, shall include any successor to its business and/or
assets which assumes and agrees to perform this Plan by operation of law, or
otherwise.
14
<PAGE>
13.9 "Date of Termination" shall have the meaning set forth in
Section 6 hereof.
13.10 "Disability" shall be deemed the reason for the termination by
the Company of the Participant's employment, if, as a result of the
Participant's incapacity due to physical or mental illness, the Participant
shall have been absent from the full-time performance of the Participant's
duties with the Company for a period of six (6) consecutive months, the Company
shall have given the Participant a Notice of Termination for Disability, and,
within thirty (30) days after such Notice of Termination is given, the
Participant shall not have returned to the full-time performance of the
Participant's duties.
13.11 "Effective Date" shall mean ____________, 1997.
13.12 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
13.13 "Good Reason" for termination by the Participant of the
Participant's employment shall mean the occurrence (without the Participant's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clauses (ii) and (iii) of the
second sentence of Section 4 hereof (treating all references in paragraphs (a)
through (g) below to a "Change in Control" as references to a "Potential Change
in Control"), of any one of the following acts by the Company, or failures by
the Company to act, unless, in the case of any act or failure to act described
in paragraphs (a), (e), (f) or (g) below, such act or failure to act is
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(a) the assignment to the Participant of any duties
inconsistent with the Participant's status as a senior executive officer of
the Company or a substantial adverse alteration in the nature or status of
the Participant's responsibilities from those in effect immediately prior
to the Change in Control;
(b) a reduction by the Company in the Participant's annual
base salary as in effect on the date hereof or as the same may be increased
from time to time except for across-the-board salary reductions similarly
affecting all senior executives of the Company and all senior executives of
any Person in control of the Company;
(c) the relocation of the Participant's principal place of
employment to a location more than 50 miles from the Participant's
principal place of
15
<PAGE>
employment immediately prior to the Change in Control or the Company's
requiring the Participant to be based anywhere other than such principal
place of employment (or permitted relocation thereof) except for required
travel on the Company's business to an extent substantially consistent with
the Participant's present business travel obligations;
(d) the failure by the Company to pay to the Participant any
portion of the Participant's current compensation except pursuant to an
across-the-board compensation deferral similarly affecting all senior
executives of the Company and all senior executives of any Person in
control of the Company, or to pay to the Participant any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such compensation
is due;
(e) the failure by the Company to continue in effect any
compensation plan in which the Participant participates immediately prior
to the Change in Control which is material to the Participant's total
compensation, including but not limited to the Company's stock option,
bonus and other plans] or any substitute plans adopted prior to the Change
in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or
the failure by the Company to continue the Participant's participation
therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount or timing of payment
of benefits provided and the level of the Participant's participation
relative to other participants, as existed immediately prior to the Change
in Control;
(f) the failure by the Company to continue to provide the
Participant with benefits substantially similar to those enjoyed by the
Participant under any of the Company's pension, savings, life insurance,
medical, health and accident, or disability plans in which the Participant
was participating immediately prior to the Change in Control (except for
across the board changes similarly affecting all senior executives of the
Company and all senior executives of any Person in control of the Company),
the taking of any other action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive the
Participant of any material fringe benefit enjoyed by the Participant at
the time of the Change in Control, or the failure by the Company to provide
the Participant with the number of paid vacation days to which the
Participant is entitled on the basis of years of service with the Company
in accordance with the Company's normal vacation policy in effect at the
time of the Change in Control; or
16
<PAGE>
(g) any purported termination of the Participant's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 6.1 hereof; for purposes of this Plan, no such
purported termination shall be effective.
The Participant's right to terminate the Participant's employment for
Good Reason shall not be affected by the Participant's incapacity due to
physical or mental illness. The Participant's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or failure
to act constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Participant that Good Reason exists shall be presumed
to be correct unless the Company establishes to the Board by clear and
convincing evidence that Good Reason does not exist.
13.14 "Notice of Termination" shall have the meaning set forth in
Section 6 hereof.
13.15 "Participant" shall mean those individuals named on Exhibit A,
---------
attached hereto.
13.16 "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
13.17 "Plan" shall mean the Aura Systems, Inc. Severance Pay Plan.
13.18 "Potential Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(a) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
17
<PAGE>
(b) the Company or any Person publicly announces an intention
to take or to consider taking actions which, if consummated, would
constitute a Change in Control;
(c) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or more of either
the then outstanding shares of common stock of the Company or the combined
voting power of the Company's then outstanding securities (not including in
the securities beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or
(d) the Board adopts a resolution to the effect that, for
purposes of this Plan, a Potential Change in Control has occurred.
13.19 "Retirement" shall be deemed the reason for the termination by
the Participant of the Participant's employment if such employment is terminated
in accordance with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
13.20 "Severance Payments" shall have the meaning set forth in
Section 5 hereof.
13.21 "Term" shall mean the period of time described in Section 8
hereof (including any extension, continuation or termination described therein).
13.22 "Terminated Participant" shall mean a participant terminated
pursuant to Section 4.
IN WITNESS WHEREOF, Aura Systems, Inc. has caused this plan document
to be executed by its duly authorized officer, this 5th day of March, 1998.
AURA SYSTEMS, INC.
By:
--------------------------
Gerald S. Papazian
Title: President
18
<PAGE>
EXHIBIT A
---------
Participants
- ------------
1. Jacob Mail
2. Keith O. Stuart
3. Gregory Um
4. Ronald J. Goldstein
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EXHIBIT 10.21
TIER I
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SEVERANCE AGREEMENT
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THIS AGREEMENT, dated March 5th, 1998, is made by and between Aura
Systems, Inc., a Delaware corporation (the "Company"), and _________________
(the "Executive").
WHEREAS, the Company considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in this
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Agreement are provided in the last Section hereof.
2. Term of Agreement. Subject to the provisions of Section 14
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hereof, the Term of this Agreement shall commence on the Effective Date and
shall continue in effect through the third anniversary of the Effective Date;
provided, however, that on each anniversary of the Effective Date during the
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Term of this Agreement, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
the Company or the Executive shall have given notice not to extend the Term; and
further provided, however, that if a Change in Control shall have occurred
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during the Term, the Term shall expire no earlier than twenty-four (24) months
beyond the month in which such Change in Control occurred.
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3. Company's Covenants Summarized. In order to induce the Executive to
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remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 11
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6 hereof,
there shall be deemed to have been) a termination of the Executive's employment
with the Company following a Change in Control and during the Term. This
Agreement shall not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the Executive and
the Company, the Executive shall not have any right to be retained in the employ
of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the
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terms and conditions of this Agreement, in the event of a Potential Change in
Control during the Term, the Executive will remain in the employ of the Company
until the earliest of (i) a date which is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
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a. Payment of Salary During Disability. Following a Change in
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Control and during the Term, during any period that the Executive fails to
perform the Executive's full-time duties with the Company as a result of
incapacity due to physical or mental illness, the Company shall pay the
Executive's full salary to the Executive at the rate in effect at the
commencement of any such period, together with all compensation and benefits
payable to the Executive under the terms of any compensation or benefit plan,
program or arrangement maintained by the Company during such period, until the
Executive's employment is terminated by the Company for Disability.
b. Accrued Salary. If the Executive's employment shall be terminated
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for any reason following a Change in Control and during the Term, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Date of Termination
or, if higher, the rate in effect immediately prior to the first occurrence of
an event or circumstance constituting Good Reason, together with all
compensation and benefits payable to the Executive through the Date of
Termination under the terms of the Company's compensation
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and benefit plans, programs or arrangements as in effect immediately prior to
the Date of Termination or, if more favorable to the Executive, as in effect
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason.
c. Post-Termination Benefits. If the Executive's employment shall be
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terminated for any reason following a Change in Control and during the Term, the
Company shall pay to the Executive the Executive's normal post-termination
compensation and benefits as such payments become due. Such post-termination
compensation and benefits shall be determined under, and paid in accordance
with, the Company's retirement, insurance and other compensation or benefit
plans, programs and arrangements as in effect immediately prior to the Date of
Termination or, if more favorable to the Executive, as in effect immediately
prior to the occurrence of the first event or circumstance constituting Good
Reason.
6. Severance Payments.
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a. If (i) the Executive's employment is terminated following a Change
in Control and during the Term, other than (A) by the Company for Cause, (B) by
reason of death or Disability, or (C) by the Executive without Good Reason, or
(ii) the Executive voluntarily terminates his employment for any reason during
the one-month period commencing on the first anniversary of the Change in
Control, then, in either such case, the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 6
("Severance Payments") and Section 7, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person, or (iii) the
Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason and such termination or the circumstance or event
which constitutes Good Reason is otherwise in connection with or in anticipation
of a Change in Control (whether or not a Change in Control ever occurs). For
purposes of any determination regarding the applicability of the immediately
preceding sentence, any position taken by the Executive
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shall be presumed to be correct unless the Company establishes to the Board by
clear and convincing evidence that such position is not correct.
(1) Lump Sum Payment. In lieu of any further salary payments to
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the Executive for periods subsequent to the Date of Termination and in lieu
of any severance benefit otherwise payable to the Executive, the Company
shall pay to the Executive a lump sum severance payment, in cash, equal to
three times the sum of (i) the Executive's base salary as in effect
immediately prior to the Date of Termination or, if higher, in effect
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, and (ii) the highest annual bonus earned by the
Executive pursuant to any annual bonus or incentive plan maintained by the
Company in respect of any of the three fiscal years ending immediately
prior to the fiscal year in which occurs the Date of Termination or, if
higher, immediately prior to the fiscal year in which occurs the first
event or circumstance constituting Good Reason.
(2) Continuation of Welfare Benefits. For the thirty-six (36)
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month period immediately following the Date of Termination, the Company
shall arrange to provide the Executive and his dependents life, disability,
accident and health insurance benefits substantially similar to those
provided to the Executive and his dependents immediately prior to the Date
of Termination or, if more favorable to the Executive, those provided to
the Executive and his dependents immediately prior to the first occurrence
of an event or circumstance constituting Good Reason, at no greater cost to
the Executive than the cost to the Executive immediately prior to such date
or occurrence; provided, however, that, unless the Executive consents to a
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different method (after taking into account the effect of such method on
the calculation of "parachute payments" pursuant to Section 7 hereof), such
health insurance benefits shall be provided through a third-party insurer.
Benefits otherwise receivable by the Executive pursuant to this Section
6(a)(2) shall be reduced to the extent benefits of the same type are
received by or made available to the Executive during the thirty-six (36)
month period following the Executive's termination of employment (and any
such benefits received by or made available to the Executive shall be
reported to the Company by the Executive); provided, however, that the
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Company shall reimburse the Executive for the excess, if any, of the cost
of such benefits to the Executive over such cost immediately prior to the
Date of Termination or, if more favorable to the Executive, the first
occurrence of an event or circumstance constituting Good Reason.
(3) Incentive Compensation. Notwithstanding any provision of any
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annual or long-term incentive plan to the contrary, the Company shall pay
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to the Executive a lump sum amount, in cash, equal to the sum of (i) any
unpaid incentive compensation which has been allocated or awarded to the
Executive for a completed fiscal year or other measuring period preceding
the Date of Termination under any such plan and which, as of the Date of
Termination, is contingent only upon the continued employment of the
Executive to a subsequent date, and (ii) a pro rata portion to the Date of
Termination of the aggregate value of all contingent incentive compensation
awards to the Executive for all then uncompleted periods under any such
plan, calculated as to each such award by multiplying the award that the
Executive would have earned on the last day of the performance award
period, assuming the achievement, at the target level, of the individual
and corporate performance goals established with respect to such award, by
the fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period through
the Date of Termination by the total number of months contained in such
performance award period.
(4) Accelerated Vesting of Stock Options. All stock options held
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by the Executive under any stock option or incentive plan maintained by the
Company shall immediately vest and become exercisable as of the Date of
Termination, to be exercised in accordance with the terms of the applicable
plan.
(5) Outplacement Services. The Company shall provide the
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Executive with outplacement services suitable to the Executive's position
for a period of three years or, if earlier, until the first acceptance by
the Executive of an offer of employment.
7. 280G Gross Up Payments.
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a. Whether or not the Executive becomes entitled to the Severance
Payments, if any of the payments or benefits received or to be received by the
Executive in connection with a Change in Control or the Executive's termination
of employment (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any Person whose actions result
in a Change in Control or any Person affiliated with the Company or such Person)
(such payments or benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject to the Excise Tax, the
Company shall pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments.
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b. For purposes of determining whether any of the Total Payments will
be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the
Total Payments shall be treated as "parachute payments" (within the meaning of
section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such payments or benefits (in whole or in
part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination (or if there is
no Date of Termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section 7), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.
c. In the event that the Excise Tax is finally determined to be less
than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Company, within five (5) business days
following the time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the Excise
Tax and federal, state and local income and employment taxes imposed on the
Gross-Up Payment being repaid by the Executive, to the extent that such
repayment results in a reduction in the Excise Tax and a dollar-for-dollar
reduction in the Executive's taxable income and wages for purposes of federal,
state and local income and employment taxes, plus interest on the amount of such
repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder in calculating the Gross-Up Payment (including by reason of
any payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus
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any interest, penalties or additions payable by the Executive with respect to
such excess) within five (5) business days following the time that the amount of
such excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
d. Timing of Payments. The payments provided in subsections (1) and
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(3) of Section 6 hereof and in Section 7 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
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amounts of such payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 7 hereof,
in accordance with Section 7 hereof, of the minimum amount of such payments to
which the Executive is clearly entitled and shall pay the remainder of such
payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth (30th) day
after the Date of Termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable on the
fifth (5th) business day after demand by the Company (together with interest at
120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time
that payments are made under this Agreement, the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from Tax
Counsel, the Auditor or other advisors or consultants (and any such opinions or
advice which are in writing shall be attached to the statement).
e. Legal Fees. The Company also shall pay to the Executive all legal
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fees and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.
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8. Non-Competition. During the period in which Executive is receiving
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Severance Payments, Executive shall not, directly or indirectly, without the
prior written consent of the Company, provide consultative services or otherwise
provide services to (whether as an employee or a consultant, with or without
pay), own, manage, operate, join, control, participate in, or be connected with
(as a stockholder, partner, or otherwise), any business, individual, partner,
firm, corporation, or other entity that is then a direct competitor of the
Company or its subsidiaries with respect to electromagnetic and electro-optical
technology (each such competitor a "Competitor of the Company"); provided,
however, that the "beneficial ownership" by Executive, either individually or as
a member of a "group," as such terms are used in Rule 13d of the General Rules
and Regulations under the Exchange Act, of not more than five percent (5%) of
the voting stock of any publicly held corporation shall not alone constitute a
violation of this Agreement. It is further expressly agreed that the Company
will or would suffer irreparable injury if Executive were to compete with the
Company or any subsidiary in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and Executive further consents and stipulates to
the entry of such injunctive relief in such a court prohibiting Executive from
competing with the Company or any subsidiary of the Company in violation of this
Agreement. Executive and the Company acknowledge and agree that the business of
the Company is national in nature, and that the terms of the non-competition
agreement set forth herein shall apply on a nationwide basis.
9. Termination Procedures and Compensation During Dispute.
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a. Notice of Termination. After a Change in Control and during the
---------------------
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 12 hereof.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
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b. Date of Termination. "Date of Termination," with respect to any
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purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
c. Dispute Concerning Termination. If within fifteen (15) days after
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any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 9(c)), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
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dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
d. Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the Term and the Date of Termination
is extended in accordance with Section 9(c) hereof, the Company shall continue
to pay the Executive the full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, salary) and continue
the Executive as a participant in all compensation, benefit and insurance plans
in which the Executive was participating when the notice giving rise to the
dispute was given, until the Date of Termination, as determined in accordance
with Section 9(c) hereof. Amounts paid under this Section 9(d) are in addition
to all other amounts due under this Agreement (other than those due under
Section 5(b) hereof) and shall not be offset against or reduce any other amounts
due under this Agreement.
10. No Mitigation. The Company agrees that, if the Executive's employment
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with the Company terminates during the Term, the Executive is not required to
seek
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other employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to Section 6 hereof or Section 9(d) hereof.
Further, the amount of any payment or benefit provided for in this Agreement
(other than Section 6(a)(2) hereof) shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to the Company, or otherwise.
11. Successors; Binding Agreement.
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a. In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
b. This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
12. Indemnification. The Company shall indemnify and hold Executive
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harmless for acts and omissions in his capacity as an officer, director or
employee of the Company to the maximum extent permitted under applicable law.
The Company shall maintain a Director's and Officer's Liability Insurance
Policy, which shall provide liability coverage for Executive's benefit.
13. Notices. For the purpose of this Agreement, notices and all other
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communications provided for in the Agreement shall be in writing and shall be
deemed
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to have been duly given when delivered or mailed by United States registered
mail, return receipt requested, postage prepaid, addressed, if to the Executive,
to the address inserted below the Executive's signature on the final page hereof
and, if to the Company, to the address set forth below, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:
To the Company:
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Attention:
14. Miscellaneous. No provision of this Agreement may be modified, waived
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or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any
other agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party;
provided, however, that this Agreement shall supersede any agreement setting
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forth the terms and conditions of the Executive's employment with the Company
only in the event that the Executive's employment with the Company is terminated
on or following a Change in Control, by the Company other than for Cause or by
the Executive other than for Good Reason. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law and any additional
withholding to which the Executive has agreed. The obligations of the Company
and the Executive under this Agreement which by their nature may require either
partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6, 7, 8, and 9 hereof) shall survive
such expiration.
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15. Validity; Pooling.
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a. Validity. The invalidity or unenforceability of any provision of
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this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
b. Pooling. In the event that the Company is party to a transaction
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which is otherwise intended to qualify for "pooling of interests" accounting
treatment then (A) this Agreement shall, to the extent practicable, be
interpreted so as to permit such accounting treatment, and (B) to the extent
that the application of clause (A) of this Section 14(b) does not preserve the
availability of such accounting treatment, then, to the extent that any
provision of the Agreement disqualifies the transaction as a "pooling"
transaction (including, if applicable, the entire Agreement), such provision
shall be null and void as of the date hereof. All determinations under this
Section 14(b) shall be made by the accounting firm whose opinion with respect to
"pooling of interests" is required as a condition to the consummation of such
transaction.
16. Counterparts. This Agreement may be executed in several counterparts,
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each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
17. Settlement of Disputes; Arbitration.
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a. All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Board and shall be in writing. Any
denial by the Board of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the
Board a decision of the Board within sixty (60) days after notification by the
Board that the Executive's claim has been denied.
b. Any further dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Los Angeles,
California in accordance with the rules of the American Arbitration Association
then in effect; provided, however, that the evidentiary standards set forth in
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this Agreement shall apply. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. Notwithstanding any provision of this
Agreement to the contrary, the Executive shall be entitled to seek specific
performance of the Executive's right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
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18. Definitions. For purposes of this Agreement, the following terms
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shall have the meanings indicated below:
a. "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
b. "Auditor" shall have the meaning set forth in Section 7 hereof.
c. "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
d. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
e. "Board" shall mean the Board of Directors of the Company.
f. "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 9(a) hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Board by
clear and convincing evidence that Cause exists.
g. A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially
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owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below; or
(2) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(3) there is consummated a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other corporation,
other than (i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
subsidiary of the Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets, other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least 60% of the
combined voting power of the voting securities of which are owned by
stockholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale. Notwithstanding the
foregoing, a "Change in Control" shall not be deemed to have occurred by virtue
of the consummation of any transaction or series of integrated transactions
14
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immediately following which the record holders of the common stock of the
Company immediately prior to such transaction or series of transactions continue
to have substantially the same proportionate ownership in an entity which owns
all or substantially all of the assets of the Company immediately following such
transaction or series of transactions. Notwithstanding the foregoing, a Change
in Control shall not include any event, circumstance or transaction occurring
during the six-month period following a Potential Change in Control which
Potential Change in Control results from the action of any entity or group which
includes, is affiliated with or is wholly or partly controlled by the Executive
(a "Management Group"); provided, however, that such action shall not be taken
-------- -------
into account for this purpose if it occurs within a six-month period following a
Potential Change in Control resulting from the action of any Person which is not
a member of a Management Group.
Notwithstanding the foregoing, any event or transaction which would
otherwise constitute a Change in Control (a "Transaction") shall not constitute
a Change in Control for purposes of this Agreement if, in connection with the
Transaction, the Executive participates as an equity investor in the acquiring
entity or any of its affiliates (the "Acquiror"). For purposes of the preceding
sentence, the Executive shall not be deemed to have participated as an equity
investor in the Acquiror by virtue of (i) obtaining beneficial ownership of any
equity interest in the Acquiror as a result of the grant to the Executive of an
incentive compensation award under one or more incentive plans of the Acquiror
(including, but not limited to, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, or (ii) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other stockholders of the Company.
h. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
i. "Company" shall mean Aura Systems, Inc. and, except in determining
under Section 17(g) hereof whether or not any Change in Control of the Company
has occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
j. "Date of Termination" shall have the meaning set forth in Section
9 hereof.
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k. "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
l. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
m. "Excise Tax" shall mean any excise tax imposed under section 4999
of the Code.
n. "Executive" shall mean the individual named in the first paragraph
of this Agreement.
o. "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) after any Change in Control, or prior to a Change in Control under the
circumstances described in clauses (ii) and (iii) of the second sentence of
Section 6 hereof (treating all references in paragraphs (1) through (7) below to
a "Change in Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraph (1),
(5), (6) or (7) below, such act or failure to act is corrected prior to the Date
of Termination specified in the Notice of Termination given in respect thereof:
(1) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer
of the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control;
(2) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person in control of the Company;
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<PAGE>
(3) the relocation of the Executive's principal place of
employment to a location more than 50 miles from the Executive's
principal place of employment immediately prior to the Change in
Control or the Company's requiring the Executive to be based anywhere
other than such principal place of employment (or permitted relocation
thereof) except for required travel on the Company's business to an
extent substantially consistent with the Executive's present business
travel obligations;
(4) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation except pursuant to an
across-the-board compensation deferral similarly affecting all senior
executives of the Company and all senior executives of any Person in
control of the Company, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such
compensation is due;
(5) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the Executive's
total compensation, including but not limited to the Company's stock
option, bonus and other plans or any substitute plans adopted prior to
the Change in Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue the Executive's
participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount or
timing of payment of benefits provided and the level of the
Executive's participation relative to other participants, as existed
immediately prior to the Change in Control;
(6) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, savings, life insurance,
medical, health and accident, or disability plans in which the
Executive was participating immediately prior to the Change in Control
(except for across the board changes similarly affecting all senior
executives of the Company and all senior executives of any Person in
control of the Company), the taking of any other action by the Company
which would
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directly or indirectly materially reduce any of such benefits or
deprive the Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure by the
Company to provide the Executive with the number of paid vacation days
to which the Executive is entitled on the basis of years of service
with the Company in accordance with the Company's normal vacation
policy in effect at the time of the Change in Control;
or
(7) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9(a) hereof; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Board by clear and convincing
evidence that Good Reason does not exist.
p. "Gross-Up Payment" shall have the meaning set forth in Section 7
hereof.
q. "Notice of Termination" shall have the meaning set forth in
Section 9 hereof.
r. "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other plan or
agreement entered into between the Executive and the Company which is designed
to provide the Executive with supplemental retirement benefits.
s. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an
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<PAGE>
offering of such securities, or (iv) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
t. "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
(1) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control;
(2) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(3) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or more of
either the then outstanding shares of common stock of the Company or
the combined voting power of the Company's then outstanding securities
(not including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates); or
(4) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
u. "Retirement" shall be deemed the reason for the termination by the
Executive of the Executive's employment if such employment is terminated in
accordance with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
v. "Severance Payments" shall have the meaning set forth in Section 6
hereof.
w. "Tax Counsel" shall have the meaning set forth in Section 7
hereof.
x. "Term" shall mean the period of time described in Section 2 hereof
(including any extension, continuation or termination described therein).
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y. "Total Payments" shall mean those payments so described in Section
7 hereof.
AURA SYSTEMS, INC.
By:
---------------------
Name: Gerald S. Papazian
Title: President
---------------------------
---------------------------
Address:
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(Please print carefully)
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EXHIBIT 10.22
TIER II
-------
SEVERANCE AGREEMENT
-------------------
THIS AGREEMENT, dated March 5th, 1998, is made by and between Aura
Systems, Inc., a Delaware corporation (the "Company"), and _______________ (the
"Executive").
WHEREAS, the Company considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in this
-------------
Agreement are provided in the last Section hereof.
2. Term of Agreement. Subject to the provisions of Section 14 hereof,
-----------------
the Term of this Agreement shall commence on the Effective Date and shall
continue in effect through the third anniversary of the Effective Date;
provided, however, that on each anniversary of the Effective Date during the
- -------- -------
Term of this Agreement, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
the Company or the Executive shall have given notice not to extend the Term; and
further provided, however, that if a Change in Control shall have occurred
- ------- -------- -------
during the Term, the Term shall expire no earlier than twenty-four (24) months
beyond the month in which such Change in Control occurred.
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<PAGE>
3. Company's Covenants Summarized. In order to induce the Executive to
------------------------------
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 11
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6 hereof,
there shall be deemed to have been) a termination of the Executive's employment
with the Company following a Change in Control and during the Term. This
Agreement shall not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the Executive and
the Company, the Executive shall not have any right to be retained in the employ
of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the
-------------------------
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the Term, the Executive will remain in the employ of the Company
until the earliest of (i) a date which is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
------------------------------------------
a. Payment of Salary During Disability. Following a Change in Control
-----------------------------------
and during the Term, during any period that the Executive fails to perform the
Executive's full-time duties with the Company as a result of incapacity due to
physical or mental illness, the Company shall pay the Executive's full salary to
the Executive at the rate in effect at the commencement of any such period,
together with all compensation and benefits payable to the Executive under the
terms of any compensation or benefit plan, program or arrangement maintained by
the Company during such period, until the Executive's employment is terminated
by the Company for Disability.
b. Accrued Salary. If the Executive's employment shall be terminated
--------------
for any reason following a Change in Control and during the Term, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Date of Termination
or, if higher, the rate in effect immediately prior to the first occurrence of
an event or circumstance constituting Good Reason, together with all
compensation and benefits payable to the Executive through the Date of
Termination under the terms of the Company's compensa-
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<PAGE>
tion and benefit plans, programs or arrangements as in effect immediately prior
to the Date of Termination or, if more favorable to the Executive, as in effect
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason.
c. Post-Termination Benefits. If the Executive's employment shall be
-------------------------
terminated for any reason following a Change in Control and during the Term, the
Company shall pay to the Executive the Executive's normal post-termination
compensation and benefits as such payments become due. Such post-termination
compensation and benefits shall be determined under, and paid in accordance
with, the Company's retirement, insurance and other compensation or benefit
plans, programs and arrangements as in effect immediately prior to the Date of
Termination or, if more favorable to the Executive, as in effect immediately
prior to the occurrence of the first event or circumstance constituting Good
Reason.
6. Severance Payments.
------------------
a. Subject to Section 7 hereof, if the Executive's employment is
terminated following a Change in Control and during the Term, other than (A) by
the Company for Cause, (B) by reason of death or Disability, or (C) by the
Executive without Good Reason, then the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 6
("Severance Payments"), in addition to any payments and benefits to which the
Executive is entitled under Section 5 hereof. For purposes of this Agreement,
the Executive's employment shall be deemed to have been terminated following a
Change in Control by the Company without Cause or by the Executive with Good
Reason, if (i) the Executive's employment is terminated by the Company without
Cause prior to a Change in Control (whether or not a Change in Control ever
occurs) and such termination was at the request or direction of a Person who has
entered into an agreement with the Company the consummation of which would
constitute a Change in Control, (ii) the Executive terminates his employment for
Good Reason prior to a Change in Control (whether or not a Change in Control
ever occurs) and the circumstance or event which constitutes Good Reason occurs
at the request or direction of such Person, or (iii) the Executive's employment
is terminated by the Company without Cause or by the Executive for Good Reason
and such termination or the circumstance or event which constitutes Good Reason
is otherwise in connection with or in anticipation of a Change in Control
(whether or not a Change in Control ever occurs). For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the Executive shall be presumed to be correct unless the
Company establishes to the Board by clear and convincing evidence that such
position is not correct.
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<PAGE>
(1) Lump Sum Payment. In lieu of any further salary payments to
----------------
the Executive for periods subsequent to the Date of Termination and in lieu
of any severance benefit otherwise payable to the Executive, the Company
shall pay to the Executive a lump sum severance payment, in cash, equal to
one and a half (1.5) times the sum of (i) the Executive's base salary as in
effect immediately prior to the Date of Termination or, if higher, in
effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, and (ii) the highest annual bonus
earned by the Executive pursuant to any annual bonus or incentive plan
maintained by the Company in respect of any of the three fiscal years
ending immediately prior to the fiscal year in which occurs the Date of
Termination or, if higher, immediately prior to the fiscal year in which
occurs the first event or circumstance constituting Good Reason.
(2) Continuation of Welfare Benefits. For the eighteen (18)
--------------------------------
month period immediately following the Date of Termination, the Company
shall arrange to provide the Executive and his dependents life, disability,
accident and health insurance benefits substantially similar to those
provided to the Executive and his dependents immediately prior to the Date
of Termination or, if more favorable to the Executive, those provided to
the Executive and his dependents immediately prior to the first occurrence
of an event or circumstance constituting Good Reason, at no greater cost to
the Executive than the cost to the Executive immediately prior to such date
or occurrence; provided, however, that, unless the Executive consents to a
-------- -------
different method (after taking into account the effect of such method on
the calculation of "parachute payments" pursuant to Section 7 hereof), such
health insurance benefits shall be provided through a third-party insurer.
Benefits otherwise receivable by the Executive pursuant to this Section
6(a)(2) shall be reduced to the extent benefits of the same type are
received by or made available to the Executive during the eighteen (18)
month period following the Executive's termination of employment (and any
such benefits received by or made available to the Executive shall be
reported to the Company by the Executive); provided, however, that the
-------- -------
Company shall reimburse the Executive for the excess, if any, of the cost
of such benefits to the Executive over such cost immediately prior to the
Date of Termination or, if more favorable to the Executive, the first
occurrence of an event or circumstance constituting Good Reason. If the
Severance Payments shall be decreased pursuant to Section 7 hereof, and the
Section 6(a)(2) benefits which remain payable after the application of
Section 7 hereof are thereafter reduced pursuant to the immediately
preceding sentence, the Company shall, no later than five (5)
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<PAGE>
business days following such reduction, pay to the Executive the least of
(a) the amount of the decrease made in the Severance Payments pursuant to
Section 7 hereof, (b) the amount of the subsequent reduction in these
Section 6(a)(2) benefits, or (c) the maximum amount which can be paid to
the Executive without being, or causing any other payment to be,
nondeductible by reason of section 280G of the Code.
(3) Incentive Compensation. Notwithstanding any provision of
----------------------
any annual or long-term incentive plan to the contrary, the Company shall
pay to the Executive a lump sum amount, in cash, equal to the sum of (i)
any unpaid incentive compensation which has been allocated or awarded to
the Executive for a completed fiscal year or other measuring period
preceding the Date of Termination under any such plan and which, as of the
Date of Termination, is contingent only upon the continued employment of
the Executive to a subsequent date, and (ii) a pro rata portion to the Date
of Termination of the aggregate value of all contingent incentive
compensation awards to the Executive for all then uncompleted periods under
any such plan, calculated as to each such award by multiplying the award
that the Executive would have earned on the last day of the performance
award period, assuming the achievement, at the target level, of the
individual and corporate performance goals established with respect to such
award, by the fraction obtained by dividing the number of full months and
any fractional portion of a month during such performance award period
through the Date of Termination by the total number of months contained in
such performance award period.
(4) Accelerated Vesting of Stock Options. All stock options
------------------------------------
held by the Executive under any stock option or incentive plan maintained
by the Company shall immediately vest and become exercisable as of the Date
of Termination, to be exercised in accordance with the terms of the
applicable plan.
(5) Outplacement Services. The Company shall provide the
---------------------
Executive with outplacement services suitable to the Executive's position
for a period of three years or, if earlier, until the first acceptance by
the Executive of an offer of employment.
7. 280G Cap.
--------
a. Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit received or to be received by the Executive in
connection with a Change in Control or the termination of the Executive's
employment
5
<PAGE>
(whether pursuant to the terms of this Agreement or any other plan, arrangement
or agreement with the Company, any Person whose actions result in a Change in
Control or any Person affiliated with the Company or such Person) (all such
payments and benefits, including the Severance Payments, being hereinafter
called "Total Payments") would not be deductible (in whole or part), by the
Company, an affiliate or Person making such payment or providing such benefit as
a result of section 280G of the Code, then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the Code
in such other plan, arrangement or agreement), the cash Severance Payments shall
first be reduced (if necessary, to zero), and all other Severance Payments shall
thereafter be reduced (if necessary, to zero); provided, however, that the
-------- -------
Executive may elect to have the noncash Severance Payments reduced (or
eliminated) prior to any reduction of the cash Severance Payments.
b. For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which the Executive shall have waived at
such time and in such manner as not to constitute a "payment" within the meaning
of section 280G(b) of the Code shall be taken into account, (ii) no portion of
the Total Payments shall be taken into account which, in the opinion of tax
counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by
the accounting firm which was, immediately prior to the Change in Control, the
Company's independent auditor (the "Auditor"), does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code, including by
reason of section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall
be reduced only to the extent necessary so that the Total Payments (other than
those referred to in clauses (i) or (ii)) in their entirety constitute
reasonable compensation for services actually rendered within the meaning of
section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance
as deductions by reason of section 280G of the Code, in the opinion of Tax
Counsel, and (iv) the value of any noncash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the Auditor in
accordance with the principles of sections 280G(d)(3) and (4) of the Code.
c. If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good faith
of the Executive and the Company in applying the terms of this Section 7, the
Total Payments paid to or for the Executive's benefit are in an amount that
would result in any portion of such Total Payments being subject to the Excise
Tax, then, if such repayment would result in (i) no portion of the remaining
Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar
reduction in the Executive's taxable income and wages for purposes of federal,
state and local income and employment taxes, the Executive shall
6
<PAGE>
have an obligation to pay the Company upon demand an amount equal to the sum of
(i) the excess of the Total Payments paid to or for the Executive's benefit over
the Total Payments that could have been paid to or for the Executive's benefit
without any portion of such Total Payments being subject to the Excise Tax; and
(ii) interest on the amount set forth in clause (i) of this sentence at the rate
provided in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
d. Timing of Payments. The payments provided in subsections (1) and
------------------
(3) of Section 6 hereof shall be made not later than the fifth day following the
Date of Termination; provided, however, that if the amounts of such payments,
-------- -------
and the limitation on such payments set forth in Section 7 hereof, cannot be
finally determined on or before such day, the Company shall pay to the Executive
on such day an estimate, as determined in good faith by the Company of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest on the unpaid
remainder (or on all such payments to the extent the Company fails to make such
payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined but in no event later than
the thirtieth (30th) day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the Company
(together with interest at 120% of the rate provided in section 1274(b)(2)(B) of
the Code). At the time that payments are made under this Agreement, the Company
shall provide the Executive with a written statement setting forth the manner in
which such payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the Company has
received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).
e. Legal Fees. The Company also shall pay to the Executive all legal
----------
fees and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.
7
<PAGE>
8. Non-Competition. During the period in which Executive is receiving
---------------
Severance Payments, Executive shall not, directly or indirectly, without the
prior written consent of the Company, provide consultative services or otherwise
provide services to (whether as an employee or a consultant, with or without
pay), own, manage, operate, join, control, participate in, or be connected with
(as a stockholder, partner, or otherwise), any business, individual, partner,
firm, corporation, or other entity that is then a direct competitor of the
Company or its subsidiaries with respect to electromagnetic and electro-optical
technology (each such competitor a "Competitor of the Company"); provided,
however, that the "beneficial ownership" by Executive, either individually or as
a member of a "group," as such terms are used in Rule 13d of the General Rules
and Regulations under the Exchange Act, of not more than five percent (5%) of
the voting stock of any publicly held corporation shall not alone constitute a
violation of this Agreement. It is further expressly agreed that the Company
will or would suffer irreparable injury if Executive were to compete with the
Company or any subsidiary in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and Executive further consents and stipulates to
the entry of such injunctive relief in such a court prohibiting Executive from
competing with the Company or any subsidiary of the Company in violation of this
Agreement. Executive and the Company acknowledge and agree that the business of
the Company is national in nature, and that the terms of the non-competition
agreement set forth herein shall apply on a nationwide basis.
9. Termination Procedures and Compensation During Dispute.
------------------------------------------------------
a. Notice of Termination. After a Change in Control and during the
---------------------
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 12 hereof.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
8
<PAGE>
b. Date of Termination. "Date of Termination," with respect to any
-------------------
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
c. Dispute Concerning Termination. If within fifteen (15) days after
------------------------------
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 9(c)), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
- -------- -------
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
d. Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 9(c) hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 9(c) hereof. Amounts paid under this Section 9(d) are in addition to
all other amounts due under this Agreement (other than those due under Section
5(b) hereof) and shall not be offset against or reduce any other amounts due
under this Agreement.
10. No Mitigation. The Company agrees that, if the Executive's employment
-------------
with the Company terminates during the Term, the Executive is not required to
seek
9
<PAGE>
other employment or to attempt in any way to reduce any amounts payable to
the Executive by the Company pursuant to Section 6 hereof or Section 9(d)
hereof. Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 6(a)(2) hereof) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.
11. Successors; Binding Agreement.
-----------------------------
a. In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
b. This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
12. Indemnification. The Company shall indemnify and hold Executive
---------------
harmless for acts and omissions in his capacity as an officer, director or
employee of the Company to the maximum extent permitted under applicable law.
The Company shall maintain a Director's and Officer's Liability Insurance
Policy, which shall provide liability coverage for Executive's benefit.
13. Notices. For the purpose of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed
10
<PAGE>
to have been duly given when delivered or mailed by United States registered
mail, return receipt requested, postage prepaid, addressed, if to the Executive,
to the address inserted below the Executive's signature on the final page hereof
and, if to the Company, to the address set forth below, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:
To the Company:
_____________
_____________
_____________
Attention:
14. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any
other agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party;
provided, however, that this Agreement shall supersede any agreement setting
- -------- -------
forth the terms and conditions of the Executive's employment with the Company
only in the event that the Executive's employment with the Company is terminated
on or following a Change in Control, by the Company other than for Cause or by
the Executive other than for Good Reason. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law and any additional
withholding to which the Executive has agreed. The obligations of the Company
and the Executive under this Agreement which by their nature may require either
partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6, 7, 8, and 9 hereof) shall survive
such expiration.
15. Validity; Pooling.
-----------------
11
<PAGE>
a. Validity. The invalidity or unenforceability of any provision of
--------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
b. Pooling. In the event that the Company is party to a transaction
-------
which is otherwise intended to qualify for "pooling of interests" accounting
treatment then (A) this Agreement shall, to the extent practicable, be
interpreted so as to permit such accounting treatment, and (B) to the extent
that the application of clause (A) of this Section 15(b) does not preserve the
availability of such accounting treatment, then, to the extent that any
provision of the Agreement disqualifies the transaction as a "pooling"
transaction (including, if applicable, the entire Agreement), such provision
shall be null and void as of the date hereof. All determinations under this
Section 15(b) shall be made by the accounting firm whose opinion with respect to
"pooling of interests" is required as a condition to the consummation of such
transaction.
16. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
17. Settlement of Disputes; Arbitration.
-----------------------------------
a. All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Board and shall be in writing. Any
denial by the Board of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the
Board a decision of the Board within sixty (60) days after notification by the
Board that the Executive's claim has been denied.
b. Any further dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Los Angeles,
California in accordance with the rules of the American Arbitration Association
then in effect; provided, however, that the evidentiary standards set forth in
-------- -------
this Agreement shall apply. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. Notwithstanding any provision of this
Agreement to the contrary, the Executive shall be entitled to seek specific
performance of the Executive's right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
12
<PAGE>
18. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the meanings indicated below:
a. "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
b. "Auditor" shall have the meaning set forth in Section 7 hereof.
c. "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
d. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
e. "Board" shall mean the Board of Directors of the Company.
f. "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 9(a) hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Board by
clear and convincing evidence that Cause exists.
g. A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its
13
<PAGE>
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below; or
(2) the following individuals cease for any reason to constitute
a majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(3) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with any other
corporation, other than (i) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
subsidiary of the Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets, other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least 60% of the
combined voting power of the voting securities of which are owned by
stockholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale. Notwithstanding the
foregoing, a "Change in Control" shall not be deemed to have occurred by virtue
of the consummation of any transaction or series of integrated transactions
immediately following which the record holders of the common stock of the
14
<PAGE>
Company immediately prior to such transaction or series of transactions continue
to have substantially the same proportionate ownership in an entity which owns
all or substantially all of the assets of the Company immediately following such
transaction or series of transactions. Notwithstanding the foregoing, a Change
in Control shall not include any event, circumstance or transaction occurring
during the six-month period following a Potential Change in Control which
Potential Change in Control results from the action of any entity or group which
includes, is affiliated with or is wholly or partly controlled by the Executive
(a "Management Group"); provided, however, that such action shall not be taken
-------- -------
into account for this purpose if it occurs within a six-month period following a
Potential Change in Control resulting from the action of any Person which is not
a member of a Management Group.
Notwithstanding the foregoing, any event or transaction which would
otherwise constitute a Change in Control (a "Transaction") shall not constitute
a Change in Control for purposes of this Agreement if, in connection with the
Transaction, the Executive participates as an equity investor in the acquiring
entity or any of its affiliates (the "Acquiror"). For purposes of the preceding
sentence, the Executive shall not be deemed to have participated as an equity
investor in the Acquiror by virtue of (i) obtaining beneficial ownership of any
equity interest in the Acquiror as a result of the grant to the Executive of an
incentive compensation award under one or more incentive plans of the Acquiror
(including, but not limited to, the conversion in connection with the
Transaction of incentive compensation awards of the Company into incentive
compensation awards of the Acquiror), on terms and conditions substantially
equivalent to those applicable to other executives of the Company immediately
prior to the Transaction, after taking into account normal differences
attributable to job responsibilities, title and the like, or (ii) obtaining
beneficial ownership of any equity interest in the Acquiror on terms and
conditions substantially equivalent to those obtained in the Transaction by all
other stockholders of the Company.
h. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
i. "Company" shall mean Aura Systems, Inc. and, except in determining
under Section 17(g) hereof whether or not any Change in Control of the Company
has occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
j. "Date of Termination" shall have the meaning set forth in Section
9 hereof.
15
<PAGE>
k. "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
l. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
m. "Executive" shall mean the individual named in the first paragraph
of this Agreement.
n. "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) after any Change in Control, or prior to a Change in Control under the
circumstances described in clauses (ii) and (iii) of the second sentence of
Section 6 hereof (treating all references in paragraphs (1) through (7) below to
a "Change in Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraph (1),
(5), (6) or (7) below, such act or failure to act is corrected prior to the Date
of Termination specified in the Notice of Termination given in respect thereof:
(1) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer
of the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control;
(2) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person in control of the Company;
(3) the relocation of the Executive's principal place of
employment to a location more than 50 miles from the Executive's
principal place of employment immediately prior to the Change in
Con-
16
<PAGE>
trol or the Company's requiring the Executive to be based anywhere
other than such principal place of employment (or permitted relocation
thereof) except for required travel on the Company's business to an
extent substantially consistent with the Executive's present business
travel obligations;
(4) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation except pursuant to an
across-the-board compensation deferral similarly affecting all senior
executives of the Company and all senior executives of any Person in
control of the Company, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such
compensation is due;
(5) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the Executive's
total compensation, including but not limited to the Company's stock
option, bonus and other plans or any substitute plans adopted prior to
the Change in Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue the Executive's
participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount or
timing of payment of benefits provided and the level of the
Executive's participation relative to other participants, as existed
immediately prior to the Change in Control;
(6) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, savings, life insurance,
medical, health and accident, or disability plans in which
the Executive was participating immediately prior to the Change in
Control (except for across the board changes similarly affecting all
senior executives of the Company and all senior executives of any
Person in control of the Company), the taking of any other action by
the Company which would directly or indirectly materially reduce any
of such benefits or deprive the Executive of any material fringe
benefit enjoyed by the Executive at the time of the Change in Control,
or the failure by the Company to
17
<PAGE>
provide the Executive with the number of paid vacation days to which
the Executive is entitled on the basis of years of service with the
Company in accordance with the Company's normal vacation policy in
effect at the time of the Change in Control; or
(7) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9(a) hereof; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Board by clear and convincing
evidence that Good Reason does not exist.
o. "Notice of Termination" shall have the meaning set forth in
Section 9 hereof.
p. "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other plan or
agreement entered into between the Executive and the Company which is designed
to provide the Executive with supplemental retirement benefits.
q. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
r. "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
18
<PAGE>
(1) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control;
(2) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(3) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or more of
either the then outstanding shares of common stock of the Company or
the combined voting power of the Company's then outstanding securities
(not including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates); or
(4) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
s. "Retirement" shall be deemed the reason for the termination by the
Executive of the Executive's employment if such employment is terminated in
accordance with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
t. "Severance Payments" shall have the meaning set forth in Section 6
hereof.
u. "Tax Counsel" shall have the meaning set forth in Section 7
hereof.
v. "Term" shall mean the period of time described in Section 2 hereof
(including any extension, continuation or termination described therein).
w. "Total Payments" shall mean those payments so described in Section
7 hereof.
AURA SYSTEMS, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
___________________________________
___________________________________
Address:
_________________
_________________
_________________
(Please print carefully)
19
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