-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VOn5ZZC1UitUWahhumngSYwesQMX2oqoKmO9eOaOEcGi9pTWN194n64/okrf7k/l Fd7id9bVssO5udicECsB3w== 0000826253-00-000008.txt : 20000209 0000826253-00-000008.hdr.sgml : 20000209 ACCESSION NUMBER: 0000826253-00-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AURA SYSTEMS INC CENTRAL INDEX KEY: 0000826253 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 954106894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17249 FILM NUMBER: 526062 BUSINESS ADDRESS: STREET 1: 2335 ALASKA AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3106435300 MAIL ADDRESS: STREET 1: 2335 ALASKA AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended...............................February 28, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from................. to .................. Commission File Number.......................................0-17249 AURA SYSTEMS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 95-4106894 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2335 Alaska Ave. El Segundo, California 90245 (Address of principal executive offices) (310) 643-5300 Registrant's telephone number Name of each exchange on which registered None Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| On February 3, 2000 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $46,140,620. The aggregate market value has been computed by reference to the last trading price of the stock on February 3, 2000. On such date the Registrant had 177,249,203 shares of Common Stock outstanding. When used in this report, the word "expects," "anticipates," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding future events and the Company's plans and expectations. The Company's actual results may differ significantly from the results discussed in forward-looking statements as a result of certain factors, including those discussed in this Report. The Company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Company's expectations with regard hereto or any change in events, conditions or circumstances on which any such statement is based. This Report includes product names, trade names and marks of companies other than the Company. All such company or product names are trademarks, registered trademarks, trade names or marks of their respective owners and are not the property of the Company. PART I ITEM 1 BUSINESS I. INTRODUCTION Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, was founded in 1987 to engage in the development, commercialization and sales of products, systems and components using its patented and proprietary electromagnetic and electro-optical technology. Since 1987 the Company's proprietary and patented technology has been developed for use in systems and products for commercial, industrial, consumer, and government use. Prior to Fiscal 1992, the Company was engaged in various classified military programs, which allowed the Company to develop its electromagnetic and electro-optical technologies and applications. A number of "one-of-a-kind" systems were built and successfully tested in these fields. Subsequently, the Company developed additional electromagnetic and electro-optics know-how and technology and transitioned from a supplier of defense technology to a supplier of consumer and industrial related products and services. In 1994, the Company founded NewCom, Inc. ("NewCom"), a Delaware corporation, which engaged in the manufacture, packaging, selling and distribution of computer related communications and sound related products, including modems, CD-ROMs, sound cards, speaker systems and multimedia products, thereby expanding presence in the growing multimedia, communication and sound-related consumer electronics market. In 1996, the Company acquired 100% of the outstanding shares of MYS Corporation of Japan ("MYS") to expand the range of its sound products and speaker distribution network. MYS engaged in the manufacture and sale of speakers and speaker systems for home, entertainment and computers. Subsequent to Fiscal 1999, the Company sold MYS to MYS management. In September 1997, NewCom completed an initial public offering, resulting in Aura owning a majority interest in NewCom at the conclusion of the offering. During the second half of Fiscal 1999 NewCom's business suffered from adverse industry conditions, including increased price reductions and a decline in demand resulting from increased incorporation of computer peripherals at the OEM level. These conditions resulted in heavy losses to NewCom and its competitors, causing a buildup in inventory and difficulty in collecting receivables from mass merchants. NewCom's business reached a critical juncture in the fourth quarter of Fiscal 1999 when Deutsche Financial Services, which maintained NewCom's working capital line, announced that it was unwilling to continue to advance working capital to NewCom under its credit facility. This, in conjunction with the actions of the retail mass merchants, resulted in NewCom ceasing most of its operations by the end of Fiscal 1999 and the ultimate cessation of its business shortly thereafter. Aura anticipated that its working capital needs in Fiscal 1999 would be met from a number of sources, including the repayment by NewCom of approximately $20 million of indebtedness, which was due in September 1998, and proceeds from external debt and equity financing. NewCom was ultimately unable to meet its obligations to Aura in September 1998, ultimately creating a significant cash shortfall to Aura. This required Aura beginning in late January 1999 to refocus its operations in shutting down certain operating divisions, selling its MYS subsidiary, licensing and selling proprietary based AuraSound speaker technology and assets, and leasing its Electrotec concert touring sound equipment. The Company also temporarily suspended the development of certain electro-magnetic projects, including the electromagnetic valve actuator ("EVA"). Subsequent to Fiscal 1999 the Company entered into agreements providing for the restructuring of more than $85 million of debt and contingent liabilities. Of this amount, over $37 million was either converted into equity or forgiven. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations. Following the end of Fiscal 1999 the Company's operations are now focused on manufacturing and commercializing the AuraGen(R) ("AuraGen") family of electromagnetic products, with applications for military, industry and the consumer. The AuraGen is a unique, patented electromagnetic generator that is mounted to the automobile engine, which generates both 110 and 220 volt AC power at all engine speeds including idle. Commercial production of the AuraGen commenced in Fiscal 1999 and product is being distributed and sold through dealers, distributors and OEMs. Aura intends to continue to focus its business on the AuraGen line of products during the remainder of Fiscal 2000 and beyond. ( See "Description of Business - Magnetic Technology".) In addition, Aura is entitled to receive royalties from Daewoo Electronics for its electro-optics technology ("AMA") licensed to Daewoo in 1992. (See "Description of business - Electro-Optical Technology.") II. DESCRIPTION OF BUSINESS A. Technology a. Magnetic Technology The Company has developed and patented highly efficient magnetic circuits, which the Company believes provides substantial improvements over devices of similar purpose, available prior to Aura's technology. These designs include the Ferrodisk Induction Motor applied in the Company's electromagnetic power generator technology and electromagnetic actuators, such as the HFATM and the EMATM actuator designs. Ferrodisk Induction Motor (AuraGen(R)) In Fiscal 1993, the Company's research discovered that certain magnetic circuit equations could apply, with different parameters, to describe linear actuators that could provide unusually high force levels in a device of relatively small volume and weight. As this concept extended from a linear actuator to a rotary actuator, a motor called the "Ferrodisk Motor" was developed by the Company. In the latter half of 1995 and in early 1996, a device named the Ferrodisk Alternator Starter (FAS(TM)) was designed, built, tested, installed on a Ford Ranger truck, and displayed publicly at the Society of Automotive Engineers (SAE) trade show. FAS(TM) used its large torque capacity to start the engine with direct drive, that is, with no gearing. After starting, its function converted to that of an alternator, which had a capacity for generating power several times that of a conventional alternator. The Company called this electromagnetic power generation feature the AuraGen. The AuraGen contains aluminum bars and rings embedded in it. AC voltages, similar to household currents, set up electric currents in the electromagnets, creating a series of magnetic poles that whirl around the rings. When the disk of steel is forced to spin faster than the motion of the magnetic poles, there is an interaction between the magnetism in the disk and the coils of the electromagnets. The electric currents in the wires are pushed so they flow backwards against the voltages, and this effect builds up the electrical energy content in the electronics at the expense of mechanical energy provided by the rotor. The electronic box of the AuraGen provides the alternating voltages to make the device work, stores the electrical energy generated, and prepares the exact type of voltages as in household wiring. The device is controlled by a computer processor that continuously measures the speed of the AuraGen rotor and the power drawn by the user, so that alternating voltages of the best phase and frequency are sent to the electromagnets. Magnetic High Fidelity Actuators (HFATM) An actuator is a device that creates a lateral force upon command. Actuators are used in a wide range of applications, including high speed, precision applications such as audio speaker drivers, computer-controlled applications such as the control of aircraft flaps, and heavy-duty applications such as the lifting of the bed of a dump truck. Actuators are generally hydraulic, pneumatic, mechanical or voice coil. Hydraulic, pneumatic and mechanical actuators can produce extremely high forces and long strokes in relatively small packages. Voice coil actuators provide high precision and high-speed operation, producing short stroke and very little force. Actuators are most commonly used to position objects, or to create or cancel vibrations by producing a force upon command. The Company believes that its high fidelity electromagnetic actuator HFATM, is the first "Lorenz's Law" actuator to provide both the high forces and long strokes produced by hydraulic or pneumatic actuators at the speed and precision of response produced by voice coil actuators. This ability is attributable to the patented magnetic design. High-energy permanent magnets are arranged to focus nearly all of their magnetic energy into useful work. Standard voice coil actuators typically utilize about 40% of the available magnetic energy whereas Aura's HFATM uses nearly 90% of that energy. The magnetic arrangement also allows virtually unlimited stroke potential. Standard voice coil actuators typically provide less than one inch of stroke whereas the HFA(TM)'s stroke is virtually unlimited. For example, Aura's HFATM is capable of producing more than 1,000 pounds of force over a 32 inch stroke. The Company has commercially used its HFATM technology in applications such as actuated weld heads and is currently employing HFA(TM) technology in industrial shakers. Electromagnetic Actuator ("EMA(TM)") During Fiscal 1995, the Company developed, built and demonstrated a new type of actuator, called the Electromagnetic Actuator, or EMATM. The Company developed EMATM to fill the performance gap between linear actuators and solenoids. To date, the principal application of the EMATM has been in Aura's Electromagnetic Valve Actuator System ("EVA(TM)"), a patented electromagnetically powered system which opens and closes engine valves at any user specified time interval. Like a solenoid, EMATM operates on purely electromagnetic principles, and therefore uses no permanent magnets. The Company developed it initially for the industrial and automotive markets, but believes it may also be incorporated into the test equipment market as well. An EMA(TM) is physically equivalent in size to solenoids with comparable force capacities and can be operated at temperatures exceeding 450 degrees Fahrenheit. What sets EMATM apart from a standard solenoid is its ability to custom-tailor the force produced as a function of stroke. For example, an automotive EGR valve requires peak force at the beginning of the stroke in order to "crack" the valve open. A standard solenoid, by its very nature, produces peak force at the end of its stroke, not at the beginning. Therefore, a solenoid will require a large amount of power to compensate for its inherent limitation. Conversely, the force profile of an EMATM can be customized to provide high force at the beginning of the stroke, resulting in a more efficient device that is much easier to control. Another advantage of EMATM over a solenoid is its actuator-like ability, which provides consistent force over much longer lengths. To be used for an application requiring proportional control, a "proportional" solenoid requires complex electronics to compensate for this inherent non-linearity. An EMATM basically "spreads" the solenoid's peak force over the entire stroke, providing linear force over a greatly extended stroke length without the need for complex electronics. b. ELECTRO-OPTICAL Technology Light Efficient Displays - Actuated Mirror Array ("AMATM") The Company has developed and patented a technology (a "light valve") for generation of images called the Actuated Mirror Array ("AMATM") technology. The AMA(TM) technology utilizes an array of micro actuators in order to control tiny mirrors whose position change is used to cause a variation in intensity. The Company expects this device to have a major impact on applications where light efficiency is paramount, such as in large screen television, movie and exhibition displays, and the testing of electro-optical devices for military or civilian use. Although there can be no assurances, the Company believes that the AMATM can be manufactured at a competitive cost in large quantities, thus making it commercially feasible. Thus, AMATM based devices are expected to offer the combination of increased display intensity at a competitive production cost. Light displays, such as projectors and large screen televisions, can be made by a number of techniques, many of which are currently available. These include liquid crystal displays ("LCD"), cathode ray tubes ("CRT"), deformable mirror displays ("DMD"), oil film projectors and plasma tubes. For the segment of the display market addressing large images, the principal requirement is to get more light out per unit watt of electricity in. However, each of these technologies requires the utilization of an element, which causes a loss of light efficiency in order to create the image. Liquid crystals utilize an electric field to change the light polarization properties of a surface, which is divided into an array of cells to paint an image. Cathode ray tubes utilize an electron beam, which is bent by the video signal to create images by colliding with a phosphor on the front surface to create light. DMD's utilize an electric field to bend a mirror at a large angle to switch it to either "on" or "off". Oil film projectors change the transmissive properties of an oil film allowing an image to be created. Plasma tubes create an electrical discharge in a tiny tube with gas. The gas glows allowing an image to be created by an array of such tiny tubes. Each of these technologies has their own advantages and limitations, thus creating niches within the display market where competitive advantages can be achieved. The Company believes that the AMATM technology has a technical advantage over other technologies in achieving higher contrast, more intensity and longer lived elements. The Company has entered into a license and manufacturing agreement with Daewoo Electronics Co., Ltd. to manufacture televisions and other devices based on AMATM technology. (See " Description of Business-Certain Product Risk Factors-AMA." B. Products a. AuraGen(R) The AuraGen is a patented technology (US Patent No. 5,734,217) that could potentially have substantial benefits in size, weight and cost for induction type electric motors and generators. The technology allows the construction of induction machines of somewhere between one-half to two-thirds reduction in weight and size for the same output. The machine itself does not use any exotic materials and the components are simple to manufacture with conventional tooling. In addition to the mechanical advantages the system uses a proprietary control system which optimizes efficiency as a function of required load. The AuraGen type machine could potentially offer substantial cost savings due to reduced material requirements and simpler components. While the technology has wide applications over a large range of horsepower it is best utilized for machines in the range of 1.5 to 50 horsepower. The Company has invested substantial resources to develop the technology into a rugged system that can be sold commercially. The first family of products using the AuraGen technology are generators designed to fit under the hood of a full size pickup truck, SUV or other large vehicle. In the under the hood application the AuraGen can provide an effective torque to weight ratio of 0.648 ft-lb/lb with efficiency of 86% as compared to a typical heavy duty brush-less alternator which has an effective torque to weight ratio of 0.109 ft-lb/lb and efficiency of 65%. Thus the AuraGen produces nearly six times more power per pound than typical heavy-duty alternators. The Company has gone through extensive testing of its 5KW (5000 watts) continuous power rated mobile electric generator in both the laboratory and in the field. Over 1000 units have been in the field for up to two years. The Company has begun selling the 5KW 120/240V pure sine wave systems with total harmonic distortion of less than 4%. Aura currently offers full turnkey plug and play systems that fit in over 70 different engine configurations in popular GM, Ford and Chrysler vehicles, as well as some models of full size trucks. In addition the Company is developing other power rated generators between 3.5KW and 12.5KW, all of which will fit under-the-hood of the types of vehicles described above. The North American market for mobile generators is estimated to be in excess of $4 billion per year and growing at 4% to 5% per year. The worldwide use is estimated to be over $10 billion per year. Traditional mobile power users are found in construction, cable, emergency/rescue, marine, railroad, recreational vehicles, telecommunications, tool sales truck, utilities, municipalities and personal use. In addition to the traditional mobile power market for generators, due to its compactness and clean power, the AuraGen could potentially allow for applications that were not practical until now, particularly in areas that require computers and other sensitive instruments. One area where the AuraGen could be used with great advantages in both cost and logistics is the military. In military applications, getting quiet clean power from vehicles at low speed could potentially be critical as the Army changes to digital applications with numerous sophisticated electronics and sensors. The US Army has been testing the AuraGen product for over one year for numerous applications and to date the results show a reliable and effective system that can be used by the military. The Company is currently working with the US Army for the use of the AuraGen in multiple army vehicle types. Another area where the AuraGen could potentially offer unique possibilities is in the telecommunication industry. Currently the AuraGen is used by a number of broadcasting TV stations in their mobile news vehicles. The AuraGen is also being used on a limited basis by cable companies for numerous applications. The technical possibilities of the AuraGen have generated numerous interests from utilities as well as municipalities across the nation. Currently over 23 utilities across the nation have bought AuraGens as samples and are evaluating the product. Similarly over 33 state and city governments have bought the AuraGen for evaluation and testing. The Company is positioning itself in the market place as a turn key mobile power solution that is safer, more reliable, more convenient, with better quality and at an effective cost. The safer solution is based on the following: a) no need to carry fuel in a container, b) no exposed hot components to touch/start, c) nothing heavy to lift, d) no pull start required, e) power outlets located away from hot components and f) not easily stolen. The increased reliability is based on using the standard vehicle engines as compared to small stand-alone engines. The system does not require any maintenance and does not have any starting problems associated with gensets. The system uses the standard vehicle exhaust system, which results in a quieter, cleaner power generating system. The AuraGen solution provides convenient power by: a) not using up valuable cargo space, b) not requiring an additional fuel tank, c) no need to wait for the genset to cool down, d) available power while driving or parked and e) the power setup and use is totally transparent to the user. The quality of power delivered by the AuraGen system is pure 60 or 50 Hz sine wave at a constant voltage. As a result one can operate sensitive equipment such as computers and coarse power such as tools and compressors at the same time. b. Electromagnetic Valve Actuator ("EVA(TM)") EVATM is an electromagnetic actuator capable of opening and closing internal combustion engine valves, replacing the mechanical camshaft on an engine Two major benefits arise from the EVA's ability to open and close the valve electromagneticaly: 1) the camshaft and associated mechanical hardware can be eliminated; and 2) the opening and closing of the intake and exhaust valves can be commanded by the engine computer. Computer control of the valve timing has potentially material benefits to engine performance, fuel economy and emissions. With EVATM, the computer can precisely control the amount of air that is allowed into the engine in the same way that modern fuel injectors control the amount of fuel. By optimizing this "fuel-air mixture" dynamically as a function of engine RPM and load, optimum engine performance can be achieved over the entire operating range of the engine. With a standard camshaft, the engine can be optimized at only one range of RPM and load conditions. That is why very high performance engines idle "rough", as they are optimized for high RPM, thereby sacrificing smoothness at low RPM. By optimizing the fuel-air mixture dynamically, both performance (horsepower) and fuel economy will increase, while emissions are expected to decrease. The entire camshaft assembly, which includes timing chain, camshaft, rockerarms, etc., is replaced by very simple valve actuators. Other emission systems currently on the vehicle, such as the EGR (exhaust gas recirculation) and IMRC (intake manifold runner control) valves can be eliminated. The throttle assembly can also be eliminated by using EVATM to control the amount of air going into the engine. In recent years, the Company has entered into agreements with 15 companies to retrofit EVA's on different types of diesel, automobile and motorcycle engines for evaluation and testing. During Fiscal 1998 an EVA system was delivered to a major domestic Original Equipment Manufacturer (OEM) which is evaluating EVA for possible use in its automobile production. In Fiscal 1998, the Company developed a new, more reliable servo control system that provides reduced power usage and reduced noise over the entire RPM range. In addition, the Company started work on an improved latching mechanism for EVA that will further reduce noise in the system. In Fiscal 1999 as part of its refocus, the Company temporarily suspended its activities on EVA development and commercialization to focus its resources on the AuraGen. The Company is however, pursuing licensing of this technology to third parties. The Company has not yet entered into any licensing agreements for EVA. C. Certain Product Risk Factors The Company's business on a going-forward basis is focused on the AuraGen family of products and on royalties for the AMA technology. While the technology for the AuraGen has been extensively tested and verified , there are significant risks associated with developing a market place for such a new product. Similarly, the Company is totally dependent on Daewoo Electronics for exploiting the AMA technology. a. AURAGEN(R) The AuraGen is a new product with limited history in the market place. There can be no assurances that the product will succeed in the marketplace. Currently, the Company's AuraGen is being evaluated by the U.S. Army with a potential for a contract to install the AuraGen in thousands of military vehicles. No assurances can be given when or if the contract will materialize and what the ultimate size of the contract may be. The U.S. Army has recently completed the field test of 5kW and 10kW AuraGens. No assurances can be given as to if and when the US Army will conduct other and future tests. The Company has a U.S. Army contract for 10kW AuraGens. No assurances can be given that the Army will purchase any material quantities of this product. The U.S. Marine Corp. has recently purchased 5kW AuraGens for evaluation. No assurances can be given that any sizable contract will develop. The AuraGen is currently configured for 110 and 240 volts. The 240V systems that are in use in other countries are different from the U.S. 240-Volt system. The Company is currently providing a solution that requires an additional transformer. A future solution will incorporate the required changes into the Electronic Control Unit ("ECU). While it is straightforward to make the changes to the international 240 Volt, it has not been done as yet. No assurances can be given as to when the changes will be made or if they will be made. The Company has recently completed the development of a 10kW AuraGen in the same geometric envelope as the 5kW unit. No assurances can be given that such a device will succeed in the market place. The Company is currently cooperating and working closely with General Motors, a major automotive OEM in regard to the AuraGen. Recently General Motors has exhibited the AuraGen as a potential option in selected future vehicles. No assurances can be given that the Company's AuraGen will be offered by General Motors as an OEM option. b. AMA(TM) The Company licensed its AMA technology to Daewoo Electronics Limited of Korea. Since 1992, Daewoo has been responsible for the commercialization, production and sale of the AMA products. Daewoo in fiscal 1999 announced the completion of the commercialization of the AMA. While the Company anticipates that the AMA will be available in the market place in the near future, no assurances can be given as to if and when it will be available. The AMA(TM)/Aurascope(TM) is a new product without a history in the marketplace. There can be no assurances that the product will succeed in the marketplace. The Company's rights under the license agreement provide for a royalty to be paid on every unit sold by Daewoo and 50% of all sublicensing fees collected by Daewoo. No assurances can be given as to when and if the royalty stream will start. D. Competition The Company is involved in the application of its technology to a variety of products and services and, as such, faces substantial competition from companies offering different and competitive technologies. The Company believes the principal competitive factors in the markets for the Company's products include ability to develop and market technologically advanced products to meet changing market conditions, price, reliability, product support and the ability to secure sufficient capital resources for the often substantial periods between technological concept and commercialization. The Company's ability to compete will also depend on its continued ability to attract and retain skilled and experienced personnel, to develop and secure patent and other protection for its technology and to exploit commercially its technology prior to the development of competing products by others. The Company competes with many companies that have more experience, name recognition, financial and other resources and expertise in research and development, manufacturing, testing, and obtaining regulatory approvals, marketing and distribution. Other companies may also prove to be significant competitors, particularly through their collaborative arrangements with research and development companies. Portable generators ("Genset") meet a large market need for auxiliary power. Millions of units per year are sold in North America alone, and millions more are sold across the world to meet market demands for 1 to 10 Kilowatts of portable power. The market for these power levels basically addresses the commercial, leisure and residential markets, and divide essentially into: a) higher power, higher quality and higher price commercial level units; and b) lower power, lower quality and lower price level units. There is significant competition in the auxiliary power market from portable generator sets with such companies as Onan, Honda and Kohler which are well-established and respected brand names in the genset market for high reliability auxiliary power generation. There are presently 44-registered Genset manufacturers ("Gensets"). The following table is a summary comparing the leading Genset products with the AuraGen(TM).
TABLE 1: GENERATORS Onan Honda Honda Kohler AuraGen(TM) Parameters Marquis EG5000X EX5500 5CKM Rated Power 5000 5,000 W 4,500 W 5,000 W 5,000 W 5,000 W Weight 258 146 393 268 68 lbs/117.3 kg lbs/66.4 kg lbs/178.6 kg lbs/122 kg lbs/30.9 kg Cubic Feet/ Cubic Meters 6.72/.19 5.39/.15 26.80/.76 3.71/0.11 0.25/0.01 Output 120 V 120/240 120/240 V V 120/240 V 120/240 V Engine RPM @ Rated Output 1,800 3,600 3,600 1,800 1,300 Noise (DBA @ 10 Ft.)` 73.5 82 65 88.5 64 Load-Follower Economy No No No No Yes
In addition to competition from Gensets, there are six major manufacturers of Inverters in the U.S.; representative of the leaders are Vanner, Dimension and Heart. Inverters provide strong competition in specific markets of the overall market place for mobile power: The specific markets where inverters are strong competitors are Ambulance, Fire and Rescue, Small Recreational Vehicles and Telecommunications. Limitations of Inverters: o Inverters address a much more limited and specialized market than Gensets; o The most significant portion of inverter sales are in the lower power range: i.e., 2500 watts or lower. o True quality Inverter power above 2500 watts requires a 24-volt automotive electrical system (twice 12 volts); and the maximum output for quality power in the commercial market is on the order of 4800 watts. (See Table 2). o Quality power (pure sine wave and well-regulated 60Hz) is a significant cost factor in Inverters (Table 2). o Often, Inverters require upgraded vehicle alternator and battery harness, and--for extended use period without battery charging--an additional battery pack. TABLE 2: INVERTERS
Heart I/F Vanner Vanner Vanner AuraGen(TM) Parameters Freedom 25 Bravo 2600 TB30-12 A40-120X G5000 1. Max Rated Power 2500 2600 4800 5000 (Watts) 2800 2. Weight (LBS) 56 70 75 110 68 2A. Weight Battery Pack No No Add/No Add/No Add/No 3. Overall Cubic In. 1207.5 1866.73 1800 2595.94 432.73 4. 60 Hz Yes Yes Yes Yes Yes 5. Sine Wave @ All RPM Yes Yes Modified Modified Modified 6. Battery Discharge Yes Yes Yes No No Operation 7. Vehicle Engine Noise (DBA @ 10Ft.) 64 64 64 64 64 8. Load Follower-Economy Yes Yes Yes Yes Yes
E. Manufacturing The AuraGen is assembled at Aura's facility in El Segundo, California with parts which are produced by various suppliers. In Fiscal 1996 the Company acquired a 27,692 square foot manufacturing facility in El Segundo for the AuraGen production line. In Fiscal 1998, the Company set up the production facilities in the acquired building. This facility is for assembly and testing and has a production capability of 5000 units per month per operating shift. The Company's ceramic division manufactures its products at its leased 38,000 square foot ceramic facility in New Hope, Minnesota. The class 100 clean room fabrication facility for the AMA product in El Segundo, California was closed in Fiscal 1999 as the Company terminated all manufacturing activities in the electro-optical area. Subsequent to the end of Fiscal 1999 the Company either sold, leased or terminated all of its sound related activities, including all the off-shore facilities and joint ventures. The Company sold MYS Corporation, AuraSound assets, leased the assets of Electrotec, and licensed the AuraSound technology. NewCom ceased most of its operations by the end of Fiscal 1999 after Deutsche Financial Services seized Newcom's inventory. F. Quality Assurance and Testing As the Company focuses its activities on the AuraGen, quality assurance and testing is a very important component. The Company performs qualification testing on the AuraGen hardware components, Electronic Control Unit ("ECU"), all software and on installed in-vehicle systems to ensure reliability in the field. The qualification testing includes; 1) in-house endurance testing, 2) in-house parametric thermal testing, 3) in house power quality testing and 4) independent laboratory environmental testing. In addition, field failure testing is performed on all returned units. In addition to the qualification testing, the Company implemented a fully controlled manufacturing lot traceability system, documentation and configuration control system, as well as, acceptance test and compliance procedures at all manufacturing levels, including suppliers. The Company also uses automated tools for "In Process Inspection" on its AuraGen assembly line. G. Product Development Expenditures During the fiscal years ended February 28, 1999, February 28, 1998, and February 28, 1997 the Company spent approximately $ 2.8 million, $1.4 million and $6.0 million, respectively, on Company sponsored research and development activities. The Company plans to continue its research and may incur substantial costs in doing so. All of the Company's sponsored R & D is focused on technological enhancements and product developments for the AuraGen. H. Patents Since Aura is engaged in the development and commercialization of proprietary technology, it believes patents and the protection of proprietary technology are important to its business. The Company's policy is to protect its technology by, among other ways, filing patent applications for technology which it considers important to the development of its business. The U.S. Patent Office has to date issued 78 patents. A majority of these patents expire between the years 2008 and 2015. The Company's first issued Auragen patent however, expires in the year 2017. Of the issued patents, 29 pertain to its automotive/industrial applications, 21 pertain to its electrooptical applications and 28 pertain to sound applications. There are additional patent applications in various stages of preparation for filing and numerous patents are pending. There are no assurances that any of the patent applications or any new other patents will be issued in the future. The Company believes that its issued and allowed patents enhance its competitive position. I. Employees As of February 28, 1999 the Company employed approximately 500 persons worldwide. During Fiscal 1999 and continuing into Fiscal 2000 the Company has gone through a major down-sizing and restructure. As of February 2, 2000, the Company employed 95 persons. Thirteen people are dedicated to the ceramics operation and 82 to the AuraGen activities. The Company believes that its relationship with its employees is good. The Company is not a party to any collective bargaining agreements. J. Principal Sources of Revenues For the year ended February 28, 1999, multimedia products and modems were the largest single source of revenues on a consolidated basis, constituting approximately $46.8 million or 57.4% of net revenues. Sound related products contributed approximately $29 million or 35.6% of net revenues. During Fiscal 1998 multimedia products on a consolidated basis accounted for approximately $52 million, or 32.3% of gross revenues. Sound related products contributed approximately $31 million or 19.3% of revenues. Modems on a consolidated basis contributed approximately $38 million or 23.6% of Fiscal 1998 revenues. No other products accounted for more than 10% of revenues during the foregoing periods. After the down-sizing, ceasing of NewCom operations and selling the sound related operations, the principal sources of revenues going forward will be related to the Company's AuraGen technology. The AuraGen is a new product with no historical basis for comparison. K. Significant Customers The Company sold sound related products and computer related products on a consolidated basis to four significant customers during Fiscal 1999. Sales of speakers to a major electronics retailer accounted for approximately $16.3 million or 20.1% of revenues. Sales of communications and multimedia products on a consolidated basis to major mass merchandisers Best Buy, Circuit City and Staples accounted for approximately $12.6 million or 15.5% of revenues. After Fiscal 1999 none of the above will be significant customers since the Company will no longer be in the consumer electronics business as it has sold or leased all the sound related operations and NewCom has ceased operations. ITEM 2. PROPERTIES The Company owns a 46,000 square foot headquarters facility in El Segundo, California and a 27,692 square foot manufacturing facility also in El Segundo, California for its AuraGen product. These properties are encumbered by a deed of trust securing a Note in the original principal amount of $5,450,000. The Company leases an approximate 38,000 square foot ceramic facility in New Hope, Minnesota. Subsequent toFiscal 1999 the Company as part of its refocus and downsizing, vacated approximately 135,000 square feet of facilities. In addition, the Company sold or terminated all of its joint ventures and foreign activities. The Company retains approximately 115,000 square feet in facilities and believes that such is adequate for its present needs. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in various legal actions listed below. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. Shareholder Litigation Barovich/Chiau v. Aura In May, 1995 two lawsuits naming Aura, certain of it 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. A settlement agreement for this proceeding was submitted to the Court on July 20, 1998, for preliminary approval, at which time the Court denied the plaintiffs' motion for approval of the settlement. On September 22, 1998, the Company and certain of its officers and directors renoticed their motion for summary judgment. Thereafter, on January 8, 1999, the plaintiffs and the defendants in the Barovich action executed a Stipulation of Settlement pursuant to which the Barovich action would be settled in return for payments by Aura and its insurer to the plaintiff's settlement class and plaintiff's attorneys in the amount of $2.8 million in cash (with $800,000 to be contributed by Aura and $2 million to be contributed by Aura's insurer, subject to a reservation of rights by the insurer against the insureds) and $1.2 million in cash or common stock, at the Company's option, to be paid by Aura. Subsequently the parties and the insurer entered into an amended settlement agreement. As amended the settlement calls for the total settlement amount of $4 million to remain the same, with the insurer contributing $1.8 million, and the remaining $2.2 million to be paid by Aura in cash over a period of three years, with accrued interest at the rate of 8% per annum. The settlement was preliminarily approved by the Court on December 6, 1999, and is subject to final confirmation by the Court on March 20, 2000. 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. In June, 1998, the Court entered an order staying further discovery in order to facilitate completion of settlement discussions between the parties. On October 12, 1998, the parties entered into a stipulation for settlement of all claims, subject to approval by the Court. Under the stipulation for settlement Aura agreed to pay $4.5 million in cash or stock, at Aura's option, plus 3.5 million warrants at an exercise price of $2.25. In addition, Aura's insurance carrier agreed to pay $10.5 million. The settlement was finally approved by the Court in October 1999 and was thereafter amended in December 1999 to allow Aura to defer payment of the settlement amount until April 2000 in exchange for an additional 2 million shares of Aura Common Stock, subject to certain adjustments. NewCom Related Litigation American Casualty v. Aura On June 22, 1999, a lawsuit naming Aura was filed in the United States District Court for the Central District of California, American Casualty Company of Reading, Pennsylvania ("American Casualty") vs. Aura et. al. (Case No. CV-99-06343). The complaint alleges that American Casualty, as surety, executed and delivered a performance bond on behalf of NewCom to Actrade Capital, Inc. ("Actrade") in 1998, which American Casualty became liable to obligee Actrade when NewCom defaulted on repayment of the penal sum of $4,427, 093.92. In seeking damages from NewCom, American Casualty further alleged that Aura was liable because it executed an express general agreement of indemnity, indemnifying American Casualty on the referenced NewCom bond and a rider which became the subject of the litigation. Aura answered the complaint and NewCom defaulted. Subsequently, in December, 1999, the parties reached mutually an agreement in principal to settle the matter, Aura agreeing to pay American Casualty: (i) $1,000,000 plus interest at a rate of 8% per annum from December 1, 1999, in thirty-six equal monthly installments commencing March 2000; (ii) $1,000,000 plus interest at a rate of 8% per annum from December 1, 1999, in twenty-four equal monthly installments commencing December 1, 2002; and (iii) warrants to purchase up to 1,000,000 shares of the Company's common stock thirty three months from November 1, 1999 at a pre-reverse stock split exercise price of $2.46 per share. The Company expects to enter into the settlement prior to February 29, 2000, which is in accordance with Aura's restructure. NEC Technologies v. NewCom In 1998, a lawsuit naming NewCom, Inc. was filed in the Superior Court of the State of California, Los Angeles County, NEC Technologies vs. NewCom et. al (Case No. YC 033592). The complaint alleged that NewCom failed to pay NEC for products purchased in the sum of approximately $3,000,000. Subsequently, NEC and NewCom entered into a stipulated settlement where Aura guaranteed expressly NewCom's performance on the settlement. NewCom thereafter defaulted on the settlement and the stipulated judgment was filed in April, 1999. Following negotiation by Aura and NEC, in November, 1999, a settlement was entered into whereby NEC is to receive $2,479,142 plus interest at eight percent per annum in thirty-six equal monthly installments, which is in accordance with Aura's restructure. Deutsche Financial Services v. Aura In June, 1999, a lawsuit naming Aura was filed in the United States District Court for the Central District of California, Deutsche Financial Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The complaint follows DFS' termination of its credit facility with NewCom of $11,000,000 and seizure of substantially all of NewCom's collateral in April, 1999. It alleges, among other things, that Aura is liable to DFS for NewCom's indebtedness under the secured credit facility purportedly guaranteed by Aura in 1996, well prior to the NewCom initial public offering of September 1997. In the proceeding, DFS sought an order to attach Aura's assets which was denied following an evidentiary hearing before the Honorable Brian Quinn Robbins, U.S. Magistrate, and the matter has been ordered by the District Court to binding arbitration. Aura has now responded in arbitration, denying DFS'claims and has asserted in its defense, among other things, that the guarantee, if any, is discharged. In addition, Aura through its counsel, has asserted cross-claims for, among other things, tortious lender liability, alleging that DFS wrongfully terminated the NewCom credit facility, wrongfully seized the NewCom collateral and wrongfully foreclosed upon NewCom collateral, acting in a commercially unreasonably manner. A panel of three arbitrators has been selected and appointed by the American Arbitration Association and a hearing in the arbitration has been set for May, 2000. The Company believes it has meritorious defenses and cross-claims. However, no assurances can be given as to the ultimate outcome of this proceeding. Excalibur v. Aura On November 12, 1999, a lawsuit was filed by three investors against Aura and Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054) arising out of two NewCom, Inc. financings consummated in December 1998. The NewCom financings comprised (1) a $3 million investment into NewCom in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and certain "Repricing Rights" which entitled the investors to receive additional shares of NewCom Common Stock in the event the price of NewCom Common Stock fell below a specified level, and (2) a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to purchase NewCom Common Stock. As part of these financings Aura agreed with the investors to allow their Repricing Rights with respect to NewCom Stock to be exercised for Aura Common Stock, at the investors' option. Aura also agreed to register Aura Common Stock relating to these Repricing Rights. The Plaintiffs allege in their complaint that Aura breached its agreements with the Plaintiffs by, among other things, failing to register the Aura Common Stock relating to the Repricing Rights. The Plaintiffs further allege that Aura misrepresented its intention to register the Aura shares in order to induce the Plaintiffs to loan $1.0 to NewCom. The Complaint seeks damages of not less than $4.5 million. In January 2000 Aura filed counterclaims against the Plaintiffs, including claims that the Plaintiffs made false representations to Aura in order to induce Aura to agree to issue its Common Stock pursuant to the Repricing Rights. The Company believes that it has meritorious defenses and counterclaims to the Plaintiffs' allegations. However, no assurances can be given as to the ultimate outcome of this proceeding. Securities and Exchange Commission Settlement. In October, 1996, the Securities and Exchange Commission ("Commission") issued an order (Securities Act Release No. 7352) instituting an administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The proceeding was settled on consent of all the parties, without admitting or denying any of the Commission's findings. In its order, the Commission found that Aura and the others violated the reporting, recordkeeping and anti-fraud provisions of the securities laws in 1993 and 1994 in connection with its reporting on two transactions in reports previously filed with the Commission. The Commission's order directs that each party cease and desist from committing or causing any future violation of these provisions. The Commission did not require Aura to restate any of the previously issued financial statements or otherwise amend any of its prior reports filed with the Commission. Neither Mr. Kurtzman nor anyone else personally benefited in any way from these events. Also, the Commission did not seek any monetary penalties from Aura, Mr. Kurtzman or anyone else. For a more complete description of the Commission's Order, see the Commission's release referred to above. Other Legal Actions The Company is also engaged in other legal actions. In the opinion of management, based upon the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since 1988, Aura Common Stock has been quoted on the Nasdaq Stock Market under the trading symbol "AURA". On May 21, 1991, Aura shares became listed on the Nasdaq National Stock Market. On July 21, 1999 the Company's shares were delisted from Nasdaq National Market. This action was taken as a result of the Company's failure to meet the filing, minimum $1.00 bid price and listing of additional shares as stated in the Market Place Rules. Since that date the Company's stock has traded on the over the counter market. Set forth below are high and low sales prices for the Common Stock of Aura for each quarterly period in each of the two most recent fiscal years. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions in the Common Stock. The Company had approximately 4450 stockholders of record as of February 3, 2000. Period High Low Fiscal 1998 First Quarter ended May 31, 1997 $2.78 $1.47 Second Quarter ended August 31, 1997 $2.13 $1.50 Third Quarter ended November 30, 1997 $3.94 $2.00 Fourth Quarter ended February 28, 1998 $3.75 $2.25 Fiscal 1999 First Quarter ended May 31, 1998 $3.69 $2.59 Second Quarter ended August 31, 1998 $1.25 $1.00 Third Quarter ended November 30, 1998 $1.81 $0.91 Fourth Quarter ended February 28, 1999 $1.50 $0.34 On February 3, 2000, the average high and low reported sales price for the Company's Common Stock was $0.27. Dividend Policy The Company has not paid any dividends on its Common Stock and currently intends to retain any future earnings for use in its business. The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future but has no restrictions preventing it from paying dividends. Changes in securities and Use of Proceeds In December 1998 the Company completed a private placement of 3,597,300 shares of its common stock and warrants to purchase 1,798,650 shares of common stock at an exercise price of $1.00 per share to a group of private investors. On December 1, 1998 (the "Initial Closing Date"), NewCom consummated a private placement of its Common Stock, warrants and Repricing Rights pursuant to Regulation D of the Securities Act of 1933 to three private investors. On the Initial Closing Date the Company received gross proceeds of $3 million in exchange for the issuance of 871,288 shares of its Common Stock, Warrants exercisible for five years for up to 166,337 shares of Common Stock at an exercise price of $4.545, and 792,088 Repricing Rights. On December 28, 1998, the same investors consummated an additional financing with NewCom pursuant to certain Notes of NewCom secured by a junior lien on Newcom's inventory and accounts receivable and issued an aggregate of 75,000 Warrants to purchase NewCom Common Stock. The Repricing Rights entitle the holder to purchase that number of shares of Common Stock of NewCom ("Repricing Shares") determined by multiplying the number of Repricing Rights by a fraction, the numerator of which is the Repricing Price minus the Average Market Price (as defined below), and the denominator of which is the Average Market Price (defined as the two lowest closing bid prices during the 20 trading days immediately preceding the exercise date of the Repricing Rights). The "Repricing Price" for the 792,088 Repricing Rights received on the Initial Closing Date is $4.32, being 114% of the Initial Closing Date price of $3.79 (computed based upon the average closing bid prices for the five consecutive trading days ending on the day immediately preceding the Initial closing Date) if the Repricing Rights are exercised within 135 days of the Initial closing Date; $4.40, being 116% of the Initial closing Date Price, if the Repricing Rights are xercised between the 136th and the 180th day of the Initial Closing Date; and an additional 2% during each 45 day period following 180 days from the Initial closing Date. The Repricing Price is increased by 7.5% if the Common Stock is listed for trading on the Nasdaq SmallCap Market, and 15% if the Common stock is not listed on a national stock exchange or the Nasdaq Stock Market or upon the occurance of a "Repurchase Event" as described below. The investors also have the right to elect to receive shares of Aura Common Stock upon exercise of the Repricing rights in lieu of NewCom Common Stock, based upon the Average Market Price of Aura Common stock at the time of exercise of the Repricing Rights. In January Aura commenced legal proceedings against these investors seeking, among other things, the recission of Aura's obligations to honor the Repricing Rights. See "Item 3, Legal Proceedings" elsewhere herein. ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data has been taken or derived from the audited consolidated financial statements of the Company and should be read in conjunction with and is qualified in its entirety by the full consolidated financial statements, related notes and other information included elsewhere herein. AURA SYSTEMS, INC. AND SUBSIDIARIES
February 28, February 28, February 28, February 29, February 28, 1999 1998 1997 1996 1995 Net Revenues $ 81,518,162 $136,715,385 $109,950,202 $77,088,850 $42,444,213 ------------- ----------- ----------- ---------- ---------- Cost of goods and overhead 158,024,723 101,622,051 86,350,828 71,849,204 30,198,196 Research and development expenses 2,831,847 1,395,160 6,022,586 5,225,735 2,037,464 Impairment of long-lived assets 9,403,687 -- -- -- -- Selling, General and administrative Expenses 74,419,812 45,018,066 18,542,840 26,399,794 12,771,151 -------------- ---------- ---------- ---------- ---------- Total costs and expenses 244,680,069 148,035,277 110,916,254 103,474,733 45,006,814 (Loss) from operations (163,161,907) (11,319,892) (966,052) (26,385,883) (2,429,340) Other income and expense Gain on sale and issuance of Subsidiary stock and other assets (1,042,665) (12,952,757) (250,000) -- -- Interest expense (income) net 12,014,690 6,827,269 1,415,934 (289,793) 220,539 Class action litigation and Other settlements 7,717,518 1,700,000 -- -- -- Loss on disposal of assets 1,188,329 -- -- -- -- Termination of license Arrangements -- 3,114,030 -- -- -- Loss on disposal of investment 4,877,839 -- -- -- -- Equity in losses of unconsolidated Joint ventures 6,268,384 1,937,747 -- -- -- Minority interests in income (loss) of Consolidated (10,372,895) 946,405 -- -- -- subsidiaries Loss in excess of basis of consolidated subsidiary 8,080,695 -- -- -- -- Excess loss of minority interest 26,561,481 -- -- -- -- Provision (benefit) for income Taxes 570,641 (1,256,046) 570,484 -- -- Foreign currency translation adjustment (406,576) -- 40,642 -- -- --------------- ------------ ----------- ------------ ----------- Net (loss) $(150,148,156) $(11,636,540) $(2,880,111) $(26,087,090) $(2,649,879) ============== =========== =========== ============ =========== Net (loss) per common share $ (1.74) $ (.15) $ (.04) $ (.48) $ (.07) ============== =========== =========== ============= ============ Weighted average number of Common shares 85,831,688 79,045,290 68,433,521 53,860,527 37,217,673 ================ ============ ========== ========== ========== Working capital (deficit) (4,869,876) 78,143,895 62,310,715 71,362,882 33,796,181 Total assets 90,143,392 227,302,629 182,528,399 134,080,568 73,467,003 Total liabilities and deferrals 103,797,049 110,400,761 57,050,812 34,917,462 19,213,584 Net stockholders' equity (deficit) (13,653,657) 116,901,868 125,477,587 99,163,106 54,253,419
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN RESULTS OF OPERATIONS RESULTS OF OPERATIONS Introduction During the Fiscal year February 28, 1999 the Company devoted substantial financial and human resources in furtherance of its plan to manufacture and sell its patented, proprietary AuraGen product. As is often the case with the introduction of a capital intensive product launch, Aura anticipated that in order to implement it's business plan, working capital would be required in an amount that would exceed cash flow generated from any initial sales of the AuraGen. The Company expected that its working capital needs would be met from, among other things, the repayment by NewCom Inc. ("NewCom") of approximately $20 million of indebtedness which was due in September 1998 and with proceeds from external debt and equity financing. NewCom was ultimately unable to meet its obligations to Aura in September 1998, creating a significant cash shortfall to Aura. NewCom's operations in the third quarter of Fiscal 1999 were severely impacted by an industry-wide slump in the computer peripherals industry, causing a buildup in inventory and difficulty in collecting receivables from the mass merchants. NewCom's business reached a critical juncture in the fourth quarter of Fiscal 1999 when Deutsche Financial Services ("DFS"), which provided NewCom's principal working capital line, announced that it was unwilling to continue to advance working capital to NewCom under its credit facility. This, coupled with the retail mass merchants failure to pay NewCom for significant receivables past due and owing, resulted in NewCom ceasing its day-to-day operations, in January 1999. These events substantially impacted Aura's results of operations for Fiscal 1999. Commencing January 1999 Aura's management was forced to take steps to curtail and refocus its plans and implement measures to reduce its overhead until such time as additional working capital could be obtained. These steps included employee layoffs, selling the Company's MYS speaker division to its former owners, eliminating the display division, temporarily suspending development activities associated with the EVA program, leasing all the assets of Electrotec, selling the AuraSound subsidiary assets and the licensing of the proprietary NRT and Line Source speaker technologies. In Fiscal 2000 the Company reached an agreement in principle to sell the ceramics assets located in New Hope, Minnesota to the president of the subsidiary. The Company's ability to maintain its focused AuraGen operations required an infusion of working capital and the restructure of Aura's principal indebtedness. The Company believed that the restructure of this indebtedness was required in order to obtain working capital from other third parties. Management therefore developed an informal restructure plan under which approximately $35.0 million of indebtedness consisting of convertible debt and other debt obligations would be eliminated. By the end of the third quarter of Fiscal 2000 the Company had entered into agreements to eliminate approximately $32.2 million of debt, and providing for the conversion of most of such debt into equity. In addition, the Company has entered into an agreement to restructure approximately $17.4 million of additional debt ("Infinity note") into a $12.5 million, 36 month 8 percent note, with interest only payments and a balloon payment at the end of the 36 months. The Company is also a party to certain express written corporate guarantees of NewCom indebtedness, including a guarantee of NewCom's indebtedness to DFS of approximately $7.2 million and two other creditors with claims for $2.4 million and $4.4 million respectively. The Company reached a settlement agreement with American Casualty and NEC Technologies for the above guarantees (See Legal Item 3, Legal Proceedings, NewCom Related Litigation). In April 1999 DFS commenced legal proceedings against the Company to obtain an attachment on Aura's assets to secure Aura's guarantee obligations. The court denied the DFS motion and the matter has been ordered to binding arbitration. Aura has responded in arbitration, denying DFS claims and has asserted in its defense, among other things, that the guarantee, if any, is discharged (See NewCom Related Litigation). In the third quarter of Fiscal 2000 the Company completed a private placement of $6.9 million in the form of common stock and debt that will convert into common stock upon the execution of the restructured Infinity note. Since January 1999 the Company's limited resources have been devoted almost entirely to the AuraGen product, the restructure of debt and the raising of new working capital. Although the Company has experienced delays in the shipping of AuraGen products since the beginning of 1999 as a result of insufficient working capital, necessary parts started to be obtained by late 1999 and limited shipments of AuraGens are now being made. Over 33 state and city governments across the U.S have purchased evaluation units and some cities have already specified the AuraGen as a requirement for some of their vehicles. Over 23 utilities in the U.S have also purchased and are evaluating the AuraGen for their applications and requirements. The Company has shipped a number of AuraGen units to two major telecommunication companies and numerous state and federal agencies are evaluating the AuraGen for their specific applications. The Company continues to support the U.S Army in its evaluation of the AuraGen (known to the U.S. Army as VIPER). The Company has continued to develop different engine mounts for the AuraGen. As of January 2000, the Company has started production of mounts that will fit most of the trucks, pickups and SUV's built in North America by the three major OEMs. The Company's 5KW model is now available for more than 70 different vehicle models and engine configurations. The Company continues to work closely with General Motors which has displayed the AuraGen on both the Sierra 2000 professional concept vehicle and the Terradyne concept vehicle. Fiscal 1999 as Compared to Fiscal 1998 The Company continued its activity in development of commercial applications of its proprietary magnetic technologies. The Company has reported a net loss for each of its five most recent fiscal years. The second half of Fiscal 1999 had significant negative results from operations which caused significant cash shortfall problems that affected the entire operation. Revenues Net revenues in Fiscal 1999 declined to $81.5 million from $136.7 million, a decrease of 40.4%. The decrease was primarily due to the virtual shutdown of operations of NewCom in the last quarter of the fiscal year, coupled with the decline in sales of NewCom in the third quarter of the Fiscal year. The decline in sales was primarily a result of price pressures in the retail channel as well as a substantial decline in sales to one of NewCom's major customers. In the last half of the fiscal year, as NewCom's business began to deteriorate in conjunction with the overall deterioration of the computer peripherals industry, the levels of returned goods began to accelerate. In the last quarter of the fiscal year, when NewCom's operations virtually shutdown, returns increased dramatically as retailers began to ship back product for fear that NewCom would go out of business and would not be able to fulfill warranty and other business obligations. Magnification of this stemmed from its lender "DFS" and a judgement creditor each sending correspondence to the retail mass merchants asking that they remit payments to them. A court battle produced an order describing whom to pay, which was sent to the retail customer. The above actions added to the uncertainties of NewCom's future and further deteriorated NewCom's relationships with its customers. Cost of Goods and Overhead Cost of goods and overhead increased to $158.0 million in Fiscal 1999 from $101.6 million in Fiscal 1998. This increase both in dollar terms and as a percentage of revenues is primarily a result of the price pressures from the retail mass merchants which included the substantial rebates that were required in order to maintain shelf space, as well as the overall business conditions at the Company's NewCom subsidiary as described above. Gross Margin and Net Loss Gross margins for Fiscal 1999 were a negative 93.9% compared to 25.7% in Fiscal 1998, primarily due to the substantial drop in gross margin at NewCom in the third and fourth quarters of the Fiscal year. In the third and fourth quarters of the Fiscal year, price pressure applied by NewCom's major customers and inventory write-downs which reflected the change in the computer peripherals industry resulted in substantially higher costs of product sold as a percentage of the selling price. Coupled with the substantial rebates NewCom was required to offer, the resulting gross margins were negative. During the fourth quarter of Fiscal 1999 the Company experienced severe cash flow problems that had a major impact on the entire operations of the Company. The Company began to consolidate its operations around the AuraGen technology and product. The Company terminated all of its joint ventures due to its inability to support them. As the Company was cutting down and scaling back its operations the Company evaluated its asset utilization and concluded that certain assets values had been impaired. In addition numerous assets such as machinery and equipment that were no longer needed were sold at a loss. The Company over the years has made strategic investments in order to improve its utilization of certain technologies. As the company eliminated operations, these investments no longer retained their economic value. In addition to the Company`s heavy losses in its NewCom investment the Company was also a party to certain explicit written guarantees that were triggered when NewCom's business deteriorated. The following table summarizes certain fourth quarter events that contribute to the loss in Fiscal 1999. Termination of Joint Ventures $5.6 million Depreciation Expense $4.6 million Accounts Receivable reserves and write-off's $13.0 million Asset Impairment $9.4 million Interest Expense $3.5 million Disposed Assets $1.2 million Investment write-off's and losses $7.0 million Guarantees for NewCom $9.9 million NewCom loss (Aura Share) $45.8 million Total $100.0 million Research and Development Research and development expense for Fiscal 1999 increased to $2.8 million from $1.4 million in Fiscal 1998 as the Company focused all its remaining resources on developing additional engine mounts for the AuraGen, and researching ways to expand its applications. Selling, General & Administrative Selling, general and administrative expenses increased to $74.4 million in Fiscal 1999 from $45 million in Fiscal 1998. The increase is primarily attributable to a substantial increase in sales and marketing related expenses at NewCom as the major retailers required higher levels of sales promotions and marketing allowances. Further, increased amortization of product design related costs were necessary to account for impairment of these assets due to shorter life cycles of products. Bad Debt Expense Bad debt expense in Fiscal 1999 increased to $13.3 million from $3.6 million in Fiscal 1998. Interest Expense Net interest expense for Fiscal 1999 increased to $12.0 million from $6.8 million in the prior Fiscal year. The increase is attributable to higher levels of borrowing and a quarterly fee being charged to interest expense on the $15 million note that was renegotiated in September of 1997. Fiscal 1998 as Compared to Fiscal 1997 The Company continued its activity in the development of commercial applications of its proprietary technologies as well as sales of commercial products. The Company has reported a net loss for each of its five most recent fiscal years. Revenues Net revenues were $136.7 million as compared to $110.0 million in Fiscal 1997, or an increase of 24.3%. The increase in revenue was due primarily to the increase in sales of computer products by the Company's NewCom subsidiary along with an increase in sales in speakers from the sound group. Sales of computer monitors to two unrelated parties declined to approximately $10 million in Fiscal 1998 or 6.2% of revenues, from $16.5 million or 12.3% of revenues in Fiscal 1997. These sales are expected to continue to decline both in dollar terms and as a percentage of revenues as the Company continues to expand its product line and its customer base. Although the Company does not have any long term agreement with any customers, it has no reason to believe that sales to customers will be abruptly curtailed. Cost of Goods and Overhead Cost of goods and overhead increased to $101.6 million in Fiscal 1998 from $86.4 million in Fiscal 1997. While the dollar value increased as a result of the increase in sales, as a percentage of net revenues, cost of goods decreased to 74.3% from 78.5% in the prior fiscal year. As the Company continues to bring new products to market and introduce new variations of existing products, this percentage may fluctuate substantially in future periods. Gross Margin and Net Loss Gross margins for Fiscal 1998 increased to 25.7% from 21.5% in Fiscal 1997 partially due to the increase in gross margin for the Company's subsidiary NewCom to 34.8% in Fiscal 1998 from 33.6% in Fiscal 1997. Due to the increase of the Company's business and in particular as it relates to consumer electronics, the Company in the fourth quarter increased its reserve for potential returns of merchandise as well as product obsolescence and potential bad debts. On a consolidated basis the reserve increased to approximately $10.5 million or 4.6% of assets as compared to $5.8 million or 3.2% of assets in the prior year. The following table summarizes the above discussion in the form of percentages. FY 98 FY 97 Net Revenues 100.0% 100.0% Cost of Goods Sold 74.3% 78.5% Gross Margins 25.7% 21.5% SG&A and R&D 33.9% 22.6% Loss from Operations 8.3% 1.1% Net Loss 8.5% 2.7% During the fourth quarter the Company attended two major tradeshows. The CES show in January and the SAE show in February. Both of these had a bias effect on expenses for the fourth quarter by approximately $0.9 million. During the fourth quarter the Company experienced an incremental increase in interest of approximately $1.2 million due to the conversion of a $15 million convertible note to a straight note in late 3rd quarter and additional interest incurred on a $10 million financing that also occurred in late 3rd quarter. Legal expenses increased above other periods in the fourth quarter as legal activities increased in numerous areas. After a careful analysis and review of expenses the Company consolidated and relocated its main warehouse facilities from San Diego, California to Kansas City, Missouri. The cost of approximately $0.8 million associated with this consolidation will be saved in approximately one year. Due to uncertainties created by India's detonation of nuclear devices and U.S. sanctions against India the Company reserved $3.1 million in license fee due from K&K in India for the AuraGen. The Company also incurred losses from foreign non-consolidated Joint Ventures of approximately $1.9 million. After year-end the Company settled one class action suit and other litigation and took a charge of $1.7 million in Fiscal 1998. The following table summarizes certain fourth quarter events contributed to the loss in Fiscal 1998 as described above. a. Seasonal expenses during the fourth quarter $0.9 million b. Increment increase in 4th quarter interest expense $1.2 million c. Increment increase in 4th quarter legal expenses $0.5 million d. Consolidate and relocate warehouse facilities in Kansas Ci $0.8 million e. Reserve on AuraGen License in India due to US sanctions $3.1 million f. Loss on foreign joint ventures $1.9 million g. Legal settlements $1.7 million Total $10.1 million Research & Development Research and development costs for Fiscal 1998 decreased to $1.4 million from $6.0 million in Fiscal 1997. The Company continues its research and development in the areas of displays and micromachines, automotive applications of magnetics and sound systems. As a percentage of net revenues research and development expenses declined in Fiscal 1998 to 1.0% as compared 5.5% in the prior year. Selling, General & Administrative Selling, general and administrative expenses increased to $45 million in Fiscal 1998 from $18.8 in Fiscal 1997, for an increase of $26.2 million. The increase is comprised principally of the following: $8.86 million increase from the NewCom subsidiary; an increase in bad debts over the prior year due to the write-off of $4.9 million in license fees; an increase in legal fees over the prior year of approximately $1.0 million; an increase in sales promotion of approximately $1.5 million, an increase of payroll and associated benefits of approximately $2.7 million with the addition of 40 new employees and an increase in depreciation and amortization of approximately $1.3 million. Bad Debt Expense Bad debt expense in Fiscal 1998 increased to $3.6 million from $0.7 million in Fiscal 1997. Interest Expense Net interest expense for Fiscal 1998 was $6.8 million as compared to net interest expense of approximately $1.4 million in the prior fiscal year. The increase was due to increased lines of credit that were utilized throughout the year, higher levels of debt issued by the Company, premiums paid on the repurchase of convertible notes, and a higher interest rate on a $15 million note. Liquidity and Capital Resources As a result of the decline in the Company's ownership percentage in NewCom to below 50%, the balance sheet, as of February 28, 1999 does not reflect NewCom on a consolidated basis. This resulted in a significant decrease in current assets and current liabilities for 1999 in comparison to 1998. Net working capital decreased by $64.5 million to $(4.8) million at Fiscal 1999 year end, with the current ratio decreasing to .88:1 from 1.76:1. The principal differences in the Company's accounts from February 28, 1998 to February 28, 1999 are a decrease in cash and equivalents of $2.3 million, a decrease in net receivables of $46 million, a decrease in inventories of $40 million a decrease in notes payable of $20.4 million and a decrease in accounts payable and accrued expenses of $17.4 million. The Company's cash balances were $3,822,210 at February 28, 1999, $6,079,411 at February 28, 1998 and $7,112,354 at February 28, 1997. The net cash used in operating activities of $24.3 million decreased by $5.3 million due primarily to the increase in the loss incurred offset by the decreases in accounts receivable, inventory and accounts payable as a result of the cessation of NewCom's business. The level of inventories has decreased primarily due to NewCom. In Fiscal 1998, the Company raised $584,850 from the exercise of warrants, $900,000 from the sale of warrants and $51,500 from the exercise of stock options. The Company also received proceeds of $34,500,000 from the issuance of convertible notes payable. In June 1998 the Company completed a refinancing of two properties owned by Aura in El Segundo, consisting of its headquarters and an adjacent facility. As part of the financing the Company encumbered these properties with a first deed of trust securing a Note in the amount of $5,450,000, resulting in net cash to the Company of approximately $3.0 million. Spending for property and equipment amounted to $4,053,848 in Fiscal 1999, $18,006,394 in Fiscal 1998 and $22,855,000 in Fiscal 1997. Of the Fiscal 1999, 1998 and 1997 amounts, $1,910,611, $16,096,180 and $16,539,899 respectively was due to the manufacture of tooling and the remainder was due to the expansion of facilities and purchases of equipment which was necessary in connection with research and development activities, services performed under various subcontracts and manufacturing requirements. The Company's cash flow generated from operating activities has to date not been sufficient to fund its working capital needs. In the past, the Company has relied upon external sources of financing to maintain its liquidity, principally private and bank indebtedness and equity financing. No assurances can be provided that these funding sources will be available in the future. The Company currently intends that funding required for future growth, operations or any joint ventures entered into would occur through a combination of existing working capital, operating profits, bank credit lines, equity and favorable financial terms from vendors. The inability of the Company to obtain sufficient working capital at the times and in the amounts required would have a material adverse affect on the Company's business and operations. Current fixed monthly expenses corporate wide, average approximately $900,000, principally for labor, overhead, travel and professional fees. The Company and its subsidiaries lease space located in El Segundo, New Hope, Minnesota, and Kansas City, Missouri. Minimum monthly rents under the leases approximate $55,000. Rent expense was approximately $1.8 million for Fiscal 1999, $1.3 million, for Fiscal 1998, and $1.3 million for Fiscal 1997. Assuming no lease terminations or lease extensions, rent expense is expected to be approximately $650,000 for Fiscal 2000, $680,000 for Fiscal 2001, and $570,000 for Fiscal 2002. The Company has no other material long-term capital commitments. Debt Restructuring Following is a description of the principle components of Aura's debt restructuring: Restructuring of RGC International Investors, LDC, Debt. Between October 1997 and March 1998 the Company issued an aggregate of $21.5 million of its convertible unsecured debentures to RGC International Investors, LDC ("RGC"). The debentures accrued interest at the rate of 7% per annum, with the entire principle amount due and payable between 2002 an 2003, and were convertible into common stock based upon a formula related to the market price of the Common Stock. In October 1998 the Company issued to RGC a $3 million convertible note which was secured by a lien on certain of the Company's assets. In October 1999 the Company entered into an agreement with RGC International Investors, LDC and a third party investor (AuraSound's assets purchaser) whereby RGC (i) sold to the third party the Company's three Convertible Unsecured Debentures (the "RGC Debentures"), in the aggregate principal amount of $17,365,000, (ii) exchanged with the Company its $3 million Secured Convertible Note for a new non-convertible Secured Note (the "New RGC Note") in the principal amount of $3 million, and (iii) cancelled Warrants to purchase 9,000,770 shares of the Company's Common Stock in exchange for new Warrants to purchase 1,000,000 shares of common stock exercisable at $0.375 per share. The New RGC Note bears interest at the rate of 8% per annum, with principal and interest payable no less frequently than quarterly. The New RGC Note continues to be secured by a lien on certain assets of the Company, including inventory and accounts receivable. Under the agreement with the new holder of the RGC Debentures, the RGC Debentures are convertible into a maximum of 46,500,000 shares of the Company's Common Stock unless Aura fails to complete the restructuring with Infinity. The holder of the RGC Debentures has agreed to cancel the outstanding principal and interest owed under the RGC Debentures upon consummation of the restructuring of approximately $17.4 million of outstanding Debentures held Infinity. See "Restructuring of Infinity Investors debt" below. Retirement of JNC Debt In June 1997 the Company issued a $4 million convertible debenture in a private placement JNC Opportunity Fund, Ltd. ("JNC"). The debenture accrued interest at the rate of 7% per annum, payable quarterly, and is due and payable was June 1999. The Debenture was convertible into shares of the Company's Common Stock at the then current market price at the time of conversion. The investor also received 318,000 warrants exercisable at ($3.50) per share. In December 1999, the Company consummated an agreement with JNC Opportunity Fund, Ltd. resulting in the surrender for cancellation by JNC of the Company's Convertible Debenture and 318,000 warrants in exchange for a cash payment of $430,000, 3,500,000 shares of the Company's Common Stock and 113,000 Restructuring of Infinity Investors Debt In March 1997 the Company issued $15 million of convertible Debentures to a group of accredited investors in a private placement. The Debentures were convertible into Common Stock of the Company in accordance with a stated formula. In October 1997 the Company and the investors entered into an Agreement modifying the Debentures to eliminate the conversion feature in exchange for increasing the interest rate on the principal to 18% and the payment of a quarterly fee of $935,000 for each quarter during which the Debentures remain outstanding. The stated maturity of the Debentures was shortened from March 2000 to September 1998. The Debentures, as modified, are secured by a Note from NewCom to Aura in the original principal amount of $17 million and 1,250,000 shares of NewCom stock, subject to adjustment under certain circumstances. As part of the modification, the Company issued warrants for an aggregate of 2,500,000 shares of Common Stock at an exercise price of $2.50 per share, subject to adjustment after one year under certain circumstances. The Company was unable to retire the Debentures upon their maturity in September 1998. As of February 28, 1999 these debentures had an outstanding balance of approximately $17.4 million. Subsequent to September 1998 the Company engaged in extensive negotiations with the holders of these Debentures. In November 1999 the Company entered into an agreement with these holders to exchange (the "Exchange") the Debentures for $3 million in cash, 1,111,111 shares of common stock, 100,000 Warrants exercisable $0.375 per share, and a new Secured Note (the "New Secured Note") in the principal amount of $12.5 million. The New Secured Note will be secured by a lien on the Company's assets, will bear interest at the rate of 8% per annum, interest only payable quarterly, with the principal due three years from the date of the exchange. In the event of a default under the New Secured Note, the holder is entitled to convert the unpaid principal and interest into Common Stock of the Company at $.60 per share. The Company is entitled to a discount if the New Secured Note is prepaid, which discount is initially 20% of the amount prepaid, and the discount declines ratably over the three year term of the New Secured Note. Consummation of the Exchange is subject to completion of a definitive agreement with the holders of the Debentures, which is expected to occur in February 2000. Restructuring of Trade debt In December 1999, the Company implemented a restructuring of approximately $10.8 million of trade debt held by certain trade creditors whereby the holders of a substantial portion of the trade debt have agreed to the repayment of outstanding trade debt over a period of three years, with interest at 8% per annum, commencing January 2000. Certain trade payables are subject to continuing negotiations with the creditors. Completion of Common Stock Private Placement In November 1999 the Company completed a private placement of approximately 27 million shares of its Common Stock at $0.27 per share, resulting in gross proceeds of approximately $6.9 million. Recently Issued Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5 (SOP No. 98-5), "Reporting on Costs of Start-up Activities." Adoption of SOP No. 98-5 will have no material impact on the Company's financial statement. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Identification of Directors The following table sets forth all of the current directors, executive officers and key employees of Aura, their age and the office they hold with the Company. Executive officers and employees serve at the discretion of the Board. All directors hold office until the next annual meeting of stockholders of the Company and until their successors have been duly elected and qualified.
NameAge Position with the Company Directors Zvi Kurtzman 52 Chief Executive Officer, Chairman, Board of Directors Gerald S. Papazian 44 President and Chief Operating Officer, Director Arthur J. Schwartz, Ph.D. 52 Executive Vice President, Director Cipora Kurtzman Lavut 43 Senior Vice President, Corporate Communications, Director Neal B. Kaufman 54 Senior Vice President, MIS, Director Steven C. Veen 44 Senior Vice President and Chief Financial Officer, Director Harvey Cohen 66 Director, member of Audit Committee Brigadier Ashok Dewan 60 Director, member of Audit and Compensation Committees Salvador Diaz-Verson, Jr. 47 Director, member of Audit, and Compensation Committees Stephen A. Talesnick 50 Director Other Executive Officers and Key Employees Michael Froch 38 Senior Vice President, General Counsel and Secretary Keith O. Stuart 44 Senior Vice President, Sales and Marketing Ronald J. Goldstein 57 Senior Vice President, Sales and Marketing Jacob Mail 49 Senior Vice President, Operations
Zvi Kurtzman is the CEO and Chairman of the Board of Directors of the Company and has served in this capacity since 1987. Mr. Kurtzman also served as the Company's President from 1987 to 1997. Mr. Kurtzman obtained his B.S. and M.S. degrees in physics from California State University, Northridge in 1970 and1971, respectively, and completed all course requirements for a Ph.D. in theoretical physics at the University of California, Riverside. He was employed as a senior scientist with the Science Applications International Corp. a scientific research company in San Diego, from 1984 to 1985 and with Hughes Aircraft Company, a scientific and aerospace company, from 1983 to 1984. Prior thereto, Mr. Kurtzman was a consultant to major defense subcontractors in the areas of computers, automation and engineering. Arthur J. Schwartz, Ph.D. is the Executive Vice President and director of the Company since February 1987. Dr. Schwartz obtained his M.S. degree in physics from the University of Chicago in 1971 and a Ph.D. in physics from the University of Pittsburgh in 1978. Dr. Schwartz was employed as a Technical Director with Science Applications International Corp., a scientific research company in San Diego, California from 1983 to 1984 and was a senior physicist with Hughes Aircraft Company, a scientific and aerospace company, from 1980 to 1984. While at Hughes, he was responsible for advanced studies and development where he headed a research and development effort for new technologies to process optical signals detected by space sensors. While at Aura, he served for 3 years on a Joint Tri Services Committee reporting to the U.S. Government on certain technology issues. Cipora Kurtzman Lavut is Senior Vice President, Corporate Communications, and has served in this capacity since December 1991. She previously served as Vice President in charge of Marketing and Contracts for the Company since 1988 and was appointed director of the Company in 1989. She graduated in 1984 from California State University at Northridge with a B.S. degree in Business Administration. Neal B. Kaufman is Senior Vice President, Management Information Systems, and has served in this capacity since 1988. Mr. Kaufman is also a director of the Company and has served in this capacity since 1989. Mr. Kaufman graduated from the University of California, Los Angeles, in 1967 where he obtained a B.S. in engineering. He was employed as a software project manager with Abacus Programming Corp., a software development firm, from 1975 to 1985. He headed a team of software specialists on the Gas Centrifuge Nuclear Fuel enrichment program for the United States Department of Energy and developed software related to the Viking and Mariner projects for the California Institute of Technology Jet Propulsion Laboratory in Pasadena, California. Gerald S. Papazian has been the Company's President and Chief Operating Officer since July 1997. He joined the Company in August 1988 from Bear, Stearns & Co., an investment-banking firm, where he served from 1986 as Vice President, Corporate Finance. His responsibilities there included valuation of companies for potential financing, merger or acquisition. Prior to joining Bear Stearns, Mr. Papazian was an Associate in the New York law firm of Stroock & Stroock & Lavan, where he specialized in general corporate and securities law with the extensive experience in public offerings. He received a BA, Economics (magna cum laude) from the University of Southern California in 1977 and a JD and MBA from the University of California, Los Angeles in 1981. He served as a trustee of the University of Southern California from 1994 to 1999. Steven C. Veen, a certified public accountant, is Senior Vice President, Chief Financial Officer, and has served in this capacity since March 1994. He joined the Company as its Controller in December 1992. Before that, he had over 12 years experience in varying capacities in the public accounting profession. Mr. Veen served from 1983 to December 1992 with Muller, King, Black, Mathys & Acker, Certified Public Accountants. He received a B.A. in accounting from Michigan State University in1981. Harvey Cohen is a director of the Company and has served in this capacity since August 1993. Mr. Cohen is President of Margate Advisory Group, Inc., an investment advisor registered with the Securities and Exchange Commission, and a management consultant since August 1981. Mr. Cohen has consulted to the Company on various operating and growth strategies since June 1989 and assisted in the sale of certain of the Company's securities. From December 1979 through July 1981, he was President and Chief Operating Officer of Silicon Systems, Inc., a custom integrated circuit manufacturer which made its initial public offering in February 1981 after having raised $4 million in venture capital in 1980. From 1975 until 1979, Mr. Cohen served as President and Chief Executive Officer of International Communication Sciences, Inc., a communications computer manufacturing start-up company for which he raised over $7.5 million in venture capital. From 1966 through 1975, Mr. Cohen was employed by Scientific Data Systems, Inc. ("S.D.S."), a computer manufacturing and service company, which became Xerox Data Systems, Inc. ("X.D.S.") after its acquisition by Xerox in 1979. During that time, he held several senior management positions, including Vice President-Systems Division of S.D.S. and Senior Vice President-Advanced Systems Operating of the Business Planning Group. Mr. Cohen received his B.S. (Honors) in Electrical Engineering in 1955 and an MBA in 1957 from Harvard University. Brigadier Ashok Dewan is a director of the Company and has served in this capacity since September 1997. Mr. Dewan is the founder and Chairman of K&K Enterprises of India (K&K), since its formation in 1986. K&K is engaged in the manufacture, sale and distribution of consumer electronics, and has been on OEM supplier to companies such as Philips, ASM, JBL and Infinity Systems. In 1995, Aura and K&K formed a joint venture, Dewan-Aura, which manufactured and sold Aura's speakers and Bass Shakers in the republic of Taiwan, the Indian subcontinent, Middle East and Europe. In 1989, Mr. Dewan founded Chand International, which is engaged in the manufacture and sale of garments, and has served as its Chairman since its formation. Salvador Diaz-Verson, Jr. is a director of the Company and has served in this capacity since September 1997. Mr. Diaz-Verson is the founder, and since 1991 has been the Chairman and President of Diaz-Verson Capital Investments, Inc., an Investment Adviser registered with the Securities and Exchange Commission. Mr. Diaz-Verson served as president and member of the Board of Directors of American Family Corporation (AFLCAC Inc.) a publicly held insurance holding company, from 1979 until 1991. Mr. Diaz-Verson also served as Executive Vice President and Chief Investment Officer of American Family Life Assurance Company, subsidiary of AFLCAC Inc. from 1976 through 1991. Mr. Diaz-Verson is a graduate of Florida State University. He is currently a director of the board of Miramar Securities, Clemente Capital Inc., Regions Bank of Georgia and The Philippine Strategic Investment Holding Limited. Stephen A. Talesnick is a director of the Company and has served in this capacity since September 1999, following appointment by resolution of the Board of Directors to fill a vacancy pursuant to the Bylaws of the corporation. Mr. Talesnick has owned and maintained a private law practice since 1977, which is presently located in Beverly Hills. Mr. Talesnick specializes in business and financial transactions in addition to entertainment industry related matters. He originally practiced as an associate in the New York law firm of White & Case. In 1992, Mr. Talesnick became a financial advisor in the financial services industry and is registered with the Securities and Exchange Commission. Mr. Talesnick is a graduate of The Wharton School Of Finance And Commerce at The University Of Pennsylvania and received his Juris Doctor degree from Columbia University School Of Law. Michael I. Froch is Senior Vice President, General Counsel and Secretary of the Company and has served as General Counsel since March 1997 and as Secretary since July 1997. He joined the Company in 1994 as its corporate counsel. From 1991 through 1994, Mr. Froch was engaged in private law practice in California. Mr. Froch is admitted to the California and District of Columbia bars. He received his Juris Doctor degree from Santa Clara University School of Law in 1989, during which time he served as judicial extern to the Honorable Spencer M. Williams, United States District Judge for the Northern District of California. He received his A.B. degree from the University of California at Berkeley in 1984, serving from 1982 through 1983 as Staff Assistant to the Honorable Tom Lantos, Member of Congress. Jacob Mail is Senior Vice President, Operations, serving in this capacity since November 1999. Previously he has served as Vice President of Operations from 1995 to 1999. Mr. Mail served over 20 years at Israeli Aircraft Industries, starting as a Lead Engineer and progressing to Program Manager. He was responsible for the development and production of hydraulic actuation, steering control systems, rotor brake systems and other systems and subsystems involved in both commercial and military aircraft. Systems designed by Mr. Mail are being used today all over the western world. In addition, Mr. Mail has extensive experience in the preparation of technical specifications planning and organizing production in accordance with customer specifications at full quality assurance. Ronald J. Goldstein is Senior Vice President, Sales and Marketing and is responsible for the marketing and sales of AuraGen for worldwide government agencies, military and OEMs and has served in various capacities at Aura since 1989. He holds two M.S. degrees in Computing Technology and the Management of R & D from George Washington University and has completed coursework for a Ph.D. in Nuclear Engineering from North Carolina State University. Mr. Goldstein has over 25 years of experience in high technology both in government and industry. Since 1989 Mr. Goldstein has been responsible for all marketing and business development activities for the Company. Prior to joining Aura, Mr. Goldstein was Manager of Space Initiatives at Hughes Aircraft Company, a scientific and research company, where he was responsible for the design, production and marketing of a wide variety of aerospace systems and hardware. Prior to joining Hughes in 1982, Mr. Goldstein was the Special Assistant for National Programs in the Office of the Secretary of Defense, and before that held high level program management positions with the Defense Department and Central Intelligence Agency. Family Relationships Cipora Kurtzman Lavut, a Senior Vice President and director, is the sister of Zvi Kurtzman, who is the Chief Executive Officer and a director of the Company. Jacob Mail, Vice President, Operations is a first cousin of Cipora Kurtzman Lavut and Zvi Kurtzman. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and beneficial owners of more than ten percent of the Common Stock, to file with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. reports of ownership and changes in ownership of the Common Stock. Copies of such reports are required to be furnished to the Company. Based solely on its review of the copies of such reports furnished to the Company, or written representations that no reports were required, the Company believes that during its fiscal year ended February 28, 1999, all filing requirements applicable to its officers, directors, and ten percent beneficial owners were satisfied. Delinquent SEC Filings None ITEM 11. EXECUTIVE COMPENSATION Cash Compensation For Executives The following table summarizes all compensation paid to the Company's Chief Executive Officer, and to the four most highly compensated executive officers of the Company other than the Chief Executive Officer whose total compensation exceeded $100,000 during the fiscal year ended February 28, 1999. SUMMARY COMPENSATION TABLE
Annual Long Term All Other Compensation(1)Compensation Awards Compensation(2) Name and Principal Position Year Salary Options/SARs Zvi (Harry) Kurtzman (1) 1999 $384,290 1,000,000 $1,966 Chief Executive Officer 1998 245,018 0 1997 212,549 0 Arthur J. Schwartz (1) 1999 $204,895 500,000 $1,872 Executive 1998 172,115 0 Vice President 1997 163,971 0 Gerald Papazian (1) 1999 $203,025 100,000 $1,846 President and Chief Operating 1998 154,737 0 Officer 1997 143,122 0 Steven Veen(1) 1999 $196,412 100,000 $1,811 Senior Vice President and 1998 150,127 0 Chief Financial Officer 1997 151,817 0 Yoshikazu Masayoshi 1999 $290,500 0 $ 0 President, MYS Corporation 1998 273,242 0 1997 270,000 0
(1) The amounts shown are the amounts actually paid to the named officers during the respective fiscal years. Because of the timing of the payments, these amounts do not represent the actual salary accrued by each individual during the period. The actual salary rate for these individuals which was accrued during the fiscal year ended February 1999, 1998 and 1997, respectively, were as follows: Zvi Kurtzman - $385,000, $200,000, $200,000; Arthur J. Schwartz,- $205,000, $160,000, $160,000; Gerald S. Papazian - $210,000, $140,000, $140,000, Steven C. Veen - $200,000, $150,000, $150,000. (2) Such compensation consisted of total Company contributions made to the plan account of each individual pursuant to the Company's Employees Stock Ownership Plan during the fiscal year ended February 28, 1999. No cash bonuses or restricted stock awards were granted to the above individuals during the fiscal years ended February 28, 1999, February 28, 1998 and February 28, 1997. Effective December 1992, the Company elected to begin to compensate non-officer directors at the rate of $5,000 per year. Effective September 1997, each non-employee director is entitled to receive $30,000 per year for serving as a director, and $5,000 per year for each director who serves on the audit committee. The following table summarizes certain information regarding the number and value of all options to purchase Common Stock of the Company held by the Chief Executive Officer and those other executive officers named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Unexercised Value of Unexercised Options/SARs at Fiscal In-the-Money Options/ Name Year End SARs at Fiscal Year End* Exercisable Unexercisable Exercisable Unexercisable Zvi Kurtzman 870,000 600,000 $ 0 $ 0 Arthur Schwartz 515,000 300,000 $ 0 $ 0 Gerald Papazian 166,000 60,000 $ 0 $ 0 Steven Veen 215,000 210,000 $ 0 $ 0 Yoshikazu Masayoshi 0 0 $ 0 $ 0
*Based on the average high and low reported prices of the Company's Common Stock on the last day of the fiscal year ended February 28, 1999. No options were exercised by the above individuals during the fiscal year ended February 28, 1999. Compensation Committee Report The Company maintains a Compensation Committee (the "Committee"), consisting entirely of outside, disinterested, directors who are not employees or former employees of the Company. The Committee recommends salary practices for executive officers of the Company, with all compensation determinations ultimately made by a majority of the outside, disinterested, directors. Prior to Fiscal 1998, compensation of executive officers, other than the Chief Executive Officer, was determined by the Chief Executive Officer after review and consultation with the Committee. Compensation Philosophy The Company's policy in compensating executive officers is to establish methods and levels of compensation that will provide strong incentives to promote the profitability and growth of the Company and reward superior performance. Compensation of executive officers includes salary as well as stock-based programs. The Board believes that compensation of the Company's key executives should be sufficient to attract and retain highly qualified personnel and also provide meaningful incentives for measurably superior performance. The Company places special emphasis on equity-based compensation, particularly in the form of options. This approach also serves to match the interests of the executive officers with the interest of the stockholders. The Company seeks to reward achievement of long and short-term performance goals which are measured by a number of factors, including improvements in revenue and achieving profitability. Included in the factors considered by the Committee in setting the compensation of the Company's Chief Executive Officer are the growth in the Company's commercial sales, the development of commercial applications for the Company's technology, and the effective allocation of capital resources. Employment Contracts The Company offers employment contracts to key executives only when it is in the best interest of the Company and its stockholders to attract and retain such key executives and to ensure continuity and stability of management. Effective as of March 1998, the Company entered into employment and severance agreements with Mr. Kurtzman, the Company's Chief Executive Officer, and Messrs. Schwartz and Kaufman and Ms. Kurtzman Lavut (the "Named Executive Officers") and other key executives of the Company. The Committee reviewed and approved such agreements unanimously after consulting with a nationally recognized employee benefits firm and determining that such agreements were necessary in order to retain highly qualified executives whose abilities are critical to the long-term success and competitiveness of the Company. Compensation of Chief Executive Officer and Other Executives The Compensation Committee increased Mr. Kurtzman's salary in March 1998 to $385,000, effective as of December 1997, after consulting with a nationally recognized employee benefits firm. The increase reflected the Compensation Committee's assessment of his performance and Mr. Kurtzman's service to the Company. Salary increases for other senior executives effected during 1998 were based on similar considerations including individual performance, position, tenure, experience and compensation surveys of comparable companies. In March 1998, the Committee reviewed and unanimously approved stock option awards under the Company's stock option plan after consulting with a nationally recognized employee benefits firm. The Committee granted Mr. Kurtzman an option to purchase 1,000,000 shares of Common Stock, which vest 20% per year over five years. The options are exercisable at $3.31 per share which was 105% of the market price of the Company's Common Stock on the date of grant. Senior executives in the Company participate in the stock option plan and the Compensation Committee granted such executives options to purchase Common Stock during Fiscal 1998. In determining the number of shares to award to Mr. Kurtzman and other executives, the Compensation Committee considered several factors, including primarily Mr. Kurtzman's and other executives' actual and potential contributions to the Company's long term success, and the size of awards provided to other executives in comparable companies holding similar positions. In July 1997 the Compensation Committee unanimously recommended the re-pricing of stock options granted to key employees, including Mr. Kurtzman and the Named Executive Officers. The Compensation Committee's re-pricing of options for key employees was made to those persons who have made significant contributions to the Company's business, for the purpose of maintaining corporate morale and creating an incentive for continued employment. See "Option Re-pricing" Effective in Fiscal 1999 Mr. Kurtzman and the Named Executive Officers are, pursuant to their employment agreements with the Company, entitled to a discretionary annual bonus as determined by the Compensation Committee and a majority of the outside, disinterested, directors of the Board of Directors. In determining the amounts of such bonuses, the Compensation Committee considers the individual performance of each executive and the performance of the Company. Based upon the Company's financial performance during Fiscal 1999 the Compensation Committee determined not to award bonuses to Mr. Kurtzman or the Named Executive Officers. Section 162(m) Policy Section 162(m) of the Internal Revenue Code of 1986, as amended, generally provides that publicly held companies may not deduct compensation paid to certain of its top executive officers to the extent such compensation exceeds $1 million per officer in any year. However, pursuant to regulations issued by the Treasury Department, certain limited exemptions to Section 162(m) apply with respect to "qualified performance-based compensation" and to compensation paid in certain circumstances by companies in the first few years following their initial public offering of stock. The Company has taken steps to provide that these exemptions will apply to compensation paid to its executive officers, and the Company will continue to monitor the applicability of Section 162(m) to its ongoing compensation arrangements. Accordingly, the Company does not expect that amounts of compensation paid to its executive officers will fail to be deductible by reason of Section 162(m). Committee Members Brigadier Ashok Dewan Salvator Diaz-Verson, Jr. Compensation Committee Interlocks and Insider Participation The Compensation Committee is comprised of Brigadier Ashok Dewan and Salvador Diaz-Verson, Jr. Decisions regarding compensation of executive officers for the fiscal year ended February 28, 1999 were made unanimously by the outside, disinterested, directors of the Board of Directors, after reviewing recommendations of the Compensation Committee. Decisions regarding option grants under the 1989 Option Plan for the fiscal year ended February 28, 1999 were made unanimously by the outside, disinterested, directors of the Board of Directors, after reviewing recommendations of the Compensation Committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the Company's Common Stock owned as of January 24, 2000 (i) by each person who is known by Aura to be the beneficial owner of more than five percent (5%) of its outstanding Common Stock, (ii) by each of the Company's directors and nominees and those executive officers named in the Summary Compensation Table, and (iii) by all directors and executive officers as a group:
Shares of Percent of Common Stock Common Stock Name Beneficially Owned Beneficially Owned Gardner Lewis Asset Management 20,517,936 11.58% Zvi (Harry) Kurtzman 2,444,468 (1)(2) 1.2% Arthur J. Schwartz 1,928,487 (1)(3)(4) 1.1% Cipora Kurtzman Lavut 1,655,468 (5) * Neal B. Kaufman 1,732,657 (1)(7) * Harvey Cohen 306,250 (6) * Yoshikazu Masayoshi 283,455 (8) * Ashok Dewan 0 * Salvador Diaz-Verson, Jr. 44,000 * Stephen A. Talesnick 2,437,596 (9) 1.4% Gerald S. Papazian 314,992 (10) * Steven C. Veen 378,585 (11) * Michael I. Froch 217,997 (12) * Keith O. Stuart 322,366 (13) * Ronald Goldstein 180,188 (14) * Jacob Mail 214,763 (15) * All executive officers and directors 12,461,272 7.0% as a group (15 persons)
- -------------------- * Less than 1% of outstanding shares. (1) Includes 175,000 shares held of record by Advanced Integrated Systems, Inc. (2) Includes 870,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of January 24, 2000. (3) Includes 515,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of January 24, 2000. (4) Includes 32,000 shares held by Dr. Schwartz as custodian for his children, to which Dr. Schwartz disclaims any beneficial ownership. (5) Includes 515,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. (6) Includes 31,250 shares beneficially owned, and 265,000 shares which may be purchased pursuant to options within 60 days of January 24, 2000 of which 100,000 are beneficially owned. (7) Includes 470,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of January 24, 2000. (8) Includes 283,455 shares which were received as part of the MYS acquisition purchase consideration. (9) Includes 196,364 shares which may be purchased pursuant to warrants exercisable within 60 days of January 24, 2000. Mr. Talesnick joined the Board of Directors in September 1999. (10) Includes 166,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. (11) Includes 215,000 shares which may be purchased pursuant to options and warrants exercisable within 60 days of January 24, 2000. (12) Includes 130,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. (13) Includes 300,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. In Fiscal 2000 these options were divided equally pursuant to a court order as part of a marital dissolution proceeding. (14) Includes 140,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. (15) Includes 150,000 shares which may be purchased pursuant to options exercisable within 60 days of January 24, 2000. The mailing address for each of these individuals is c/o Aura Systems, Inc., 2335 Alaska Avenue, El Segundo, CA 90245. a) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS (a) Documents filed as part of this Form 10-K: (1) Financial Statements See Index to Consolidated Financial Statements at page F-1 (2) Financial Statement Schedules See Index to Consolidated Financial Statements at page F-1 (3) Exhibits See Exhibit Index (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended February 28, 1999. INDEX TO EXHIBITS Description of Documents 3.1(1) Certificate of Incorporation of Registrant. 3.2(1) Bylaws of Registrant. 10.1(1) Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee Directors. 10.2(1) Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement. 10.3(1) Deed of Trust and Assignment of Rents, dated as of February 27, 1989, by the Registrant in favor of Chicago Title Insurance Company, as Trustee, for the benefit of City National Bank. 10.4(2) Indenture, dated as of March 1, 1989, between the Registrant and Interwest Transfer Co., Inc. as Trustee, relating to the 7% Secured Convertible Non-Recourse Notes due 1999. 10.5(2) Form of 7% Secured Convertible Non-Recourse Notes due 1999. 10.6(2) Deed of Trust, Assignment of Leases and Rents and Fixture Filing, dated as of March 1, 1989, by the Registrant in favor of Ticor Title Insurance Company, as Trustee, for the benefit of Interwest Transfer Co., Inc., as trustee under the Indenture. 10.7(3) Form of 7% Secured Convertible Non-Recourse Note due 2000. 10.8(4) 1989 Stock Option Plan. 10.9(5) Joint Development and License Agreement, dated August 24, 1992, between the Registrant and Daewoo Electronics Co., Ltd. 10.10(6) Agreement, dated September 23, 1993, between the Registrant and Burlington Technopole SDN. BHD. 10.11(7) Dedicated Supplier Agreement, dated December 2, 1993, between the Registrant and Daewoo Electronics Co., Ltd. 10.12(8) Form of 7% Secured Convertible Non-Recourse Note due 2002. 10.13(9) Agreement dated July 19, 1995 between the Company and K&K Enterprises. 10.14(9) Agreement dated July 19, 1995 between the Company and K&K Enterprises. 10.15(9) Agreement dated July 12, 1995 between the Company and K&K Enterprises. 10.16(9) Agreement dated July 12, 1995 between the Company and K&K Enterprises. 10.17(9) Stock Purchase and Sale Agreement dated April 30, 1996 between the Company and MYS Corporation 10.18(9) Joint Venture Agreement dated July 26, 1995 between the Company and Microbell 10.19 AuraSound Asset Purchase 10.19.1 Asset Purchase Agreement dated December 1, 1999 among AuraSound, Inc., Aura Systems, Inc., AlgoSound, Inc., and Algo Technology, Inc. 10.19.2 Amendment dated December 22, 1999 to Asset Purchase Agreement dated December 1, 1999. 10.19.3 Assignment and License Agreement as of July 15, 1999 between Speaker Acquisition Sub, Algo Technology, Inc., Aura Systems, Inc., AuraSound Inc. 10.20 MYS Stock Purchase 10.20.1 Escrow Agreement as of March 26, 1999 among the Company, Inc.,Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi, Kazuaki Masayoshi, and Wolf Haldenstein Adler Freeman & Herz LLP. 10.20.2 Promissory Note in the amount of $1,000,000 dated March 26, 1999 payable to the Company by Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.20.3 Promissory Note in the amount of $3,200,000 dated March 26, 1999 payable to the Company by Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.20.4 Stock Purchase Agreement dated March 26, 1999 between the Company and Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.21 Agreement with RGC International Investors, LDC 10.21.1 First Amendment to Security Agreement dated October 22, 1999 between RGC International Investors, LDC and the Company. 10.21.2 Settlement Agreement and Complete Release of all Claims dated October 22, 1999 between RGC International Investors, LDC, and the Company 10.21.3 Stock Purchase Warrant issued to RGC International Investors, LDC by the Company. 10.21.4 Amended and Restated Convertible Senior Secured Note dated October 7, 1998 in the amount of $3,000,000 issued to RGC International Investors, LDC by the Company. 10.22 Settlement Agreement and Release of Claims dated as of December 1, 1999 between JNC Opportunity Fund, Ltd., and the Company. 10.23 Payment Agreement by and between Credit Managers Association of California and Aura Systems, Inc. 21.1 Aura Systems, Inc. and Subsidiaries EX-27 Data Schedule (1) Incorporated by reference to the Exhibits to the Registration Statement on Form S-1 (File No. 33-19530). (2) Incorporated by reference to the Exhibits in the Registrant's Current Report on Form 8-K dated March 24, 1989 (File No. 0-17249). (3) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 33-27164). (4) Incorporated by reference to the Exhibits to the Registration Statement on Form S-8 (File No. 33-32993). (5) Incorporated by Reference to the Exhibit to the Registration Statement on Form S-1 (File No. 35-57 454). (6) Incorporated by reference to the Registrants Current Report in Form 10-Q dated November 30, 1993. (7) Incorporated by reference to the Exhibits to the Registration Statement on Form S-1 (File No.-33-57454). (8) Incorporated by reference to the Exhibits to the registrants Annual Report Form 10-K for the fiscal year ended February 28, 1994 (File No. 0-17249). (9) Incorporated by reference to the Registrants Annual Report Form 10-K for the fiscal year ended February 29, 1996 (File No. 0-17249) Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AURA SYSTEMS, INC. Dated: February 7, 2000 By: /s/ Zvi Kurtzman Zvi Kurtzman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
Signatures Title Date /s/Zvi Kurtzman Chief Executive Officer and Director February 7, 2000 - --------------------------------- Zvi Kurtzman (Principal Executive Officer) /s/Steven C. Veen Senior Vice President, February 7, 2000 - --------------------------------- Steven C. Veen Chief Financial Officer (Principal Financial and Accounting Officer) /s/Gerald S. Papazian President and Director February 7, 2000 - --------------------------------- Gerald Papazian /s/Arthur J. Schwartz Executive Vice President and Director February 7, 2000 - --------------------------------- Arthur J. Schwartz /s/Neal Kaufman Senior Vice President and Director February 7, 2000 - --------------------------------- Neal B. Kaufman /s/Cipora Kurtzman Lavut Senior Vice President and Director February 7, 2000 - --------------------------------- Cipora Kurtzman Lavut Director February 7, 2000 - --------------------------------- Ashok Dewan /s/Salvador Diaz-Verson, Jr. Director February 7, 2000 - --------------------------------- Salvador Diaz-Verson, Jr. Director February 7, 2000 - --------------------------------- Stephen A. Talesnick /s/Harvey Cohen Director February 7, 2000 - --------------------------------- Harvey Cohen
AURA SYSTEMS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements
Independent Auditors' Report on Consolidated Financial Statements and Financial Statement Schedule F-2 Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries: Consolidated Balance Sheets-February 28, 1999 and February 28, 1998 F-3 to F-4 Consolidated Statements of Operations and Comprehensive Income (Loss) - Years ended February 28, 1999, February 28, 1998 and February 28, 1997 F-5 Consolidated Statements of Stockholders' Equity (Deficit)-Years ended February 28, 1999, February 28, 1998 and February 28, 1997 F-6 Consolidated Statements of Cash Flows-Years ended February 28, 1999, February 28, 1998 and February 28, 1997 F-7 to F-8 Notes to Consolidated Financial Statements F-9 to F-25 Consolidated Financial Statement Schedule: II Valuation and Qualifying Accounts F-26 Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the respective consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Aura Systems, Inc. El Segundo, California We have audited the consolidated balance sheets of Aura Systems, Inc. and subsidiaries as of February 28, 1999, and February 28, 1998 and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended February 28, 1999 and the related financial statement schedule listed in the accompanying Index at Item 14. These consolidated financial statements, and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aura Systems, Inc. and subsidiaries as of February 28, 1999, and February 28, 1998 and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1999, and the financial statement schedule presents fairly, in all material respects, the information set forth therein, all in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming Aura Systems, Inc. will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has generated significant losses from operations, all major debt obligations were in default as of year-end and the Company is currently in the process of restructuring all major debt obligations. If the Company continues to suffer recurring losses from operations and continues to have a net capital deficiency, there may be substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. /s/ Pannell Kerr Forster Certified Public Accountants A Professional Corporation Los Angeles, California 90017 February 4, 2000 AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 28, February 28, 1999 1998 ASSETS CURRENT ASSETS: Cash and equivalents $ 3,822,210 $ 6,079,411 Receivables, net 8,380,414 54,418,141 Inventories 18,477,058 58,713,875 Prepayments 3,435,645 13,326,789 Other current assets 2,124,535 5,925,642 Deferred income taxes -- 838,000 Note receivable 250,000 -- ------------- ------------- Total current assets 36,489,862 139,301,858 ------------- ------------- PROPERTY AND EQUIPMENT, AT COST 47,976,699 66,667,671 Less accumulated depreciation and amortization (10,994,734) (11,888,586) ----------------- -------------- Net property and equipment 36,981,965 54,779,085 JOINT VENTURES -- 6,903,918 LONG-TERM Investments 2,923,835 7,476,299 long-term receivables 2,500,000 3,627,098 Patents and trademarks-Net 5,293,278 6,410,771 GOODWILL-NET 5,383,208 6,146,642 OTHER ASSETS 571,244 2,656,958 ------------- ------------- Total $ 90,143,392 $ 227,302,629 ============== ============= See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 28, February 28, LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998 ----------- ------- CURRENT LIABILITIES: Notes payable $ 8,787,113 $ 31,147,572 Convertible note, unsecured 2,000,000 -- Accounts payable 22,515,842 43,995,364 Accrued expenses 8,056,783 3,990,027 ------------- ------------- Total current liabilities 41,359,738 79,132,963 ------------- ------------- 25,955,529 3,282,003 ------------- ------------- NOTES PAYABLE AND OTHER LIABILITIES convertible Notes-SECURED 4,000,000 2,112,900 ------------- ------------- CONVERTIBLE NOTES-UNSECURED 32,481,782 15,500,000 ------------- ------------- MINORITY INTERESTS IN SUBSIDIARY -- 10,372,895 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock par value $.005 per share and additional paid in capital. Issued and outstanding 107,752,042 and 80,001,244 shares respectively. 218,693,245 199,100,614 Cumulative currency translation adjustment (CTA) (365,932) 40,642 Accumulated deficit (231,980,970) (82,239,388) -------------- -------------- Total stockholders' equity (deficit) (13,653,657) 116,901,868 -------------- ----------- Total $ 90,143,392 $227,302,629 ============= =========== See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Years ended February 28, 1999, February 28, 1998 and February 28, 1997 1999 1998 1997 ------------- ------------- ------- Net Revenues $81,518,162 $136,715,385 $109,950,202 Cost of GOODS AND OVERHEAD 158,024,723 101,622,051 86,350,828 ------------- ------------- ------------- GROSS PROFIT (LOSS) (76,506,561) 35,093,334 23,599,374 -------------- ------------- ------------- EXPENSES: Research and development 2,831,847 1,395,160 6,022,586 Impairment of long-lived assets 9,403,687 -- -- Selling, general and administrative expenses 74,419,812 45,018,066 18,761,123 ------------- ------------- ------------- Total expenses 86,655,346 46,413,226 24,783,709 ------------- ------------- ------------- (LOSS) FROM OPERATIONS (163,161,907) (11,319,892) (1,184,335) OTHER (INCOME) AND EXPENSE Gain on sale and issuance of subsidiary stock and other assets (1,042,665) (12,952,757) (250,000) Legal settlements 7,717,518 1,700,000 -- Equity in losses of unconsolidated joint ventures 6,268,384 1,937,747 -- Loss on disposal of assets 1,188,329 -- -- Loss on disposal of investment 4,877,839 -- -- Termination of license arrangement -- 3,114,030 -- Interest income (184,168) (224,385) (475,758) Interest expense 12,198,858 7,051,654 1,891,692 ------------- ------------- ------------- (LOSS) BEFORE INCOME TAXES AND OTHER ITEMS (194,186,002) (11,946,181) (2,350,269) Provision (benefit) for taxes 570,651 (1,256,046) 570,484 Minority interests in consolidated subsidiary: Income -- 946,405 -- Loss 10,372,895 -- -- Loss in excess of basis of consolidated subsidiary Aura 8,080,695 -- -- Minority interests 26,561,481 -- -- -------------- ------------- ------------- NET (LOSS) (149,741,582) (11,636,540) (2,920,753) --------------= --------------= -------------= Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments (406,574) -- 40,642 --------------- -------------- ------------- Comprehensive loss $ (150,148,156) $ (11,636,540) $ (2,880,111) =============== ============== ============= NET (LOSS) PER COMMON SHARE $ (1.74) $ (.15) $ (.04) =============== ============== ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 85,831,688 79,045,290 68,433,521 ============= ============= =============
See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended February 28, 1999, February 28, 1998 and February 28, 1997
Accumulated Additional other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit (CTA) Income (Loss) Total Balances at February 29, 1996 62,222,438 $311,112 $166,534,089 $(67,682,095) $ -- $99,163,106 Private placements, net of issuance cost 385,000 1,925 1,499,575 -- -- 1,501,500 Notes payable converted 12,815,368 64,077 24,679,389 -- -- 24,743,466 Exercise of warrants 300,000 1,500 598,500 -- -- 600,000 Exercise of stock options 10,000 50 34,950 -- -- 35,000 Stock issued to acquire assets 748,860 3,744 2,310,882 -- -- 2,314,626 Other comprehensive income (CTA) -- -- -- -- 40,642 40,642 Net (loss) -- -- -- (2,920,753) (2,920,753) ----------- ------ ------------- ----------- -------- ----------- Balances at February 28, 1997 76,481,666 382,408 195,657,385 (70,602,848) 40,642 125,477,587 Notes payable converted 3,164,001 15,820 4,528,958 -- -- 4,544,778 Exercise of warrants 241,688 1,208 583,642 -- -- 584,850 Exercise of stock options 25,000 125 51,375 -- -- 51,500 Proceeds from issuance of warrants -- -- 900,000 -- -- 900,000 Repurchase of warrants -- -- (1,679,956) -- -- (1,679,956) Stock issued to acquire assets 88,889 445 199,555 -- -- 200,000 Expenses of issuances -- -- (1,540,351) -- -- (1,540,351) Net (loss) -- -- -- (11,636,540) (11,636,540) ----------- ------ ------------- ------------ -------- ------------ Balances at February 28, 1998 80,001,244 400,006 198,700,608 (82,239,388) 40,642 116,901,868 Notes payable converted 16,513,282 82,566 10,126,867 -- -- 10,209,433 Exercise of warrants 7,475,383 37,377 7,971,198 -- -- 8,008,575 Exercise of stock options 50,000 250 102,750 -- -- 103,000 Stock issued to acquire assets 114,833 574 28,134 -- -- 28,708 Private placements 3,597,300 17,986 1,779,656 -- -- 1,797,642 Expenses of issuances -- -- (554,727) -- -- (554,727) Other comprehensive income (CTA) -- -- -- -- (406,574) (406,574) Net (loss) -- -- -- (149,741,582) -- (149,741,582) Balances at February 28, 1999 107,752,042 $538,759 $218,154,486 $(231,980,970) $(365,932) $(13,653,657) ============== ======== =============== ============== ============= =============
See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended February 28, 1999, February 28, 1998 and February 28, 1997
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss $(149,741,582) $(11,636,540) $(2,920,753) -------------- ---------- --------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 12,985,278 8,362,110 4,797,436 Provision for environmental cleanup 44,516 40,597 37,021 (Gain) Loss on disposition of assets 6,066,168 (555,326) (255,665) Equity in losses of unconsolidated joint ventures 6,268,384 1,937,747 -- Gain on sale of subsidiary and other stock investments (262,804) (12,144,740) -- Impairment of long-lived assets 9,403,687 -- 2,005,000 Foreign currency translation adjustment (406,574) -- 172,617 Assets-(Increase) Decrease: Receivables 46,037,727 (674,443) (12,830,713) Inventories 40,236,817 (24,866,579) (9,410,343) Prepayments 9,891,144 (5,631,521) -- Other current assets 3,801,107 (5,534,281) 1,245,613 Deferred income taxes 838,000 (940,000) -- Liabilities-Increase (Decrease): Accounts payable (21,479,522) 20,279,113 3,270,971 Accrued expenses 4,614,005 2,086,583 323,435 Litigation and other liabilities 7,389,649 (345,372) -- ------------ ------------ ----------- Total adjustments 125,427,582 (17,986,112) (11,986,546) ----------- ---------- ---------- Net cash used by operating activities (24,314,000) (29,622,652) (13,565,381) ------------ ---------- ------------- Cash flows from investing activities: Proceeds from sale of assets 2,721,000 920,000 286,217 Purchase of property and equipment (2,143,237) (1,910,214) (8,606,686) Manufacture of special tools and equipment (1,910,611) (16,096,180) (16,539,899) Purchase of subsidiary -- -- (1,101,278) Investment in joint ventures (164,466) 1,202,138 (3,163,475) Long-term investments (4,940,000) (1,117,465) (2,430,756) Long-term receivables 3,436,809 3,347,144 (2,450,959) Patents and trademarks (467,167) (1,903,718) (696,677) Goodwill and other assets 1,425,794 (2,398,400) (645,241) Proceeds from subsidiary stock 1,611,873 5,472,656 -- ----------- ----------- ----------- Net cash used by investing activities (430,005) (12,484,039) (35,348,754) ------------ ----------= -----------
See accompanying notes to consolidated financial statements AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
1999 1998 1997 ---- ---- ---- Cash flows from financing activities: Net proceeds from borrowings $17,922,584 $26,287,632 $ 9,772,600 Repayment of notes payable (3,396,083) (10,874,683) (2,624,214) Proceeds from exercise of options 103,000 -- -- Net proceeds from issuance of common stock 1,675,873 636,350 2,136,500 Net proceeds from exercise of warrants 7,884,325 -- -- Proceeds from issuance of warrants -- 900,000 -- Net proceeds from issuance of convertible notes 11,720,000 13,959,649 24,841,239 Repayment of convertible notes (3,050,000) (5,905,223) -- Minority interest adjustment (10,372,895) 17,749,979 -- Repurchase of warrants -- (1,679,956) -- ------------ --------- ----------- Net cash provided by financing activities 22,486,804 41,073,748 34,126,125 ------------ ---------- ----------- Net decrease in cash and equivalents (2,257,201) (1,032,943) (14,788,010) Cash and equivalents at beginning of year 6,079,411 7,112,354 21,900,364 ------------ ----------- ---------- Cash and equivalents at end of year $ 3,822,210 $ 6,079,411 $ 7,112,354 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 3,374,992 $ 6,280,859 $1,065,796 ============ =========== ========= Income Taxes $ 2,244,762 $ 186,310 $ 8,000 ============ =========== ===========
Supplemental disclosures of non-cash investing and financing activities: During the year ended February 28, 1997, the Company issued 748,860 shares in connection with the acquisitions of MYS Corporation., Phillips Sound Labs and Revolver U.K. Limited valued at $2,314,626. During the year ended February 28, 1997, $25,900,000 of convertible notes and accrued interest were converted into 12,815,368 shares of common stock. During the year ended February 28, 1998, $4,544,778 of convertible notes and accrued interest were converted into 3,164,001 shares of common stock. Effective January 29, 1998, the Company executed a contract to purchase title and interest to the "Aura" trademark name in several locations in Europe, Hong Kong and Taiwan. Partial consideration paid included $200,000 worth of Aura common stock or 88,889 shares, and $1,587,678 of operating assets transferred to the seller of the trademark name. During the year ended February 28, 1998 the Company entered into financing arrangements whereby it acquired assets for notes payable in the amount of $493,781. During the year ended February 28, 1999, $10,209,433 of convertible notes and accrued interest were converted into 16,513,282 shares of common stock. Additionally, 90,510 shares of common stock were issued for services received totaling $90,510. During the year ended February 28, 1999, 2,000,000 shares of the Company's investment in NewCom Inc., valued at $2,820,000, were surrendered to a NewCom creditor pursuant to a security agreement that collateralized a NewCom note in the amount of $1,000,000. During the year ended February 28, 1999, $800,000 in joint ventures assets were transferred to long term investments. During the year ended February 28, 1999, the Company sold a stock investment for $5,499,000, of which $2,750,000 was recorded as a note receivable. During the year ended February 28, 1999, the Company assumed explicitly certain obligations of NewCom, effectively transferring approximately $9,900,000 from current notes and trade payables to litigation payable. The $9,900,000 represents NewCom obligations guaranteed by the Company, including a line of credit with a commercial lending institution and two other trade creditors. See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 28, 1999, February 28, 1998 and February 28, 1997 (1) Business and Summary of Significant Accounting Policies Business Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is engaged in the development, commercialization and sales of products, systems and components using its patented and proprietary electromagnetic and electro-optical technology. In 1994, the Company founded its subsidiary NewCom, Inc. ("NewCom"), a Delaware corporation, which was engaged in the manufacture, packaging, selling and distribution of computer related communications and sound related products, including modems, CD-ROMs, sound cards, speaker systems and multimedia products, thereby expanding its presence in the growing multimedia, communication and sound-related consumer electronics market. NewCom ceased operations in 1999. The Company acquired 100% of the outstanding shares of MYS Corporation of Japan ("MYS") in 1996 to expand the range of its sound products and speaker distribution network. Subsequent to Fiscal 1999, the Company sold MYS to its management. The Company is involved in the application of its technology to a variety of products and services and, as such, faces substantial competition from companies offering different and competitive technologies. The Company believes the principal competitive factors in the markets for the Company's products include the ability to develop and market technologically advanced products to meet changing market conditions, price, reliability, product support and the ability to secure sufficient capital resources for the often substantial periods between technological concept and commercialization. The Company's ability to compete will also depend on its continued ability to attract and retain skilled and experienced personnel, to develop and secure patent and other protection for its technology and to exploit commercially its technology prior to the development of competing products by others. The Company competes with many companies that have more experience, name recognition, financial and other resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals, marketing and distribution. Other companies may also prove to be significant competitors, particularly through their collaborative arrangements with research and development companies. Basis of Presentation and Going Concern The accompanying consolidated financial statements of the Company have been prepared on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, as a result of the Company's losses from operations and inability to service its debt obligations, such realization of assets and liquidation of liabilities is subject to significant uncertainties. Further, the Company's ability to continue as a going concern is dependent upon the successful restructuring of obligations, achievement of profitable operations and the ability to generate sufficient cash from operations and financing sources to meet the restructured obligations. Management is currently seeking or obtaining additional sources of funds and the Company has restructured a significant portion of its debt obligations. The Company intends to focus its business on the AuraGen line of products. Except as otherwise disclosed, the consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the possible inability of the Company to continue as a going concern as otherwise disclosed. Principles of Consolidation The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, MYS and its subsidiaries Audio-MYS, MYS America and MYS U.S.A, Aura Ceramics, Inc., Aura Sound Inc. and Electrotec Productions, Inc. (and its wholly owned subsidiary Electrotec Europe). For the years ended February 28, 1998 and 1997, the Company's interest in NewCom, a majority owned subsidiary, is reported on a consolidated basis, the consolidated financial statements include 100 percent of the assets and liabilities of the subsidiary, and the ownership percentage of minority interests is recorded as "Minority Interests in Subsidiary." In February 1999, the Company reduced its interest in NewCom to approximately 41%. Accordingly, for the year ended February 28, 1999, the Statement of Operations and Comprehensive Loss reflects the operating results of NewCom through the period of majority ownership. The balance sheet as of February 28, 1999 reflects the Company's investment on an equity basis of accounting. In consolidation, all significant intercompany balances and transactions have been eliminated. For the year ended February 28, 1999, the Company's losses from NewCom, on a consolidated basis, were in excess of the Company's allocation of losses as accounted for under the equity method. In accordance with Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" the Company has recognized losses up the amount of their investment, advances, and guarantees of indebtedness. Losses related to the consolidation of NewCom in excess of losses appropriate under the equity method, in the amount of $8,080,695, are reflected as an other item in the Statement of Operations and Comprehensive Loss. For the year ended February 28, 1999, the minority interest in loss of subsidiary are in excess of minority interests investments. The minoritiy interests loss in excess of investment in the amount of $26,561,481, are reflected as an Other Item in the Statement of Operations and Comprehensive Loss. Revenue Recognition The Company recognizes revenue for product sales upon shipment. The Company provides for estimated returns and allowances based upon experience. The Company also earns a portion of its revenues from license fees, and generally records these fees as income when the Company has fulfilled its obligations under the particular agreement. Comprehensive Income In March 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This standard requires that an enterprise classify items of other comprehensive income by their nature in a financial statement; display the accumulated balances of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. the Company adopted SFAS 130 in Fiscal 1999. The adoption of this statement did not have any impact on the Company's results of operations, financial position, or cash flows. Cash Equivalents maturity of less than three months, to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from those estimates. Long-Term Investments Investments in equity securities with no readily determinable fair value are stated at cost. Management periodically evaluates these investments as to whether fair value is less than cost. In the event fair value is less than cost, and the decline is determined to be other than temporary, the Company will reduce the carrying value accordingly. Goodwill Goodwill represents the excess purchase price over the fair market value of the assets acquired of certain acquisitions. Goodwill is being amortized over 40 years on a straight-line basis. The carrying value of goodwill is based on management's current assessment of recoverability. Management evaluates recoverability using both objective and subjective factors. Objective factors include management's best estimates of projected future earnings and cash flows and analysis of recent sales and earnings trends. Subjective factors include competitive analysis and the Company's strategic focus. Inventories Inventories are stated at the lower of (first-in,first-out) or market. Per Share Information The consolidated net loss per common share is based on the weighted average number of common shares outstanding during the year. Common share equivalents have been excluded since inclusion would dilute the reported loss per share. Patents and Trademarks The Company capitalizes the costs of obtaining or acquiring patents and trademarks. Amortization of patent costs is provided for by the straight line method over the shorter of the legal or estimated economic life. If a patent or trademark is rejected, abandoned, or otherwise invalidated the un-amortized cost is expensed in that period. Joint Ventures The Company initially records investments in joint ventures at cost. These cost amounts are adjusted quarterly to reflect the Company's share of venture income or losses. Impairment of long-lived assets The Company reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amounts of the assets against the estimated undiscounted cash flows associated with these assets. At the time such evaluation indicates that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows). During 1999, the Company's management redirected its strategy to focus on the AuraGen production. The Company made the decision to cease operations in various divisions, reduce overhead and sell or lease Company assets that were not compatible with the Company's strategy. Management reviewed the estimated future cash flows related to these operations and deemed them to be insufficient to fully recover the carrying value of the assets. Accordingly, the Company has recognized an $9,403,687 impairment expense to reduce the assets to their estimated fair value. The impairment includes a write down of property and equipment and goodwill of $8,893,259 and $510,428, respectively. Research and Development Research and development costs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising charged to expense in Fiscal 1999, 1998 and 1997 approximated $ 9.4 million, $5.8 million and $4.5 million, respectively, including approximately nil, $300,000 and $700,000 for the production of the advertising, which is continuing to be used but has been expensed. Buildings, Equipment and Leasehold Improvements Buildings, equipment and leasehold improvements are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows: Buildings 40 years Machinery and equipment 5-10 years Furniture and fixtures 7 years Leasehold improvements Life of lease During 1999 and 1998, the Company capitalized costs of $1,910,611 and $16,096,180, respectively, on special tools and equipment, which have been designed for the manufacturing and development of actuators, speakers and related products, automotive products, actuator mirror array wafers and internet access and multimedia computer products. The capitalized amounts, included in machinery and equipment, include allocated costs of direct labor and overhead. During 1999, management reduced previously capitalized amounts to their estimated fair value, due to impairment of assets. See note on Impairment of long-lived assets. Depreciation and amortization expense of buildings, machinery and equipment, furniture and fixtures and leasehold improvements approximated $11.9 million, $5.4 million and $3.2 million for Fiscal 1999, 1998 and 1997, respectively. Product Return Risks The Company has been exposed to the risk of product returns from its retailer mass merchant and distributor customers as a result of several factors, including returns from their customers, contractual stock rotation privileges, returns of defective products or product components, primarily through NewCom. In addition, the Company generally accepts returns of unsold product from customers with whom the Company has severed its customer relationship. Overstocking by the Company's customers could lead to higher than normal returns, which could have a material adverse effect on the Company's results of operations. The Company also has a policy of offering price protection to its customers for some or all of their inventory, whereby when the Company reduces its prices for a product, the customer receives a credit for the difference between the original purchase price of the product and the Company's reduced price for the product. As a result of this policy, significant reductions in price have had, and may in the future have, a material adverse effect on the Company's results of operations. In management's opinion, the financial statements include adequate provisions to reserve for future product returns. (2) Receivables Receivables consist of the following:
1999 1998 ---- ---- Commercial receivables: Amounts billed $16,548,666 $59,277,378 Recoverable costs and accrued profits not billed -- 931,056 ----------- ----------- Total commercial receivables 16,548,666 60,208,434 Advances due from related parties 102,773 210,837 Less allowance for uncollectible receivables and (8,271,025) (6,001,130) ----------- ---------- sales returns $8,380,414 $54,418,141
Bad debt expense was approximately $13.3 million, $3.6 million and $.7 million in Fiscal 1999, 1998 and 1997 respectively. (3) Long Term Investments Long-term investments consist of the following: 1999 1998 ---- ---- Telemac Cellular C $ -- $4,782,500 Aquajet Corporation 923,835 883,834 Alaris Industries, 1,200,000 1,200,000 Other 800,000 609,965 ---------- ----------- $2,923,835 $7,476,299 ========== ========== During Fiscal 1999, the Company sold a portion of its shares in Telemac Cellular Corp.(Telemac) back to Telemac. The Company then entered into a cancellation of shares agreement whereby it tendered its shares to Telemac in exchange for a note receivable from Telemac resulting in a gain recognized of approximately $850,000. In February 1998, NewCom, Inc. entered into an Equipment Buy-Sell Agreement with Fourth Communications Network ("FCN") whereby NewCom purchased 200,000 shares of FCN Series F Preferred Stock, which is convertible into Common Stock at a conversion price of $25.00 per share, and received warrants to purchase 200,000 shares of Common Stock at $15.00 per share, in consideration of a cash payment of $5,000,000 of which $150,000 was paid in February 1998 with the balance of $4,850,000 paid in March 1998. In Fiscal 1999, NewCom pledged the investment as collateral to a secured creditor. The investment has been foreclosed upon. (4) Joint Ventures and Other Agreements (a) Malaysian Joint Venture In 1993, the Company entered into an agreement with Burlington Technopole SDN. BHD., a Malaysian corporation (Burlington) for the formation of a joint venture to manufacture and sell speakers using Aura's proprietary technology. In Fiscal 1999 the joint venture was terminated, and a total of $1,064,911 in joint venture losses and write-off's were recorded during Fiscal 1999. (b) Aura-Dewan Joint Venture In 1995, the Company entered into an agreement with K&K Enterprises of India ("K&K") for the formation of a joint venture to manufacture and sell speakers using Aura's proprietary technology. In 1995 the Company also entered into an agreement with K&K for the formation of a joint venture to manufacture Aura's Bass ShakerTM. In Fiscal 1999 the joint venture was terminated, and a total of $534,911 in joint venture losses and write-off's were recorded during Fiscal 1999. The Company's remaining investment in property of the joint venture, for the amount of $800,000 has been reclassified to long term investments. (c) Daewoo Agreement In 1992, the Company entered into a joint development and licensing agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and commercialize televisions using Aura's AMA(TM) display technology. Aura is to receive a fixed royalty (depending on television size), for each television set manufactured by Daewoo or licensed by Daewoo to a third party. Due to Daewoo's existing financial difficulties, it is currently undeterminable if Daewoo will be able to commercialize a television using Aura's AMA(TM) display technology. (d) Eric Joint Venture In 1997, the Company entered into an agreement with the European Group to form a joint venture for sales, marketing and further development of motion base simulators using the Company's proprietary technology. In Fiscal 1999, as a result of financial crisis the Company ceased on its commitment to continue to develop improvements to the Company's motion base simulator technology. The parties agreed to terminate the joint venture, and $3,856,091 was written-off to loss in joint ventures. (e) Microbell Joint Venture In 1995 the Company entered into an agreement with Microbell to form a joint venture to further develop and commercialize patented and proprietary technology developed by Microbell. Aura's inability to continue to fund the joint venture as required, the joint venture was terminated, and $635,902 was written-off to loss in joint venture. (5) Related Party Transactions Notes and advances due from related parties, aggregated $102,773 and $210,837 at February 28, 1999 and February 28, 1998, respectively, included in current receivables, and $0 and $19,000 included in (6) Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of the following: 1999 1998 ---- ---- Raw materials $11,318,263 $19,202,024 Finished goods 15,034,795 44,046,851 Reserves for product obsolence (7,876,000) (4,535,000) --------------- --------------- $18,477,058 $58,713,875 ============== ============== Inventories at February 28, 1999 and 1998 include approximately $3.5 million and $5.0 million, respectively, that was received subsequent to year end, but was shipped F.O.B. shipping point, requiring the Company to include this amount in its reported inventory and to record the corresponding liability in accounts payable. At February 28, 1999, inventories consist primarily of components and completed units for the Company's AuraGen product, along with speaker components and finished product. (7) Property and Equipment Property and Equipment, at cost is comprised as follows: 1999 1998 ---- ---- Land $ 3,877,074 $ 3,870,361 Buildings 9,396,392 9,366,512 Machinery and equipment 32,354,243 48,610,238 Furniture, fixtures and leasehold improvements 2,348,990 4,820,560 ------------ ----------- $47,976,699 $66,667,671 =========== ========== (8) Notes Payable and Other Liabilities Notes Payable and Other Liabilities consist of the following: All major debt obligations were in default as of February 28, 1999, see note 21. 1999 1998 ---- --- ---- Litigation payable $17,302,047 $ -- Lines of Credit 3,000,000 9,569,235 Notes payable-equipment (a) 194,296 2,870,971 Notes payable-buildings (b) 8,549,854 3,553,187 Unsecured notes payable (c) 4,907,068 17,975,000 Unsecured bonds payable (d) 283,679 -- -------------- ----------- 34,236,944 33,968,393 Less: current portion 8,787,113 31,147,572 -------------- ---------- Long term portion 25,449,831 2,820,821 Reserve for environmental cleanup 505,698 461,182 -------------- ----------- $25,955,529 $ 3,282,003 ============== =========== (a) Notes payable-equipment consists of various notes maturing at various dates through September 2000 bearing interest at various rates and are collaterized by equipment. (b) Notes payable-buildings consists of a 1st Trust Deed on a building in California, due in Fiscal 2009, and a note due October 2000 collateralized by a building in Malaysia. (c) Unsecured notes payable consists of two notes. (d) There are five unsecured bonds payable. Annual maturities of long term notes payable and litigation payable for the next fiscal years are as follows: Fiscal Year Amount 2000 $8,787,113 2001 7,825,765 2002 2,686,351 2003 2,493,440 2004 925,941 thereafter 11,518,334 ---------- $34,236,944 ========== (9) Convertible Notes Payable In Fiscal 1993, the Company issued its Secured 7% Convertible Notes due 2002 in the total amount of $5.5 million. In Fiscal 1999, the remaining $2,122,900 of these notes were redeemed by the Company. In Fiscal 1997, the Company issued $26,350,000 of unsecured convertible notes due at various dates, $17.9 million of these notes plus accrued interest of $228,534 were converted into 10,069,924 shares of common stock in Fiscal 1997. In Fiscal 1998, the Company issued $34.5 million of unsecured notes payable to investors. During the fiscal year the Company redeemed $3.8 million of notes issued in Fiscal 1997 and $2 million of notes issued in Fiscal 1998. Additionally, $4.5 million of notes issued in Fiscal 1997 were converted into 3,164,001 shares of common stock. In Fiscal 1999, the Company issued $8 million of unsecured notes payable to investors and $4,662,900 of secured notes payable to investors. During the Fiscal year the Company redeemed $1.6 million of convertible notes issued in Fiscal 1998. Additionally $9,662,184 worth of convertible notes issued in Fiscal 1998 plus interest of $547,249, were converted into 16,513,282 shares of common stock. (10) Accrued Expenses Accrued expenses consist of the following: 1999 1998 ---- ---- Accrued payroll and related expenses $1,076,185 $1,092,082 Bond interest payable 4,535,789 880,158 Other 2,444,809 2,017,787 ------------- --------- $8,056,783 $3,990,027 (11) Income Taxes At February 28, 1999, the Company had net operating loss carry-forwards for Federal and state income tax purposes of approximately $216 million and $95 million respectively, which expire through 2014. Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the liability method of accounting for income taxes. Accordingly, the Company has recorded a deferred tax benefit of approximately $93 million for Fiscal 1999 and $23 million for Fiscal 1998. The Company has also recorded a valuation account to fully offset the deferred benefit due to the uncertainty of the realization of this benefit. As of September 19, 1997, NewCom, Inc. is no longer included in the Company's consolidated Federal tax return since the Company's ownership percentage was reduced below 80% as of that date. In connection with the deconsolidation of NewCom, Inc. for Federal income tax reporting purposes, the Company recognized an income tax benefit of approximately $1.3 million for financial reporting purposes in the accompanying statement of operations for Fiscal 1998. The Company's Japanese subsidiary, MYS Corporation, pays income taxes to the Japanese government at an effective rate of approximately fifty eight percent. At February 28, 1999 and February 28, 1998, MYS Corporation had a current income tax receivable and liability of approximately $153,000 and $176,000, respectively. (12) Common Stock, Stock Options and Warrants The Company has 200,000,000 shares of $.005 par value common stock authorized for issuance. The Company has granted nonqualified stock options to certain directors and employees. Options are granted at fair market value at the date of grant, vest immediately, and are exercisable at any time within a five-year period from the date of grant. A summary of activity in the directors stock option plan follows:
Shares Exercise Price Options outstanding at February 29, 1996 1,009,578 $1.44-$5.50 Grants -- -- Cancellations -- -- Exercises -- -- ---------- ------------- Options outstanding at February 28, 1997 1,009,578 1.44-5.50 Grants 50,000 2.30 Cancellations -- -- Exercises -- -- Options outstanding at February 28, 1998 1,059,578 1.44-5.50 Grants -- -- Cancellations -- -- Exercises -- -- Expired 499,578 1.44-5.50 -------------- -------------- Options outstanding at February 28,1999 560,000 $2.06-$4.75 ============== ==============
The following table summarizes information about director stock options at February 28, 1999:
Number Weighted Number Range of Outstanding at Average Average Exercise Exercisable As Exercise Price 2/28/99 Remaining Life Price of 2/28/99 Exercise Price $2.30 50,000 8.13 2.30 50,000 $2.30 $2.06 400,000 8.36 2.06 400,000 $2.06 $3.06 70,000 0.33 3.00 70,000 $3.06 $4.75 40,000 0.09 4.75 40,000 $4.75
(13) Employee Stock Plans The Company has two employee benefit plans: The Employee Stock Ownership Plan (ESOP) and the 1989 Stock Option Plan (the Stock Option Plan). A previous plan, the 1989 Employee Stock Ownership Plan, was terminated in Fiscal 1992 and all plan assets were distributed to participants. The ESOP is a qualified discretionary employee stock ownership plan that covers substantially all employees. This plan was formally approved by the Board of Directors during Fiscal 1990. The Company made no contributions to the ESOP in Fiscal 1999, 1998 and 1997 respectively. During Fiscal 1990, the Company's Board of Directors adopted the Stock Option Plan, a nonqualified plan which was subsequently approved by the shareholders. The Stock Option Plan authorizes the grant of options to purchase the greater of up to 8% of the Company's outstanding common shares or 4,170,000 common shares. Shares currently under option generally vest ratably over a five year period. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measure compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock option and similar equity instruments under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined is SFAS No. 123 had been applied. Management accounts for options under APB Opinion No. 25. If the alternative accounting-related provisions of SFAS No. 123 had been adopted as of the beginning of 1995, any effect on 1999, 1998 and 1997 net loss and loss per share would have been immaterial. A summary of activity in the employee stock option plan is as follows:
Shares Exercise Price Options outstanding at February 29, 1996 3,889,800 $1.44-7.31 ----------- ------------- Grants -- -- Cancellations -- -- Exercises (10,000) 3.50 Options outstanding at February 28, 1997 3,879,800 1.44-7.31 --------- ------------- Grants 2,983,000 1.79-2.15 Cancellations (3,002,800) 1.44-3.06 Exercises (25,000) 2.06 ----------- ------------- Options outstanding at February 28, 1998 3,835,000 1.44-7.31 -------------- ------------- Grants 2,800,000 3.31 Cancellations (59,700) 1.44-7.31 Exercises (50,000) 2.06 --------------- ------------- Options outstanding at February 28, 1999 6,525,300 $1.44-7.31 ============== =============
The following table summarizes information about employee stock options at February 28, 1999:
Number Weighted Number Range of Outstanding at Average Average Exercise Exercisable As Exercise Price 2/28/99 Remaining Life Price of 2/28/99 Exercise Price $3.06-$4.12 131,800 0.44 3.26 131,800 $3.06-$4.12 $1.44 431,000 1.92 1.44 431,000 $1.44 $7.25 7,500 2.75 7.25 7,500 $7.25 $3.00-$4.00 215,000 3.62 3.47 215,000 $3.00-$4.00 $3.50-$7.31 32,000 4.60 5.89 32,000 $3.50-$7.31 $1.79-$2.15 2,908,000 8.42 2.04 2,628,000 $2.06 $3.31 2,800,000 9.05 3.31 -- $3.31
(14) Leases The Company leases office facilities and equipment under operating leases that expire through Fiscal 2009. Other costs, such as property taxes, insurance and maintenance, are also paid by the Company. Rental expense charged to operations approximated $ 1.8 million, $1.3 million and $1.3 million in Fiscal 1999, 1998 and 1997, respectively. At February 28, 1999, minimum rentals under non-cancelable operating leases are as follows: Fiscal year: Gross Rents Sublease Net Rents 2000 $1,238,623 $77,472 $1,161,151 2001 1,030,348 18,005 1,012,343 2002 995,209 -- 995,209 2003 998,728 -- 998,728 2004 959,456 -- 959,456 2005-2009 3,049,967 -- 3,049,967 -------------- -------------- -------------- $8,272,331 $95,477 $8,176,854 ============== ============== ============== (15) Significant Customers The Company on a consolidated basis sold sound related products and computer related products to five significant customers during Fiscal 1999. Sales by MYS Corporation to a major electronics retailer accounted for approximately $16.3 million or 20.1% of revenues. Sales of communications and multimedia products to major mass merchandisers Best Buy, Circuit City, and Staples accounted for $12.6 million or 15.5% of revenues. None of these customers are related to the Company or any other customer of the Company. (16) Commitments and Contingencies The Company is engaged in various legal actions listed below. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. At February 28, 1999, the Company had approximately $2.8 million in firm non-cancelable commitments related to tooling costs incurred by independent contractors and for the purchase of inventory. 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. A settlement agreement for this proceeding was submitted to the Court on July 20, 1998, for preliminary approval, at which time the Court denied the plaintiffs' motion for approval of the settlement. On September 22, 1998, the Company and certain of its officers and directors renoticed their motion for summary judgment. Thereafter, on January 8, 1999, the plaintiffs and the defendants in the Barovich action executed a Stipulation of Settlement pursuant to which the Barovich action would be settled in return for payments by Aura and its insurer to the plaintiff's settlement class and plaintiff's attorneys in the amount of $2.8 million in cash (with $800,000 to be contributed by Aura and $2 million to be contributed by Aura's insurer, subject to a reservation of rights by the insurer against the insureds) and $1.2 million in cash or common stock, at the Company's option, to be paid by Aura. Subsequently the parties and the insurer entered into an amended settlement agreement. As amended the settlement calls for the total settlement amount of $4 million to remain the same, with the insurer contributing $1.8 million and the remaining $2.2 million to be paid by Aura in cash over a period of three years, with accrued interest at the rate of 8% per annum. The settlement was preliminarily approved by the Court on December 6, 1999, and is subject to final confirmation by the Court on March 20, 2000. 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. In June, 1998, the Court entered an order staying further discovery in order to facilitate completion of settlement discussions between the parties. On October 12, 1998, the parties entered into a stipulation for settlement of all claims, subject to approval by the Court. Under the stipulation for settlement Aura agreed to pay $4.5 million in cash or stock, at Aura's option, plus 3.5 million warrants at an exercise price of $2.25. In addition, Aura's insurance carrier agreed to pay $10.5 million. The settlement was finally approved by the Court in October 1999 and was thereafter amended in December 1999 to allow Aura to defer payment of the settlement amount until April 2000 in exchange for an additional 2 million shares of Aura Common Stock, subject to certain adjustments. NewCom Related Litigation American Casualty v. Aura On June 22, 1999, a lawsuit naming Aura was filed in the United States District Court for the Central District of California, American Casualty Company of Reading, Pennsylvania ("American Casualty") vs. Aura et. al. (Case No. CV-99-06343). The complaint alleges that American Casualty, as surety, executed and delivered a performance bond on behalf of NewCom to Actrade Capital, Inc. ("Actrade") in 1998, which American Casualty became liable to obligee Actrade when NewCom defaulted on repayment of the penal sum of $4,427,093.92. In seeking damages from NewCom, American Casualty further alleged that Aura was liable because it executed an express general agreement of indemnity, indemnifying American Casualty on the referenced NewCom bond and a rider which became the subject of the litigation. Aura answered the complaint and NewCom defaulted. Subsequently, in December, 1999, the parties reached mutually an agreement in principal to settle the matter, Aura agreeing to pay American Casualty: (i) $1,000,000 plus interest at a rate of 8% per annum from December 1, 1999, in thirty-six equal monthly installments commencing March 2000; (ii) $1,000,000 plus interest at a rate of 8% per annum from December 1, 1999, in twenty-four equal monthly installments commencing December 1, 2002; and (iii) warrants to purchase up to 1,000,000 shares of the Company's common stock thirty three months from November 1, 1999 at a pre-reverse stock split exercise price of $2.46 per share. The Company expects to enter into the settlement prior to February 29, 2000, which is in accordance with the Aura's informal restructure . NEC Technologies v. NewCom In 1998, a lawsuit naming NewCom, Inc. was filed in the Superior Court of the State of California, Los Angeles County, NEC Technologies vs. NewCom et. al (Case No. YC 033592). The complaint alleged that NewCom failed to pay NEC for products purchased in the sum of approximately $3,000,000. Subsequently, NEC and NewCom entered into a stipulated settlement where Aura guaranteed expressly NewCom's performance on the settlement. NewCom thereafter defaulted on the settlement and the stipulated judgment was filed in April, 1999. Following negotiation by Aura and NEC, in November, 1999, a settlement was entered into whereby NEC is to receive $2,479,142.50 plus interest at eight percent per annum in thirty-six equal monthly installments, which is in accordance with Aura's informal restructure. Deutsche Financial Services v. Aura In June, 1999, a lawsuit naming Aura was filed in United States District Court for the Central District of California, Deutsche Financial Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The complaint follows DFS' termination of its credit facility with NewCom of $11,000,000 and seizure of substantially all of NewCom's collateral in April, 1999. It alleges, among other things, that Aura is liable to DFS for NewCom's indebtedness under the secured credit facility purportedly guaranteed by Aura in 1996, well prior to the NewCom initial public offering of September 1997. In the proceeding, DFS sought an order to attach Aura's assets which was denied following an evidentiary hearing before the Honorable Brian Quinn Robbins, U.S. Magistrate, and the matter has been ordered by the District Court to binding arbitration. Aura has now responded in arbitration, denying DFS' claims and has asserted in its defense, among other things, that the guarantee, if any, is discharged. In addition, Aura through its counsel, has asserted cross-claims for, among other things, tortious lender liability, alleging that DFS wrongfully terminated the NewCom credit facility, wrongfully seized the NewCom collateral and wrongfully foreclosed upon NewCom collateral, acting in a commercially unreasonably manner. A panel of three arbitrators has been selected and appointed by the American Arbitration Association and a hearing in the arbitration has been set for May, 2000. The Company believes it has meritorious defenses and cross claims. However, no assurances can be given as to the ultimate outcome of this proceeding. Excalibur v. Aura On November 12, 1999, a lawsuit was filed by three investors against Aura and Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054) arising out of two NewCom, Inc. financings consummated in December 1998. The NewCom financings comprised (1) a $3 million investment into NewCom in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and certain "Re-pricing Rights" which entitled the investors to receive additional shares of NewCom Common Stock in the event the price of NewCom Common Stock fell below a specified level, and (2) a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to purchase NewCom Common Stock. As part of these financings Aura agreed with the investors to allow their Re-pricing Rights with respect to NewCom Stock to be exercised for Aura Common Stock, at the investors' option. Aura also agreed to register Aura Common Stock relating to these Re-pricing Rights. The Plaintiffs allege in their complaint that Aura breached its agreements with the Plaintiffs by, among other things, failing to register the Aura Common Stock relating to the Re-pricing Rights. The Plaintiffs further allege that Aura misrepresented its intention to register the Aura shares in order to induce the Plaintiffs to loan $1.0 million to NewCom. The Complaint seeks damages of not less than $4.5 million. In January 2000 Aura filed counterclaims against the Plaintiffs, including claims that the Plaintiffs made false representations to Aura in order to induce Aura to agree to issue its Common Stock pursuant to the Re-pricing Rights. The Company believes that it has meritorious defenses and counterclaims to the Plaintiffs' allegations. However, no assurances can be given as to the ultimate outcome of this proceeding. Securities and Exchange Commission Settlement. In October, 1996, the Securities and Exchange Commission ("Commission") issued an order (Securities Act Release No. 7352) instituting an administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The proceeding was settled on consent of all the parties, without admitting or denying any of the Commission's findings. In its order, the Commission found that Aura and the others violated the reporting, record-keeping 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 Legal Actions The Company is also engaged in other legal actions. In the opinion of management, based upon the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect. (17) Concentrations of Credit Risk Financial instruments that subject the Company to concentration of credit risk are cash equivalents, trade receivables, notes receivable, trade payables and notes payable. The carrying value of these financial instruments approximate their fair value at February 28, 1999. Cash equivalents consist principally of short-term money market funds, these instruments are short term in nature and bear minimal risk. The Company performs credit background checks and evaluates the credit worthiness of all potential new customers prior to granting credit. UCC financing statements are filed, when deemed necessary. (18) Recently Issued Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5 (SOP No. 98-5), "Reporting on Costs of Start-up Activities." Adoption of SOP No. 98-5 will have no material impact on the Company's financial statements. (19) Fourth Quarter Adjustments Certain fourth quarter adjustments were made in Fiscal 1999 that are significant to the quarter and to comparisons between quarters. Presented below are the approximate amount of adjustments which are the result of fourth quarter events and their effects recorded in the fourth quarter. During the fourth quarter of Fiscal 1999 the Company experienced severe cash flow problems that had a major impact on the entire operations of the Company. The Company began to consolidate its operations around the AuraGen technology and product. The Company terminated all of its joint ventures due to its inability to support them. As the Company was cutting down and scaling back its operations the Company evaluated its asset utilization and concluded that certain asset values had been impaired. In addition numerous assets such as machinery and equipment that were no longer needed were sold at a loss. The Company over the years has made strategic investments in order to improve its utilization of certain technologies. As the company eliminated operations, these investments no longer retained their economic value. In addition to the Company`s heavy losses in its NewCom investment the Company was also a party to certain explicit written guarantees that were triggered when NewCom's business deteriorated. The following table summarizes certain fourth quarter events that contribute to the loss in Fiscal 1999. Termination of Joint Ventures $5.6 million Depreciation Expense $4.6 million Accounts Receivable reserves and write-off's $13.0 million Asset Impairment $9.4 million Interest Expense $3.5 million Disposed Assets $1.2 million Investment write-off's and losses $7.0 million Guarantees for NewCom $9.9 million NewCom loss (Aura Share) $45.8 million Total $100.0 million (20) Segment Reporting The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information," as of February 28, 1999. SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services geographic areas and major customers. SFAS 131 defined operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company has aggregated its business activities into three operating segments: electromagnetic and electro-optical technology (Aura), computer related communications (NewCom) and sound and professional and consumer sound system components (AuraSound). The electromagnetic and electro-optical technology operating segment consists of the development, commercialization and sales of products, systems and components using patented and proprietary electromagnetic and electro-optical technology. The Company has aggregated all electromagnetic and electro-optical operating units due to commonality of economic characteristics, technology employed, and class of customer. In addition, this segment also includes our corporate headquarters and revenues generated from the sale of computer monitors. The overall management and operating results for this segment are based on the activities and operations as noted. The computer related communications and sound related products operating segment consists of the manufacturing and selling of high performance computer communication and multimedia products for the personal computer market. The segment also includes internal and external data fax modems, speaker phones, sound cards, and multimedia kits. This operating segment suffered significant operating losses during the year ended February 28, 1999 and ceased operations subsequent to the year ended February 28, 1999. The sound segment consists of the manufacture and sale of professional and consumer sound system components and products, including speakers, amplifiers, and Bass Shakers. We aggregated the sound segment operating units due to economic characteristics, products and services, the production process class of customer and distribution process. Subsequent to February 28, 1999, the Company elected to discontinue this segment and the segment was sold in two separate transactions, see note 21.
Aura NewCom AuraSound Consolidated Net Revenues* (in thousands) 1999 $ 6,830 $ 46,820 $ 27,868 $ 81,518 1998 $ 10,252 $ 93,687 $ 32,776 $ 136,715 1997 $ 27,547 $ 50,632 $ 31,771 $ 109,950 Income (loss) from Operations 1999 $ (54,396) $ (94,357) $ (14,409) $ (163,162) 1998 $ (19,238) $ 11,872 $ (3,954) $ (11,320) 1997 $ (4,913) $ 5,164 $ (1,435) $ (1,184) Identifiable Assets 1999 $ 63,754 $ -- $ 26,389 $ 90,143 1998 $ 96,735 $ 96,127 $ 34,441 $ 227,303 1997 $ 86,957 $ 47,435 $ 48,136 $ 182,528 Depreciation and Amortization 1999 $ 7,375 $ 1,511 $ 4,099 $ 12,985 1998 $ 3,621 $ 1,274 $ 3,467 $ 8,362 1997 $ 2,591 $ 348 $ 1,858 $ 4,797 Capital Expenditures 1999 $ 2,450 $ 161 $ 1,443 $ 4,054 1998 $ 15,322 $ 1,455 $ 1,229 $ 18,006 1997 $ 14,008 $ 2,121 $ 9,018 $ 25,147 Number of operating locations at year-end (unaudited) 1999 2 2 5 9 1998 2 2 5 9 1997 4 1 5 10
* Includes revenue from external customers for all groups of products and services in each segment reported. Products and services sold by each segment are generally similar in nature; also it is impracticable to disclose revenues by product. Segment Reporting Revenue from customer geographical segments are as follows (in thousands):
1999 1998 1997 ---- ---- ---- U.S., Canada, Latin America $58,871 72.22% $120,517 88.15% $84,862 77.18% Europe $ 772 0.95 451 0.33 1,404 1.28 Pacific Rim 21,875 26.83 15,747 11.52 23,684 21.54 ------- ------ -------- ------ -------- ------ $81,518 100.00% $136,715 100.00% $109,950 100.00% ======= ======= ========= ======= ========= =======
The majority of the Company's operating long-lived assets are located in the United States (21) Subsequent Events Sale of MYS Corp. In March 1999, the Company entered into an agreement for the sale of MYS Corp. and subsidiaries to the management of MYS. The terms of the agreement called for a purchase price of $4.2 million with a down payment of $1.0 million, which was paid on April 15, 1999, and the balance, including interest at 8% per annum, due in twelve equal monthly installments. Sale of Assets of AuraSound In July 1999, the Company entered into an agreement for the sale of the assets of the Company's AuraSound speaker division with a supplier to Sound. The terms of the agreement called for a purchase price of $2.0 million plus the assumption of up to $1.6 million in debt. The terms further stated that the liabilities assumed would not exceed the net realizable value of the accounts receivable by more than $300,000. In addition to the sale of the assets, the Company entered into a licensing agreement with the purchaser which calls for a license fee of $1.5 million payable in monthly installments, with an additional option to purchase the patents under license. The option may be exercised at any time prior to the third year anniversary for an additional payments of $1,500,000. Restructuring of RGC International Investors, LDC, debt In October 1999 the Company entered into an agreement with RGC International Investors, LDC and a third party investor (AuraSound's assets purchaser) whereby RGC (i) sold to the third party the Company's Convertible Unsecured Debentures (the "RGC debentures") in the aggregate principal amount of $17,365,000, (ii) exchanged with the Company its $3 million Secured Convertible Note for a new non-convertible Secured Note (the "New RGC Note") in the principal amount of $3 million, and (iii) cancelled Warrants to purchase 9,000,770 shares of the Company's Common Stock in exchange for new Warrants to purchase 1,000,000 shares of common stock exercisable at $0.375 per share. The New RGC Note bears interest at the rate of 8% per annum, with principal and interest payable no less frequently than quarterly. The New RGC Note continues to be secured by a lien on certain assets of the Company, including inventory and accounts receivable. Under the agreement with the new holder of the RGC Debentures, the RGC Debentures are convertible into a maximum of 46,500,000 shares of the Company's Common Stock. The holder of the RGC Debentures has agreed to cancel the outstanding principal and interest owed under the RGC Debentures upon consummation of the restructuring of approximately $14.7 million of outstanding Debentures held by a third party. See "Restructuring of Infinity Investors debt" below. Retirement of JNC Debt In December 1999, the Company consummated an agreement with JNC Opportunity Fund, Ltd. resulting in the surrender for cancellation by JNC of the Company's Convertible Debenture and 318,000 warrants in exchange for a cash payment of $430,000, 3,500,000 shares of the Company's Common Stock and 113,000 Warrants exercisable at $0.375 per share expiring December 1, 2002. Restructuring of Infinity Investors Debt In November 1999 the Company entered into an agreement with the holders of approximately $14.7 million of Debentures which were due in September 1998. Under the terms of the agreement the Investors have agreed to exchange (the "Exchange") the Debentures and Warrants to purchase 1,111,111 shares of the Company's Common Stock for $3 million in cash and a new Secured Note (the "New Secured Note") in the principal amount of $12.5 million. The New Secured Note will be secured by a lien on the Company's assets, will bear interest at the rate of 8% per annum, payable quarterly, with the principal due three years from the date of the exchange. In the event of a default under the New Secured Note, the holder is entitled to convert the unpaid principal and interest into Common Stock of the Company at $.60 per share. The Company is entitled to a discount if the New Secured Note is prepaid, which discount is initially 20% of the amount prepaid, and the discount declines ratably over the three year term of the New Secured Note. Consummation of the Exchange is subject to completion of a definitive agreement with the holders of the Debentures. Restructuring of Trade debt In December 1999, the Company implemented a restructuring of approximately $10.8 million of trade debt held by certain trade creditors whereby the holders of a substantial portion of the trade debt have agreed to the repayment of outstanding trade debt over a period of three years, with interest at 8% per annum, commencing January 2000. Completion of Common Stock Private Placement In November 1999 the Company completed a private placement of approximately 27 million shares of its Common Stock at $0.27 per share, resulting in gross proceeds of approximately $6.9 million. SCHEDULE II AURA SYSTEMS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended February 28, 1999, February 28, 1998 and February 28, 1997
Balance at Charged to Charged to Balance at beginning of costs and other end period expenses Accounts Deductions of period ----------------------------------------------------------------------------------- Allowances are deducted from the assets to which they apply Year ended February 28, 1999 Allowance for: Uncollectible Accounts $ 5,431,525 $13,314,320 $10,000,000 $20,596,294 $ 8,149,551 Reserve for returns 569,605 24,741,084 -- 25,189,215 121,474 Reserve for potential product obsolescence 4,535,000 15,906,337 -- 12,565,337 7,876,000 --------- ---------- ------------ ---------- --------- $10,536,130 $53,961,741 $10,000,000 $58,350,846 $16,147,025 ========== ========== ========== =========== ========== Year ended February 28, 1998: Allowance for: Uncollectible Accounts $2,090,652 $ 3,617,056 $ -- $ 276,183 $5,431,525 Reserve for returns 1,512,679 23,504,148 -- 24,447,222 569,605 Reserve for potential product obsolescence 2,255,000 4,030,000 -- 1,750,000 4,535,000 --------- ------------ ---------- ----------- ---------- $5,858,331 $31,151,204 $ -- $26,473,405 $10,536,130 ========= ========== ========== ========== ========== Year ended February 28, 1997: Allowance for: Uncollectible Accounts $ 1,947,883 $ 737,577 $ -- $ 594,808 $2,090,652 Reserve for returns 535,119 977,560 -- -- 1,512,679 Reserve for potential product obsolescence -- 2,255,000 -- -- 2,255,000 ---------- --------- ----------- ----------- --------- $2,483,002 $3,970,137 $ -- $ 594,808 $5,858,331 ========= ========= ========== ========== =========
Amounts charged to other accounts include amounts charged for price protection and rebates. EX-10.19.1 2 AURASOUND ASSET PURCHASE AGREEMENT DATED 12/1/99 ASSET PURCHASE AGREEMENT among: AURASOUND, INC., a Delaware corporation; AURA SYSTEMS, INC., a Delaware corporation; ALGO SOUND, INC., a California corporation; and ALGO TECHNOLOGY, INC., a California corporation ---------------------------- Dated as of December 1, 1999 ---------------------------- 28 1 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is entered into as of December 1, 1999, by and among: AURASOUND, INC., a Delaware corporation (the "Seller"); AURA SYSTEMS, INC., a Delaware corporation and Seller's sole shareholder (the "Shareholder"); and ALGO TECHNOLOGY, INC., a California corporation ("Parent") and ALGO SOUND, INC., a California corporation (the "Purchaser"). Certain capitalized terms used in this Agreement are defined in Exhibit A. RECITALS A. The Shareholder is the sole shareholder of the Seller. B. The Shareholder and the Seller wish to provide for the sale of substantially all of the assets of the Seller to the Purchaser on the terms set forth in this Agreement. C. The Shareholder has licensed and granted an option to certain intellectual property rights pursuant to a license agreement of even date herewith (the "License Ageement"). AGREEMENT The parties to this Agreement, intending to be legally bound, agree as follows: 1. SALE OF ASSETS; RELATED TRANSACTIONS. 1.1 Sale of Assets. The Shareholder and the Seller shall cause to be sold, assigned, transferred, conveyed and delivered to the Purchaser, at the Closing (as defined below), good and valid title to the Assets (as defined below), free of any Encumbrances, on the terms and subject to the conditions set forth in this Agreement. For purposes of this Agreement, "Assets" shall mean and include all of the properties, rights, interests and other tangible and intangible assets of the Seller (wherever located and whether or not required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles; provided, however, that the Assets shall not include any Excluded Assets. Without limiting the generality of the foregoing, the Assets shall include: (1) all accounts receivable, notes receivable and other receivables of the Seller (including all accounts receivable identified in Part 2.8 of the Disclosure Schedule); (2) all inventories and work-in-progress of the Seller, and all rights to collect from customers (and to retain) all fees and other amounts payable, or that may become payable, to the Seller with respect to services performed on behalf of the Seller on or prior to the Closing Date; (3) all equipment, materials, prototypes, tools, supplies, vehicles, furniture, fixtures, improvements and other tangible assets of the Seller (including the tangible assets identified in Part 2.11 of the Disclosure Schedule); (4) all advertising and promotional materials possessed by the Seller; (5) all Proprietary Assets and goodwill of the Seller (including the Proprietary Assets identified in Part 2.13 of the Disclosure Schedule); (6) all rights of the Seller under the Seller Contracts (including the Seller Contracts identified in Part 2.14 of the Disclosure Schedule); (7) all Governmental Authorizations held by the Seller (including the Governmental Authorizations identified in Part 2.17 of the Disclosure Schedule); (8) all claims (including claims for past infringement of Proprietary Assets) and causes of action of the Seller against other Persons (regardless of whether or not such claims and causes of action have been asserted by the Seller), and all rights of indemnity, warranty rights, rights of contribution, rights to refunds, rights of reimbursement and other rights of recovery possessed by the Seller (regardless of whether such rights are currently exercisable); and (9) all books, records, files and data of the Seller or Shareholder necessary for the non-interrupted operation of the business of Seller. 1.2 License Agreement. It shall be a condition to Closing that the parties thereto shall have entered into that certain license agreement in substantially the form attached hereto as Exhibit ___. 1.3 Purchase Price. (a) As consideration for the sale of the Assets to the Purchaser: (i) at the Closing (as defined below), the Purchaser shall (i) pay to the Seller a total of $100,000.00 (less all principal and accrued and unpaid interest accrued as of the Closing Date under those certain promissory notes, dated June 7, 1999, June 25, 1999, July 1, 1999, and July 1, 1999 (the "Notes"), issued by Seller to Lender (as defined therein) and (ii) deliver the canceled Notes; intentionally omitted; (iii) subject to Section 6.4, beginning on January 15, 2000 and on the 15th of each month thereafter for a total of nineteen (19) payments, Parent shall pay to Seller each month, in cash, $100,000.00 for a total payment of $1,900,000.00; (iv) subject to Section 6.4, on each annual anniversary of the Closing Date until such time as the payment obligations of Sections 1.2(a)(ii) and (iii) have been completed, Parent shall pay to the Seller, in cash, interest that has accrued on amounts unpaid under Sections 1.2(a)(ii) and (iii). Interest shall accrue commencing on the Closing Date at the rate of eight percent (8%) per annum; and (v) at the Closing, the Purchaser shall assume the Assumed Liabilities by delivering to the Seller a Bill of Sale, Assignment, and Assumption Agreement in substantially the form of Exhibit ___ (the "Assumption Agreement"). Notwithstanding the foregoing, Parent's payment obligations under Sections 1.2(a)(iii) and (iv) may be suspended in accordance with Section 6.4. (b) For purposes of this Agreement "Assumed Liabilities" shall mean only the following liabilities of the Seller: (i) those accounts payable of the Seller in an amount not to exceed one million six hundred thousand dollars ($1,600,000) that arose from bona fide transactions entered into in the Ordinary Course of Business and that remained unpaid as of the Closing Date which are listed in Part 2.15(b) of the Disclosure Schedule; and (ii) the obligations of the Seller under the Contracts identified in Part 2.14 to the Disclosure Schedule, but only to the extent such obligations (A) arise after the Closing Date, (B) do not arise from or relate to any Breach by the Seller of any provision of any of such Contracts, (C) do not arise from or relate to any event, circumstance or condition occurring or existing on or prior to the Closing Date that, with notice or lapse of time, would constitute or result in a Breach of any of such Contracts, and (D) are ascertainable (in nature and amount) solely by reference to the express terms of such Contracts; provided, however, that notwithstanding the foregoing, and notwithstanding anything to the contrary contained in this Agreement, the "Assumed Liabilities" shall not include, and the Purchaser shall not be required to assume or to perform or discharge: (1) any Liability of any Shareholder or any other Person, except for the Seller; (2) any Liability of the Seller arising out of or relating to the execution, delivery or performance of any of the Transactional Agreements; (3) any Liability of the Seller for any fees, costs or expenses of the type referred to in Section 8.4(a) of Agreement; (4) any Liability of the Seller arising from or relating to any action taken by the Seller, or any failure on the part of the Seller to take any action, at any time after the Closing Date; (5) any Liability of the Seller arising from or relating to (x) any services performed by the Seller for any customer, or (y) any claim or Proceeding against the Seller; (6) any Liability of the Seller for the payment of any Tax; (7) any Liability of the Seller to any employee or former employee of the Seller under or with respect to any Employee Benefit Plan, profit sharing plan or dental plan or for severance pay; (8) any Liability of the Seller to any Shareholder or any other Related Party; (9) any Liability under any Contract, if the Seller shall not have obtained, prior to the Closing Date, any Consent required to be obtained from any Person with respect to the assignment or delegation to the Purchaser of any rights or obligations under such Contract; (10) any Liability that is inconsistent with or constitutes an inaccuracy in, or that arises or exists by virtue of any Breach of, (x) any representation or warranty made by the Seller or any Shareholder in any of the Transactional Agreements, or (y) any covenant or obligation of the Seller or any Shareholder contained in any of the Transactional Agreements; or (11) any other Liability that is not referred to specifically in clause "(i)" or "(ii)" of this sentence. 1.4 Sales Taxes. The Seller shall bear and pay, and shall reimburse the Purchaser and the Purchaser's affiliates for, any transfer taxes, documentary charges, recording fees or similar taxes, charges, fees or expenses that may become payable in connection with the sale of the Assets to the Purchaser or in connection with any of the other Transactions. 1.5 Allocation. At or prior to the Closing, Purchaser shall deliver to the Seller a statement setting forth the Purchaser's good faith determination of the manner in which the consideration referred to in Sections 1.2(a)(i), 1.2(a)(ii) and 1.2(a)(iii) is to be allocated among the Assets. The allocation prescribed by such statement shall be conclusive and binding upon the Shareholder and the Seller for all purposes, and neither the Seller nor Shareholder shall file any Tax Return or other document with, or make any statement or declaration to, any Governmental Body that is inconsistent with such allocation. 1.6 Closing. (a) The closing of the sale of the Assets to the Purchaser (the "Closing") shall take place at the offices of Cooley Godward LLP in Palo Alto, California, at 10:00 a.m. on such date as the Purchaser may designate in a written notice delivered to the Seller; provided, however, that if any condition set forth in Section 4 has not been satisfied as of the date designated by the Purchaser, then the Purchaser may, at its election, unilaterally postpone the Scheduled Closing Time by up to 60 days. For purposes of this Agreement, "Scheduled Closing Time" shall mean the time and date as of which the Closing is required to take place pursuant to this Section 1.6(a); and "Closing Date" shall mean the time and date as of which the Closing actually takes place. (b) At the Closing: (i) the Seller shall execute and deliver to the Purchaser such bills of sale, endorsements, assignments and other documents as may (in the reasonable judgment of the Purchaser or its counsel) be necessary or appropriate to assign, convey, transfer and deliver to the Purchaser good and valid title to the Assets free of any Encumbrances; (ii) the Purchaser shall pay to the Seller such amount in cash as contemplated by Section 1.2(a)(i) and deliver the canceled Notes; (iii) the Purchaser shall execute and deliver to the Seller the Assumption Agreement; (iv) the Shareholder and the Seller shall execute and deliver to the Purchaser a certificate (the "Closing Certificate") setting forth the representations and warranties of the Shareholder and the Seller that (A) each of the representations and warranties made by the Shareholder and the Seller in this Agreement was accurate in all respects as of the date of this Agreement, (B) except as expressly set forth in the Closing Certificate, each of the representations and warranties made by the Shareholder and the Seller in this Agreement is accurate in all respects as of the Closing Date as if made on the Closing Date, (C) each of the covenants and obligations that any of the Shareholder or the Seller is required to have complied with or performed pursuant to this Agreement at or prior to the Closing has been duly complied with and performed in all respects, and (D) except as expressly set forth in the Closing Certificate, each of the conditions set forth in Section 4.3 has been satisfied in all respects; and (v) the parties thereto shall have executed and delivered the License Agreement. 2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER AND THE SELLER. The Shareholder and the Seller, jointly and severally, represent and warrant, to and for the benefit of the Indemnitees, as follows: 2.1 Due Organization; No Subsidiaries; Etc. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Seller is not required to be qualified, authorized, registered or licensed to do business as a foreign corporation in any jurisdiction other than the jurisdictions listed in Part 2.1 of the Disclosure Schedule. The Seller is in good standing as a foreign corporation in each of the jurisdictions listed in Part 2.1 of the Disclosure Schedule. The Seller does not have any subsidiaries other than those listed in Part 2.1 of the Disclosure Schedule, and does not own, beneficially or otherwise, any shares or other securities of, or any direct or indirect interest of any nature in, any other Entity. The Seller has never conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name. 2.2 Certificate of Incorporation and Bylaws; Records. The Seller has delivered to (or made available for inspection by) the Purchaser accurate and complete copies of: (i) the certificate of incorporation and bylaws of the Seller, including all amendments thereto; and (ii) the stock records of the Seller. The books of account, stock records, minute books and other records of the Seller are accurate, up-to-date and complete, and have been maintained in accordance with sound and prudent business practices. All of the records of the Seller are in the actual possession and direct control of the Seller. 2.3 Capitalization. The Shareholder is the sole shareholder of the Seller. No person other than the Shareholder has any right to vote with respect to the sale of the Assets to the Purchaser or any of the other Transactions. 2.4 Financial Statements. The Seller has delivered to the Purchaser the following financial statements (collectively, the "Financial Statements"): (a) the unaudited balance sheet of the Seller as of February 28, 1999, and the unaudited statement of income of the Seller for the one year period ending February 28, 1999 ; and (b) the balance sheet of the Seller as of May 31, 1999 (the "Unaudited Interim Balance Sheet") and the unaudited statement of income of the Seller for the period of March 1, 1999 through May 31, 1999. The Financial Statements are accurate and complete in all respects, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered (except that the financial statements referred to in clause "(b)" of this Section 2.4 do not have notes) and present fairly the financial position of the Seller as of the respective dates thereof. 2.5 Absence Of Changes. Except as set forth in Part 2.5 of the Disclosure Schedule, since February 28, 1999: (a) there has not been any adverse change in, and no event has occurred that might have an adverse effect on, the business, condition, assets, liabilities, operations, financial performance, net income or prospects of the Seller; (b) there has not been any loss, damage or destruction to, or any interruption in the use of, any of the assets of the Seller (whether or not covered by insurance); (c) the Seller has not purchased or otherwise acquired any asset from any other Person, except for supplies acquired by the Seller in the Ordinary Course of Business; (d) the Seller has not leased or licensed any asset from any other Person; (e) the Seller has not made any capital expenditure; (f) the Seller has not sold or otherwise transferred, or leased or licensed, any asset to any other Person; (g) the Seller has not written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other indebtedness; (h) the Seller has not made any loan or advance to any other Person; (i) the Seller has not (i) established or adopted any Employee Benefit Plan, or (ii) paid any bonus or made any profit-sharing or similar payment to, or increased the amount of the wages, salary, commissions, fees, fringe benefits or other compensation or remuneration payable to, any of its directors, officers, employees or independent contractors; (j) no Contract by which the Seller or any of the assets owned or used by the Seller is or was bound, or under which the Seller has or had any rights or interest, has been amended or terminated; (k) the Seller has not incurred, assumed or otherwise become subject to any Liability, other than accounts payable (of the type required to be reflected as current liabilities in the "liabilities" column of a balance sheet prepared in accordance with GAAP) incurred by the Seller in bona fide transactions entered into in the Ordinary Course of Business; (l) the Seller has not discharged any Encumbrance or discharged or paid any indebtedness or other Liability, except for accounts payable that (i) are reflected as current liabilities in the "liabilities" column of the Unaudited Interim Balance Sheet or have been incurred by the Seller since May 31, 1999, in bona fide transactions entered into in the Ordinary Course of Business, and (ii) have been discharged or paid in the Ordinary Course of Business; (m) the Seller has not forgiven any debt or otherwise released or waived any right or claim; (n) the Seller has not changed any of its methods of accounting or accounting practices in any respect; (o) the Seller has not entered into any transaction or taken any other action outside the Ordinary Course of Business; and (p) the Seller has not agreed, committed or offered (in writing or otherwise) to take any of the actions referred to in clauses "(c)" through "(o)" above. 2.6 Title To Assets. The Seller owns, and has good and valid title to, all of the all assets purported to be owned by it and transferred to Purchaser pursuant to this Agreement, including: all assets reflected on the Unaudited Interim Balance Sheet; all assets acquired by the Seller since May 31, 1999; all assets referred to in Parts 2.7, 2.8, 2.10, 2.11, 2.12, and 2.13 of the Disclosure Schedule; all rights of the Seller under Seller Contracts; and all other assets reflected in the books and records of the Seller as being owned by the Seller. Except as set forth in Part 2.6 of the Disclosure Schedule, all of said assets are owned by the Seller free and clear of any Encumbrances. Part 2.6 of the Disclosure Schedule identifies all of the assets that are being leased or licensed to the Seller. The Assets, in conjunction with the License Agreement, will collectively constitute, as of the Closing Date, all of the properties, rights, interests and other tangible and intangible assets necessary to enable the Purchaser to conduct Seller's business in the manner in which such business is currently being conducted and in the manner in which such business is proposed to be conducted. 2.7 Bank Accounts. Part 2.7 of the Disclosure Schedule accurately sets forth, with respect to each account maintained by or for the benefit of the Seller at any bank or other financial institution: (a) the name and location of the institution at which such account is maintained; (b) the name in which such account is maintained and the account number of such account; (c) a description of such account and the purpose for which such account is used; (d) the current balance in such account; (e) the rate of interest being earned on the funds in such account; and (f) the names of all individuals authorized to draw on or make withdrawals from such account. There are no safe deposit boxes or similar arrangements maintained by or for the benefit of the Seller. 2.8 Receivables. Part 2.8 of the Disclosure Schedule provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable and other receivables of the Seller as of the Closing Date. Except as set forth in Part 2.8 of the Disclosure Schedule, all existing accounts receivable of the Seller: (i) represent valid obligations of customers of the Seller arising from bona fide transactions entered into in the Ordinary Course of Business; and (ii) are current and will be collected in full (without any counterclaim or setoff) on or before September 15, 1999). Part 2.8 of the Disclosure Schedule identifies all unreturned security deposits and other deposits made by, or held by any Person for the benefit of, the Seller. 2.9 Customers; Distributors. Part 2.9 of the Disclosure Schedule accurately identifies, and provides an accurate and complete breakdown of the revenues received from, each customer or other Person that (together which such customer's or other Person's affiliates) accounted for more than $20,000.00 of the gross revenues of the Seller in 1997, 1998, or 1999. Other than as identified in Part 2.9 of the Disclosure Schedule, neither the Seller nor Shareholder has received any notice or other communication (in writing or otherwise), and neither the Seller nor Shareholder has received any other information, indicating that any customer or other Person identified or required to be identified in Part 2.9 of the Disclosure Schedule may cease dealing with the Seller or may otherwise reduce the volume of business transacted by such Person with the Seller below historical levels. Neither the Seller nor Shareholder has received any notice or other communication (in writing or otherwise), or has received any other information, indicating that any distributor of any of the Seller's products may cease acting as a distributor of such products or otherwise dealing with the Seller. 2.10 Inventory. Part 2.10 of the Disclosure Schedule provides an accurate and complete breakdown of all inventory (including raw materials, work in process and finished goods) of the Seller as of the Closing Date. All of the Seller's existing inventory not identified otherwise as "scrap" or "closeout": (a) is of such quality and quantity as to be usable and saleable by the Seller in the Ordinary Course of Business; (b) has been priced at the lower of cost or market value using the "last-in, first-out" method; and (c) is free of any defect or deficiency. 2.11 Equipment, Etc. Part 2.11 of the Disclosure Schedule accurately identifies all equipment, materials, prototypes, tools, supplies, vehicles, furniture, fixtures, improvements and other tangible assets owned by the Seller. Part 2.11 of the Disclosure Schedule also accurately identifies all tangible assets leased to the Seller. Each asset identified or required to be identified in Part 2.11 of the Disclosure Schedule: (i) is structurally sound, free of defects and deficiencies and in good condition and repair (ordinary wear and tear excepted); (ii) complies in all respects with, and is being operated and otherwise used in full compliance with, all applicable Legal Requirements; and (iii) is adequate and appropriate for the uses to which it is being put. The assets identified in Part 2.11 of the Disclosure Schedule are adequate for the conduct of the business of the Seller in the manner in which such business is currently being conducted and in the manner in which such business is proposed to be conducted. 2.12 Real Property. The Seller does not own any real property or any interest in real property, except for the leaseholds created under the real property leases identified in Part 2.12 of the Disclosure Schedule. Part 2.12 of the Disclosure Schedule provides an accurate and complete description of the premises covered by said leases and the facilities located on such premises. The Seller enjoys peaceful and undisturbed possession of such premises. 2.13 Proprietary Assets. (a) Part 2.13(a)(1) of the Disclosure Schedule identifies and provides a brief description of all Proprietary Assets owned by the Seller (or by Shareholder and that are needed for the conduct of, or are useful in connection with, the business of the Seller). Part 2.13(a)(2) of the Disclosure Schedule identifies and provides a brief description of each Proprietary Asset that is owned by any other Person and that is licensed to or used by the Seller (except for any Proprietary Asset that is licensed to the Seller under any third party software license that (1) is generally available to the public, and (2) imposes no future monetary obligation on the Seller) and identifies the license agreement or other agreement under which such Proprietary Asset is being licensed to or used by the Seller. The Seller or Shareholder has good and valid title to all of the Proprietary Assets identified in Part 2.13(a)(1) of the Disclosure Schedule, free of any Encumbrances, and has a valid right to use and otherwise exploit, and to license others to use and otherwise exploit, all Proprietary Assets identified in Part 2.13(a)(2) of the Disclosure Schedule. Except as set forth in Part 2.13(a)(3) of the Disclosure Schedule, the Seller is not obligated to make any payment to any Person for the use or other exploitation of any Proprietary Asset. Except as set forth in Part 2.13(a)(4) of the Disclosure Schedule, the Seller is free to use, modify, copy, distribute, sell, license or otherwise exploit each of the Seller Proprietary Assets on an exclusive basis (other than Proprietary Assets consisting of software licensed to the Seller under third party licenses generally available to the public, with respect to which the Seller's rights are not exclusive). (b) The Seller or Shareholder has taken all reasonable measures and precautions necessary to protect and maintain the confidentiality and secrecy of all Seller and Shareholder Proprietary Assets (except Seller and Shareholder Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all Seller Proprietary Assets. The Seller and Shareholder have not disclosed or delivered or permitted to be disclosed or delivered to any Person, and no Person (other than the Seller or Shareholder) has access to or has any rights with respect to, the source code, or any portion or aspect of the source code, of any Seller or Shareholder Proprietary Asset. (c) All patents, trademarks, service marks and copyrights that are registered with any Governmental Body and held by the Seller or Shareholder are valid and subsisting. None of the Seller Proprietary Assets infringes or conflicts with any Proprietary Asset owned or used by any other Person. The Seller is not infringing, misappropriating or making any unlawful use of, and the Seller has not at any time infringed, misappropriated or made any unlawful use of, or received any notice or other communication of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Proprietary Asset owned or used by any other Person. To the best of the knowledge of the Seller and the Shareholder, no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Seller Proprietary Asset. (d) The Proprietary Assets constitute all the Proprietary Assets necessary to enable the Seller to conduct its business in the manner in which such business is being conducted and in the manner in which such business is proposed to be conducted. The Seller has not licensed any of the Seller Proprietary Assets to any Person on an exclusive basis. The Seller has not entered into any covenant not to compete or Contract limiting its ability to exploit fully any of the Seller Proprietary Assets or to transact business in any market or geographical area or with any Person. (e) Except as set forth in Part 2.13(e) of the Disclosure Schedule, the Seller has not entered into and is not bound by any Contract under which any Person has the right to distribute or license any Proprietary Asset. The Seller has not disclosed or delivered to any Person, or permitted the disclosure or delivery to any Person, of the source code, or any portion or aspect of the source code, or any proprietary information or algorithm contained in any source code, of any Proprietary Asset. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, result in the disclosure or delivery to any Person of the source code, or any portion or aspect of the source code, or any proprietary information or algorithm contained in any source code, of any Proprietary Asset. 2.14 Contracts. (a) Part 2.14 of the Disclosure Schedule identifies and provides an accurate and complete description of each Seller Contract, except for any Immaterial Contract. The Seller has delivered to the Purchaser accurate and complete copies of all Contracts identified in Part 2.14 of the Disclosure Schedule, including all amendments thereto. Each Seller Contract is valid and in full force and effect. (b) Except as set forth in Part 2.14 of the Disclosure Schedule: (i) no Person has violated or breached, or declared or committed any default under, any Seller Contract; (ii) no event has occurred, and no circumstance or condition exists, that might (with or without notice or lapse of time) (A) result in a violation or breach of any of the provisions of any Seller Contract, (B) give any Person the right to declare a default or exercise any remedy under any Seller Contract, (C) give any Person the right to accelerate the maturity or performance of any Seller Contract, or (D) give any Person the right to cancel, terminate or modify any Seller Contract; (iii) the Seller has not received any notice or other communication (in writing or otherwise) regarding any actual, alleged, possible or potential violation or breach of, or default under, any Seller Contract; and (iv) the Seller has not waived any right under any Seller Contract. (c) To the best of the knowledge of the Seller and the Shareholder, each Person against which the Seller has or may acquire any rights under any Seller Contract is solvent and is able to satisfy all of such Person's current and future monetary obligations and other obligations and Liabilities thereunder. (d) Except as set forth in Part 2.14 of the Disclosure Schedule, the Seller has never guaranteed or otherwise agreed to cause, insure or become liable for, and the Seller has never pledged any of its assets to secure, the performance or payment of any obligation or other Liability of any other Person. (e) The performance of the Seller Contracts will not result in any violation of or failure to comply with any Legal Requirement. (f) No Person is renegotiating, or has the right to renegotiate, any amount paid or payable to the Seller under any Seller Contract or any other term or provision of any Seller Contract. (g) The Seller has no knowledge of any basis upon which any party to any Seller Contract may object to (i) the assignment to the Purchaser of any right under such Seller Contract, or (ii) the delegation to or performance by the Purchaser of any obligation under such Seller Contract. (h) The Contracts identified in Part 2.14 of the Disclosure Schedule collectively constitute all of the Contracts necessary to enable the Seller to conduct its business in the manner in which such business is currently being conducted and in the manner in which such business is proposed to be conducted. (i) Part 2.14 of the Disclosure Schedule identifies and provides an accurate and complete description of each proposed Contract as to which any bid, offer, written proposal, term sheet or similar document has been submitted or received by the Seller. 2.15 Liabilities. (a) Except as set forth in Part 2.15 of the Disclosure Schedule, the Seller has no Liabilities, except for: (i) liabilities identified as such in the "liabilities" columns of the Unaudited Interim Balance Sheet; (ii) accounts payable (of the type required to be reflected as current liabilities in the "liabilities" column of a balance sheet prepared in accordance with GAAP) incurred by the Seller in bona fide transactions entered into in the Ordinary Course of Business since May 31, 1999; and (iii) obligations under the Contracts listed in Part 2.14 of the Disclosure Schedule, to the extent that the existence of such obligations is ascertainable solely by reference to such Contracts. (b) Part 2.15 of the Disclosure Schedule: (i) provides an accurate and complete breakdown and aging of the accounts payable of the Seller as of the Closing Date; (ii) provides an accurate and complete breakdown of any customer deposits or other deposits held by the Seller as of the date of this Agreement; and (iii) provides an accurate and complete breakdown of all notes payable and other indebtedness of the Seller as of the date of this Agreement. (c) Except as set forth in Part 2.15 of the Disclosure Schedule, the Seller has not paid, and the Seller is not and will not become liable for the payment of, any fees, costs or expenses of the type referred to in Section 8.4(a). (d) Part 2.15 of the Disclosure Schedule accurately identifies, and provides an accurate and complete breakdown of the amounts paid to, each supplier or other Person that (together which such Person's affiliates) received more than $50,000 in the aggregate from the Seller in any of 1997, 1998, or 1999. (e) The Seller has not, at any time, (i) made a general assignment for the benefit of creditors, (ii) filed, or had filed against it, any bankruptcy petition or similar filing, (iii) suffered the attachment or other judicial seizure of all or a substantial portion of its assets, (iv) admitted in writing its inability to pay its debts as they become due, (v) been convicted of, or pleaded guilty or no contest to, any felony, or (vi) taken or been the subject of any action that may have an adverse effect on its ability to comply with or perform any of its covenants or obligations under any of the Transactional Agreements. 2.16 Compliance with Legal Requirements. Except as set forth in Part 2.16 of the Disclosure Schedule: (a) the Seller is in full compliance with each Legal Requirement that is applicable to it or to the conduct of its business or the ownership or use of any of its assets; (b) the Seller has at all times been in full compliance with each Legal Requirement that is or was applicable to it or to the conduct of its business or the ownership or use of any of its assets; (c) no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) constitute or result directly or indirectly in a violation by the Seller of, or a failure on the part of the Seller to comply with, any Legal Requirement; and (d) the Seller has not received, at any time, any notice or other communication (in writing or otherwise) from any Governmental Body or any other Person regarding (i) any actual, alleged, possible or potential violation of, or failure to comply with, any Legal Requirement, or (ii) any actual, alleged, possible or potential obligation on the part of the Seller to undertake, or to bear all or any portion of the cost of, any cleanup or any remedial, corrective or response action of any nature. The Shareholder and the Seller have delivered to the Purchaser an accurate and complete copy of each report, study, survey or other document to which the Shareholder or the Seller has access that addresses or otherwise relates to the compliance of the Seller with, or the applicability to the Seller of, any Legal Requirement. To the best of the knowledge of the Seller and the Shareholder, no Governmental Body has proposed or is considering any Legal Requirement that, if adopted or otherwise put into effect, (i) may have an adverse effect on the business, condition, assets, liabilities, operations, financial performance, net income or prospects of the Seller or on the ability of the Shareholder or the Seller to comply with or perform any covenant or obligation under any of the Transactional Agreements, or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the Transactions. 2.17 Governmental Authorizations. Part 2.17 of the Disclosure Schedule identifies: (a) each Governmental Authorization that is held by the Seller; and (b) each other Governmental Authorization that, to the best of the knowledge of the Shareholder and the Seller, is held by any employee of the Seller and relates to or is useful in connection with the business of the Seller. The Shareholder and the Seller have delivered to the Purchaser accurate and complete copies of all of the Governmental Authorizations identified in Part 2.17 of the Disclosure Schedule, including all renewals thereof and all amendments thereto. Each Governmental Authorization identified or required to be identified in Part 2.17 of the Disclosure Schedule is valid and in full force and effect. Except as set forth in Part 2.17 of the Disclosure Schedule: (i) the Seller is and has at all times been in full compliance with all of the terms and requirements of each Governmental Authorization identified or required to be identified in Part 2.17 of the Disclosure Schedule; (ii) no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) (A) constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any Governmental Authorization identified or required to be identified in Part 2.17 of the Disclosure Schedule, or (B) result directly or indirectly in the revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization identified or required to be identified in Part 2.17 of the Disclosure Schedule; (iii) the Seller has never received any notice or other communication (in writing or otherwise) from any Governmental Body or any other Person regarding (A) any actual, alleged, possible or potential violation of or failure to comply with any term or requirement of any Governmental Authorization, or (B) any actual, proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization; and (iv) all applications required to have been filed for the renewal of the Governmental Authorizations required to be identified in Part 2.17 of the Disclosure Schedule have been duly filed on a timely basis with the appropriate Governmental Bodies, and each other notice or filing required to have been given or made with respect to such Governmental Authorizations has been duly given or made on a timely basis with the appropriate Governmental Body. The Governmental Authorizations identified in Part 2.17 of the Disclosure Schedule constitute all of the Governmental Authorizations necessary (i) to enable the Seller to conduct its business in the manner in which such business is currently being conducted and in the manner in which such business is proposed to be conducted, and (ii) to permit the Seller to own and use its assets in the manner in which they are currently owned and used and in the manner in which they are proposed to be owned and used. 2.18 Tax Matters. (a) Each Tax required to have been paid, or claimed by any Governmental Body to be payable, by the Seller has been duly paid in full on a timely basis. Any Tax required to have been withheld or collected by the Seller has been duly withheld and collected; and (to the extent required) each such Tax has been paid to the appropriate Governmental Body. (b) Part 2.18 of the Disclosure Schedule accurately identifies each examination or audit of any Tax Return of the Seller that has been conducted since December 31, 1996. The Shareholders and the Seller have delivered to the Purchaser accurate and complete copies of all audit reports and similar documents (to which any Shareholder or the Seller has access) relating to such Tax Returns. (c) Except as set forth in Part 2.18 of the Disclosure Schedule, no claim or other Proceeding is pending or has been threatened against or with respect to the Seller in respect of any Tax. There are no unsatisfied Liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar document received by the Seller. The Seller has not entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. (d) There is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of the Seller that, individually or collectively, could give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. (e) The Shareholder and the Seller have delivered to (or made available for inspection by) the Purchaser accurate and complete copies of all Tax Returns that have been filed on behalf of or with respect to the Seller since December 31, 1996. The information contained in such Tax Returns is accurate and complete in all respects. 2.19 Employee And Labor Matters. (a) Part 2.19 of the Disclosure Schedule accurately sets forth, with respect to each employee of the Seller (including any employee who is on a leave of absence or on layoff status): (i) the name and title of such employee; (ii) the aggregate dollar amounts of the compensation (including wages, salary, commissions, director's fees, fringe benefits, bonuses, profit-sharing payments and other payments or benefits of any type) received by such employee from the Seller with respect to services performed in 1998 and with respect to services performed in 1999; (iii) such employee's annualized compensation as of the date of this Agreement; (iv) the number of hours of sick-time which such employee has accrued as of the date hereof and the aggregate dollar amount thereof; and (v) the number of hours of vacation time which such employee has accrued as of the date hereof and the aggregate dollar amount thereof. (b) Part 2.19 of the Disclosure Schedule accurately identifies each former employee of the Seller who is receiving or is scheduled to receive (or whose spouse or other dependent is receiving or is scheduled to receive) any benefits from the Seller relating to such former employee's employment with the Seller; and Part 2.19 of the Disclosure Schedule accurately describes such benefits. (c) Except as set forth in Part 2.19 of the Disclosure Schedule, the Seller is not a party to or bound by, and has never been a party to or bound by, any employment contract or any union contract, collective bargaining agreement or similar Contract. (d) The employment of the employees of the Seller is terminable by the Seller at will and no employee is entitled to severance pay or other benefits following termination or resignation, except as otherwise provided by law. The Shareholder and the Seller have delivered to the Purchaser accurate and complete copies of all employee manuals and handbooks, disclosure materials, policy statements and other materials relating to the employment of the current and former employees of the Seller. (e) The Seller is not engaged in any unfair labor practice of any nature. There has never been any slowdown, work stoppage, labor dispute or union organizing activity, or any similar activity or dispute, affecting the Seller or any of its employees, and no Person has threatened to commence any such slowdown, work stoppage, labor dispute or union organizing activity or any similar activity or dispute. 2.20 Benefit Plans; ERISA. (a) Part 2.20 of the Disclosure Schedule identifies and provides an accurate and complete description of each Plan. The Seller has never established, adopted, maintained, sponsored, contributed to, participated in or incurred any Liability with respect to any Employee Benefit Plan, except for the Plans identified in Part 2.20 of the Disclosure Schedule; and the Seller has never provided or made available any fringe benefit or other benefit of any nature to any of its employees, except as set forth in Part 2.20 of the Disclosure Schedule. (b) No Plan: (i) provides or provided any benefit guaranteed by the Pension Benefit Guaranty Corporation; (ii) is or was a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA; or (iii) is or was subject to the minimum funding standards of Section 412 of the Code or Section 302 of ERISA. There is no Person that (by reason of common control or otherwise) is or has at any time been treated together with the Seller as a single employer within the meaning of Section 414 of the Code. (c) The Shareholder and the Seller have caused to be delivered to the Purchaser, with respect to each Plan: (i) an accurate and complete copy of such Plan and all amendments thereto (including any amendment that is scheduled to take effect in the future); (ii) an accurate and complete copy of each Contract (including any trust agreement, funding agreement, service provider agreement, insurance agreement, investment management agreement or recordkeeping agreement) relating to such Plan; (iii) an accurate and complete copy of any description, summary, notification, report or other document that has been furnished to any employee of the Seller with respect to such Plan; (iv) an accurate and complete copy of any form, report, registration statement or other document that has been filed with or submitted to any Governmental Body with respect to such Plan; and (v) an accurate and complete copy of any determination letter, notice or other document that has been issued by, or that has been received by the Seller from, any Governmental Body with respect to such Plan. (d) Each Plan is being and has at all times been operated and administered in full compliance with the provisions thereof. Each contribution or other payment that is required to have been accrued or made under or with respect to any Plan has been duly accrued and made on a timely basis. Each Plan has at all times complied and been operated and administered in full compliance with all applicable reporting, disclosure and other requirements of ERISA and the Code and all other applicable Legal Requirements. The Seller has never incurred any Liability to the Internal Revenue Service or any other Governmental Body with respect to any Plan; and no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) give rise directly or indirectly to any such Liability. Neither the Seller nor any Person that is or was an administrator or fiduciary of any Plan (or that acts or has acted as an agent of the Seller or any such administrator or fiduciary) has engaged in any transaction or has otherwise acted or failed to act in a manner that has subjected or may subject the Seller to any Liability for breach of any fiduciary duty or any other duty. No Plan, and no Person that is or was an administrator or fiduciary of any Plan (or that acts or has acted as an agent of any such administrator or fiduciary): (i) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code; (ii) has failed to perform any of the responsibilities or obligations imposed upon fiduciaries under Title I of ERISA; or (iii) has taken any action that (A) may subject such Plan or such Person to any Tax, penalty or Liability relating to any "prohibited transaction," or (B) may directly or indirectly give rise to or serve as a basis for the assertion (by any employee or by any other Person) of any claim under, on behalf of or with respect to such Plan. (e) No inaccurate or misleading representation, statement or other communication has been made or directed (in writing or otherwise) to any current or former employee of the Seller (i) with respect to such employee's participation, eligibility for benefits, vesting, benefit accrual or coverage under any Plan or with respect to any other matter relating to any Plan, or (ii) with respect to any proposal or intention on the part of the Seller to establish or sponsor any Employee Benefit Plan or to provide or make available any fringe benefit or other benefit of any nature. (f) The Seller has not advised any of its employees (in writing or otherwise) that it intends or expects to establish or sponsor any Employee Benefit Plan or to provide or make available any fringe benefit or other benefit of any nature in the future. 2.21 Environmental Matters. (a) The Seller is not liable or potentially liable for any response cost or natural resource damages under Section 107(a) of CERCLA, or under any other so-called "superfund" or "superlien" law or similar Legal Requirement, at or with respect to any site. (b) The Seller has never received any notice or other communication (in writing or otherwise) from any Governmental Body or other Person regarding any actual, alleged, possible or potential Liability arising from or relating to the presence, generation, manufacture, production, transportation, importation, use, treatment, refinement, processing, handling, storage, discharge, release, emission or disposal of any Hazardous Material. No Person has ever commenced or threatened to commence any contribution action or other Proceeding against the Seller in connection with any such actual, alleged, possible or potential Liability; and no event has occurred, and no condition or circumstance exists, that may directly or indirectly give rise to, or result in the Seller becoming subject to, any such Liability. (c) Except as set forth in Part 2.21 of the Disclosure Schedule, the Seller has never generated, manufactured, produced, transported, imported, used, treated, refined, processed, handled, stored, discharged, released or disposed of any Hazardous Material (whether lawfully or unlawfully). Except as set forth in Part 2.21 of the Disclosure Schedule, the Seller has never permitted (knowingly or otherwise) any Hazardous Material to be generated, manufactured, produced, used, treated, refined, processed, handled, stored, discharged, released or disposed of (whether lawfully or unlawfully): (i) on or beneath the surface of any real property that is, or that has at any time been, owned by, leased to, controlled by or used by the Seller; (ii) in or into any surface water, groundwater, soil or air associated with or adjacent to any such real property; or (iii) in or into any well, pit, pond, lagoon, impoundment, ditch, landfill, building, structure, facility, improvement, installation, equipment, pipe, pipeline, vehicle or storage container that is or was located on or beneath the surface of any such real property or that is or has at any time been owned by, leased to, controlled by or used by the Seller. (d) All property that is owned by, leased to, controlled by or used by the Seller, and all surface water, groundwater, soil and air associated with or adjacent to such property: (i) is in clean and healthful condition; (ii) is free of any Hazardous Material and any harmful chemical or physical conditions; and (iii) is free of any environmental contamination of any nature. (e) Each storage tank or other storage container that is or has been owned by, leased to, controlled by or used by the Seller, or that is located on or beneath the surface of any real property owned by, leased to, controlled by or used by the Seller: (i) is in sound condition; and (ii) has been demonstrated by accepted testing methodologies to be free of any corrosion or leaks. 2.22 Sale of Products. Each product that has been sold by the Seller to any Person: (i) conformed and complied in all respects with the terms and requirements of any applicable warranty or other Contract and with all applicable Legal Requirements; and (ii) was free of any design defects construction defects or other defects or deficiencies at the time of sale. The Seller will not incur or otherwise become subject to any Liability arising directly or indirectly from any product manufactured or sold by the Seller on or at any time prior to the Closing Date. No product manufactured or sold by the Seller has been the subject of any recall or other similar action; and no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any such recall or other similar action relating to any such product. 2.23 Performance Of Services. All services that have been performed on behalf of the Seller were performed properly and in full conformity with the terms and requirements of all applicable warranties and other Contracts and with all applicable Legal Requirements. The Purchaser will not incur or otherwise become subject to any Liability arising directly or indirectly from any services performed by the Seller. There is no claim pending or being threatened against the Seller relating to any services performed by the Seller, and, to the best of the knowledge of the Shareholder and the Seller, there is no basis for the assertion of any such claim. 2.24 Insurance. (a) Part 2.24 of the Disclosure Schedule accurately sets forth, with respect to each insurance policy maintained by or at the expense of, or for the direct or indirect benefit of, the Seller: (i) the name of the insurance carrier that issued such policy and the policy number of such policy; (ii) whether such policy is a "claims made" or an "occurrences" policy; (iii) a description of the coverage provided by such policy and the material terms and provisions of such policy (including all applicable coverage limits, deductible amounts and co-insurance arrangements and any non-customary exclusions from coverage); (iv) the annual premium payable with respect to such policy, and the cash value (if any) of such policy; and (v) a description of any claims pending, and any claims that have been asserted in the past, with respect to such policy or any predecessor insurance policy. Part 2.24 of the Disclosure Schedule also identifies (1) each pending application for insurance that has been submitted by or on behalf of the Seller, (2) each self-insurance or risk-sharing arrangement affecting the Seller or any of the assets of the Seller, and (3) all material risks (of the type customarily insured by Comparable Entities) for which the Seller does not maintain insurance coverage. The Shareholder and the Seller have delivered to the Purchaser accurate and complete copies of all of the insurance policies identified in Part 2.24 of the Disclosure Schedule (including all renewals thereof and endorsements thereto) and all of the pending applications identified in Part 2.24 of the Disclosure Schedule. Each of the policies identified in Part 2.24 of the Disclosure Schedule is valid, enforceable and in full force and effect, and has been issued by an insurance carrier that, to the best of the knowledge the Seller and the Shareholder, is solvent, financially sound and reputable. All of the information contained in the applications submitted in connection with said policies was (at the times said applications were submitted) accurate and complete, and all premiums and other amounts owing with respect to said policies have been paid in full on a timely basis. (b) Part 2.24 of the Disclosure Schedule identifies each insurance claim made by the Seller since December 31, 1996. No event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any such insurance claim. The Seller has not received: (i) any notice or other communication (in writing or otherwise) regarding the actual or possible cancellation or invalidation of any of the policies identified in Part 2.24 of the Disclosure Schedule or regarding any actual or possible adjustment in the amount of the premiums payable with respect to any of said policies; (ii) any notice or other communication (in writing or otherwise) regarding any actual or possible refusal of coverage under, or any actual or possible rejection of any claim under, any of the policies identified in Part 2.24 of the Disclosure Schedule; or (iii) any indication that the issuer of any of the policies identified in Part 2.24 of the Disclosure Schedule may be unwilling or unable to perform any of its obligations thereunder. 2.25 Related Party Transactions. Except as set forth in Part 2.25 of the Disclosure Schedule: (a) no Related Party has any direct or indirect interest of any nature in any of the assets of the Seller; (b) no Related Party is, or has at any time since December 31, 1996 been, indebted to the Seller; (c) since December 31, 1996, no Related Party has entered into, or has had any direct or indirect financial interest in, any Seller Contract, transaction or business dealing of any nature involving the Seller; (d) no Related Party is competing, or has at any time since December 31, 1996 competed, directly or indirectly, with the Seller; (e) no Related Party has any claim or right against the Seller; and (f) no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any claim or right in favor of any Related Party against the Seller. 2.26 Certain Payments, Etc. The Seller has not, and no officer, employee, agent or other Person associated with or acting for or on behalf of the Seller has, at any time, directly or indirectly: (a) used any corporate funds (i) to make any unlawful political contribution or gift or for any other unlawful purpose relating to any political activity, (ii) to make any unlawful payment to any governmental official or employee, or (iii) to establish or maintain any unlawful or unrecorded fund or account of any nature; (b) made any false or fictitious entry, or failed to make any entry that should have been made, in any of the books of account or other records of the Seller; (c) made any payoff, influence payment, bribe, rebate, kickback or unlawful payment to any Person; (d) performed any favor or given any gift which was not deductible for federal income tax purposes; (e) made any payment (whether or not lawful) to any Person, or provided (whether lawfully or unlawfully) any favor or anything of value (whether in the form of property or services, or in any other form) to any Person, for the purpose of obtaining or paying for (i) favorable treatment in securing business, or (ii) any other special concession; or (f) agreed, committed or offered (in writing or otherwise) to take any of the actions described in clauses "(a)" through "(e)" above. 2.27 Proceedings; Orders. Except as set forth in Part 2.27 of the Disclosure Schedule, there is no pending Proceeding, and no Person has threatened to commence any Proceeding: (i) that involves the Seller or that otherwise relates to or might affect the business of the Seller or any of the Assets (whether or not the Seller is named as a party thereto); or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Transactions. Except as set forth in Part 2.27 of the Disclosure Schedule, no event has occurred, and no claim, dispute or other condition or circumstance exists, that might directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding. Except as set forth in Part 2.27 of the Disclosure Schedule, no Proceeding has ever been commenced by or against the Seller. The Shareholders and the Seller have delivered to the Purchaser accurate and complete copies of all pleadings, correspondence and other written materials (to which the Shareholder or the Seller has access) that relate to the Proceedings identified in Part 2.27 of the Disclosure Schedule. There is no Order to which the Seller, or any of the assets owned or used by the Seller, is subject; and neither the Shareholders nor any other Related Party is subject to any Order that relates to the Seller's business or to any of the assets of the Seller. To the best of the knowledge of the Seller and the Shareholder, no employee of the Seller is subject to any Order that may prohibit employee from engaging in or continuing any conduct, activity or practice relating to the business of the Seller. There is no proposed Order that, if issued or otherwise put into effect, (i) may have an adverse effect on the business, condition, assets, liabilities, operations, financial performance, net income or prospects of the Seller or on the ability of the Shareholder or the Seller to comply with or perform any covenant or obligation under any of the Transactional Agreements, or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the Transactions. 2.28 Authority; Binding Nature Of Agreements. (a) The Seller has the absolute and unrestricted right, power and authority to enter into and to perform its obligations under each of the Transactional Agreements to which it is or may become a party; and the execution, delivery and performance by the Seller of the Transactional Agreements to which it is or may become a party have been duly authorized by all necessary action on the part of the Seller and its shareholders, board of directors and officers. This Agreement constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms. Upon the execution of each of the other Transactional Agreements at the Closing, each of such other Transactional Agreements to which the Seller is a party will constitute the legal, valid and binding obligation of the Seller and will be enforceable against the Seller in accordance with its terms. (b) The Shareholder has the absolute and unrestricted right, power and capacity to enter into and to perform its obligations under each of the Transactional Agreements to which it is or may become a party. This Agreement constitutes the legal, valid and binding obligation of the Shareholder, enforceable against the Shareholder in accordance with its terms. Upon the execution of each of the other Transactional Agreements at the Closing, each of such other Transactional Agreements to which the Shareholder is a party will constitute the legal, valid and binding obligation of Shareholder and will be enforceable against Shareholder in accordance with its terms. 2.29 Non-Contravention; Consents. Except as set forth in Part 2.29 of the Disclosure Schedule, neither the execution and delivery of any of the Transactional Agreements, nor the consummation or performance of any of the Transactions, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Shareholder or the Seller, or any of the assets of the Seller, is subject; (b) cause the Purchaser or any affiliate of the Purchaser to become subject to, or to become liable for the payment of, any Tax; (c) cause any of the Assets to be reassessed or revalued by any taxing authority or other Governmental Body; (d) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is to be included in the Assets or is held by the Seller or any employee of the Seller; (e) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Contract; (f) give any Person the right to (i) declare a default or exercise any remedy under any Contract, (ii) accelerate the maturity or performance of any Contract, or (iii) cancel, terminate or modify any Contract; or (g) result in the imposition or creation of any Encumbrance upon or with respect to any of the Assets. Except as set forth in Part 2.29 of the Disclosure Schedule, neither the Seller nor Shareholder was, is or will be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with the execution and delivery of any of the Transactional Agreements or the consummation or performance of any of the Transactions. 2.30 Brokers. Neither the Seller nor Shareholder has agreed or become obligated to pay, or has taken any action that might result in any Person claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the Transactions. 2.31 The Shareholders. (a) The Shareholder has never (i) made a general assignment for the benefit of creditors, (ii) filed, or had filed against it, any bankruptcy petition or similar filing, (iii) suffered the attachment or other judicial seizure of all or a substantial portion of its assets, (iv) admitted in writing its inability to pay its debts as they become due, or (v) taken or been the subject of any action that may have an adverse effect on its ability to comply with or perform any of its covenants or obligations under any of the Transactional Agreements. (b) The Shareholder is not subject to any Order or is bound by any Contract that may have an adverse effect on his ability to comply with or perform any of his or her covenants or obligations under any of the Transactional Agreements. There is no Proceeding pending, and no Person has threatened to commence any Proceeding, that may have an adverse effect on the ability the Shareholder to comply with or perform any of its covenants or obligations under any of the Transactional Agreements. No event has occurred, and no claim, dispute or other condition or circumstance exists, that might directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding. 2.32 Full Disclosure. None of the Transactional Agreements contains or will contain any untrue statement of fact; and none of the Transactional Agreements omits or will omit to state any fact necessary to make any of the representations, warranties or other statements or information contained therein not misleading. All of the information set forth in the Disclosure Schedule, and all other information regarding the Seller and its business, condition, assets, liabilities, operations, financial performance, net income and prospects that has been furnished to the Purchaser or any of the Purchaser's Representatives by or on behalf of the Shareholder or the Seller or by any Representative of the Shareholder or of the Seller, is accurate and complete in all respects. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants, to and for the benefit of the Seller, as follows: 3.1 Authority; Binding Nature Of Agreements. The Purchaser has the absolute and unrestricted right, power and authority to enter into and perform its obligations under this Agreement, and the execution and delivery of this Agreement by the Purchaser have been duly authorized by all necessary action on the part of the Purchaser and its board of directors. The Purchaser has the absolute and unrestricted right, power and authority to enter into and perform its obligations under the Assumption Agreement, and the execution, delivery and performance of the Assumption Agreement by the Purchaser have been duly authorized by all necessary action on the part of the Purchaser and its board of directors. This Agreement constitutes the legal, valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms. Upon the execution and delivery of the Assumption Agreement at the Closing, the Assumption Agreement will constitute the legal, valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their terms. 3.2 Brokers. The Purchaser has not become obligated to pay, and has not taken any action that might result in any Person claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the Transactions. 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION TO CLOSE. The Purchaser's obligation to purchase the Assets and to take the other actions required to be taken by the Purchaser at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by the Purchaser, in whole or in part, in writing): 4.1 Accuracy Of Representations. All of the representations and warranties made by the Shareholder and the Seller in this Agreement (considered collectively), and each of said representations and warranties (considered individually), shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the Closing Date as if made at the Closing Date, without giving effect to any update to the Disclosure Schedule. 4.2 Performance Of Obligations. (a) Each of the documents referred to in Sections 1.6(b)(i), 1.6(b)(iii), 1.6(b)(iv), and 1.6(b)(v), shall have been executed by each of the parties thereto and delivered to the Purchaser. (b) All of the covenants and obligations that the Shareholder and the Seller are required to comply with or to perform at or prior to the Closing (considered collectively), and each of said covenants and obligations (considered individually), shall have been duly complied with and performed in all material respects. 4.3 Consents. Each of the Consents identified in Part 2.29 of the Disclosure Schedule shall have been obtained and shall be in full force and effect. 4.4 Additional Documents. Purchaser shall have received the following documents: (a) an opinion letter from counsel to the Seller, dated the Closing Date, in the form of Exhibit ___; and (b) such other documents as Purchaser may request in good faith for the purpose of (i) evidencing the accuracy of any representation or warranty made by the Shareholder or the Seller, (ii) evidencing the compliance by the Shareholder or the Seller with, or the performance by the Shareholder or the Seller of, any covenant or obligation set forth in this Agreement, (iii) evidencing the satisfaction of any condition set forth in this Section 4, or (iv) otherwise facilitating the consummation or performance of any of the Transactions. 4.5 No Prohibition. Neither the consummation nor the performance of any the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of, or cause the Purchaser or any Person affiliated with the Purchaser to suffer any adverse consequence under, any applicable Legal Requirement or Order. 5. CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATION TO CLOSE. The Seller's obligation to sell the Assets and to take the other actions required to be taken by the Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by the Shareholders' Representative, in whole or in part, in writing): 5.1 Accuracy Of Representations. All of the representations and warranties made by the Purchaser in this Agreement (considered collectively), and each of said representations and warranties (considered individually), shall have been accurate in all material respects as of the date of this Agreement and shall be accurate in all material respects as of the Closing Date as if made at the Closing Date. 5.2 Purchaser's Performance. (a) The Purchaser shall have executed and delivered the Assumption Agreement and shall have made the payment contemplated by Section 1.6(b)(ii). (b) All of the other covenants and obligations that the Purchaser is required to comply with or to perform pursuant to this Agreement at or prior to the Closing (considered collectively), and each of said covenants and obligations (considered individually), shall have been complied with and performed in all material respects. 6. INDEMNIFICATION, ETC. 6.1 Survival Of Representations And Covenants. (a) The representations, warranties, covenants and obligations of each party to this Agreement shall survive (without limitation): (i) the Closing and the sale of the Assets to the Purchaser; (ii) any sale or other disposition of any or all of the Assets by the Purchaser; and (iii) the death or dissolution of any party to this Agreement. Except as set forth in Section 6.1(c), all of said representations, warranties, covenants and obligations shall remain in full force and effect and shall survive for an unlimited period of time. (b) The representations, warranties, covenants and obligations of the Shareholder and the Seller, and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or any knowledge of, any of the Indemnitees or any of their Representatives. (c) Subject to Section 6.1(d), the representations and warranties set forth in Section 2 shall expire on the fourth anniversary of the Closing Date; provided, however, that if a Claim Notice (as defined below) relating to any representation or warranty set forth in any of said Sections is given to the Shareholder's Representative on or prior to the fourth anniversary of the Closing Date, then, notwithstanding anything to the contrary contained in this Section 6.1(c), such representation or warranty shall not so expire, but rather shall remain in full force and effect until such time as each and every claim (including any indemnification claim asserted by any Indemnitee under Section 6.2) that is based directly or indirectly upon, or that relates directly or indirectly to, any Breach or alleged Breach of such representation or warranty has been fully and finally resolved, either by means of a written settlement agreement executed on behalf of the Shareholder's Representative and the Purchaser or by means of a final, non-appealable judgment issued by a court of competent jurisdiction. (d) Notwithstanding anything to the contrary contained in Section 6.1(c) (and without limiting the generality of anything contained in Section 6.1(a)), if the Shareholder or the Seller had knowledge, on or prior to the Closing Date, of any circumstance that constitutes or that has given rise or could be expected to give rise, directly or indirectly, to any Breach of any representation or warranty set forth in Section 2, then such representation or warranty shall not expire, but rather shall remain in full force and effect for an unlimited period of time (regardless of whether any Claim Notice relating to such representation or warranty is ever given). (e) For purposes of this Agreement, a "Claim Notice" relating to a particular representation or warranty shall be deemed to have been given if any Indemnitee, acting in good faith, delivers to the Shareholders' Representative a written notice stating that such Indemnitee believes that there is or has been a possible Breach of such representation or warranty and containing (i) a brief description of the circumstances supporting such Indemnitee's belief that there is or has been such a possible Breach, and (ii) a non-binding, preliminary estimate of the aggregate dollar amount of the actual and potential Damages that have arisen and may arise as a direct or indirect result of such possible Breach. (f) For purposes of this Agreement, each statement or other item of information set forth in the Disclosure Schedule or in any update to the Disclosure Schedule shall be deemed to be a representation and warranty made by the Shareholder and the Seller in this Agreement. 6.2 Indemnification By The Shareholders And The Seller. (a) The Shareholder and the Seller, jointly and severally, shall hold harmless and indemnify each of the Indemnitees from and against, and shall compensate and reimburse each of the Indemnitees for, any Damages that are directly or indirectly suffered or incurred by any of the Indemnitees or to which any of the Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and that arise directly or indirectly from or as a direct or indirect result of, or are directly or indirectly connected with: (i) any Breach of any of the representations or warranties made by the Shareholder or the Seller in this Agreement or in the Closing Certificate or any of the other Transactional Agreements; (ii) any Breach of any representation, warranty, statement, information or provision contained in the Disclosure Schedule or in any other document delivered or otherwise made available to the Purchaser or any of its Representatives by or on behalf of the Shareholder, the Seller or any Representative of the Shareholder or of the Seller; (iii) any Breach of any covenant or obligation of the Shareholder or the Seller contained in any of the Transactional Agreements; (iv) any Liability of the Seller or of any Related Party, other than the Assumed Liabilities; (v) any Liability (other than the Assumed Liabilities) to which the Purchaser or any of the other Indemnitees may become subject and that arises directly or indirectly from or relates directly or indirectly to (A) any product produced or sold or any services performed by or on behalf of the Seller, (B) the presence of any Hazardous Material at any site owned, leased, occupied or controlled by the Seller on or at any time prior to the Closing Date, (C) the generation, manufacture, production, transportation, importation, use, treatment, refinement, processing, handling, storage, discharge, release or disposal of any Hazardous Material (whether lawfully or unlawfully) by or on behalf of the Seller, (D) the operation by the Seller of its business, or (E) any failure to comply with any bulk transfer law or similar Legal Requirement in connection with any of the Transactions; (vi) any matter identified or referred to in Part ____ or Part ____ of the Disclosure Schedule; or (vii) any Proceeding relating directly or indirectly to any Breach, alleged Breach, Liability or matter of the type referred to in clause "(i)," "(ii)," "(iii)," "(iv)," "(v)" or "(vi)" above (including any Proceeding commenced by any Indemnitee for the purpose of enforcing any of its rights under this Section 7). 6.3 Indemnification By Purchaser. (a) The Purchaser shall hold harmless and indemnify the Seller from and against, and shall compensate and reimburse the Seller for, any Damages that are directly or indirectly suffered or incurred by the Seller or to which the Seller may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and that arise directly or indirectly from or as a direct or indirect result of, or are directly or indirectly connected with: (i) any failure on the part of the Purchaser to perform and discharge the Assumed Liabilities on a timely basis; (ii) any Breach of any representation or warranty made by the Purchaser in this Agreement; or (iii) any Proceeding relating directly or indirectly to any failure or Breach of the type referred to in clause "(i)" or "(ii)" above (including any Proceeding commenced by the Seller for the purpose of enforcing its rights under this Section 6.3). 6.4 Setoff. In addition to any rights of setoff or other rights that the Parent or Purchaser or any of the other Indemnitees may have at common law or otherwise, Parent and Purchaser shall have the right to withhold and deduct any sum that may be owed to any Indemnitee under this Section 6 from any amount otherwise payable by any Indemnitee, including amounts payable pursuant to Sections 1.2(a) (iii) and (iv), to the Shareholder's Representative or to the Seller or the Shareholder. Additionally, Parent and Purchaser shall have the right, but not the obligation, to withhold and deduct such amount as is equal to the difference between (a) (i) the June 14th Accounts Payable Amount plus any other accounts payable amounts accrued prior to June 14, 1999 minus (ii) actual amounts collected by Purchaser directly (or collected by Seller prior to the Closing and delivered to Purchaser) from the June 14th Accounts Receivable Amount minus (b) three hundred thousand dollars ($300,000); provided, however, that Purchaser shall assign such uncollected accounts receivable to Shareholder. The withholding and deduction of any such sum shall operate for all purposes as a complete discharge (to the extent of such sum) of the obligation to pay the amount from which such sum was withheld and deducted. From time to time, Parent or Purchaser may give notice (a "Notice") to Seller and Shareholder specifying in reasonable detail the nature and dollar amount of any claim (a "Claim") it may have under Section 6 of this Agreement; Parent and Purchaser may make more than one claim with respect to any underlying state of facts. If Seller gives notice to Parent and Purchaser disputing any Claim (a "Counter Notice") within 30 days following receipt by Seller and Shareholder of the Notice regarding such Claim, such Claim shall be resolved as provided below. If no Counter Notice is received by Parent and Purchaser within such 30-day period, then the dollar amount of damages claimed by Parent or Purchaser as set forth in its Notice shall be deemed established for purposes of this Agreement and, at the end of such 30-day period, Purchaser shall be entitled to withhold and deduct from payments owed to Seller the dollar amount claimed in the Notice. If a Counter Notice is given with respect to a Claim, Purchaser shall withhold and deduct from payment owed to Seller with respect thereto only (i) upon the mutual agreement of Purchaser and Shareholder or (ii) a final non-appealable order of a court of competent jurisdiction; provided, however, until such Claim is resolved pursuant to (i) or (ii) above, Purchasers payment obligations under Sections 1.2(a) (iii) and (iv) shall be suspended. Purchaser's payment obligations will only resume upon such time as the Claim is resolved. 6.5 Nonexclusivity Of Indemnification Remedies. The indemnification remedies and other remedies provided in this Section 6 shall not be deemed to be exclusive. Accordingly, the exercise by any Person of any of its rights under this Section 6 shall not be deemed to be an election of remedies and shall not be deemed to prejudice, or to constitute or operate as a waiver of, any other right or remedy that such Person may be entitled to exercise (whether under this Agreement, under any other Contract, under any statute, rule or other Legal Requirement, at common law, in equity or otherwise). 6.6 Defense Of Third Party Claims. In the event of the assertion or commencement by any Person of any claim or Proceeding (whether against the Purchaser, against any other Indemnitee or against any other Person) with respect to which the Shareholder or the Seller may become obligated to indemnify, hold harmless, compensate or reimburse any Indemnitee pursuant to this Section 6, the Purchaser shall have the right, at its election, to designate the Shareholder's Representative to assume the defense of such claim or Proceeding at the sole expense of the Shareholder and the Seller. If the Purchaser so elects to designate the Shareholder's Representative to assume the defense of any such claim or Proceeding: (a) the Shareholder's Representative shall proceed to defend such claim or Proceeding in a diligent manner with counsel satisfactory to the Purchaser; (b) the Purchaser shall make available to the Shareholder's Representative any non-privileged documents and materials in the possession of the Purchaser that may be necessary to the defense of such claim or Proceeding; (c) the Shareholder's Representative shall keep the Purchaser informed of all material developments and events relating to such claim or Proceeding; (d) the Purchaser shall have the right to participate in the defense of such claim or Proceeding; (e) the Shareholder's Representative shall not settle, adjust or compromise such claim or Proceeding without the prior written consent of the Purchaser; and (f) the Purchaser may at any time (notwithstanding the prior designation of the Shareholder's Representative to assume the defense of such claim or Proceeding) assume the defense of such claim or Proceeding. If the Purchaser does not elect to designate the Shareholder's Representative to assume the defense of any such claim or Proceeding (or if, after initially designating the Shareholder's Representative to assume such defense, the Purchaser elects to assume such defense), the Purchaser may proceed with the defense of such claim or Proceeding on its own. If the Purchaser so proceeds with the defense of any such claim or Proceeding on its own: (i) all expenses relating to the defense of such claim or Proceeding (whether or not incurred by the Purchaser) shall be borne and paid exclusively by the Shareholder and the Seller; (ii) the Shareholder and the Seller shall make available to the Purchaser any documents and materials in the possession or control of either of the Shareholder or the Seller that may be necessary to the defense of such claim or Proceeding; (iii) the Purchaser shall keep the Shareholder's Representative informed of all material developments and events relating to such claim or Proceeding; and (iv) the Purchaser shall have the right to settle, adjust or compromise such claim or Proceeding with the consent of the Shareholder's Representative; provided, however, that the Shareholder's Representative shall not unreasonably withhold such consent. 6.7 Exercise Of Remedies By Indemnitees Other Than Purchaser. No Indemnitee (other than the Purchaser or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless the Purchaser (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. 7. CERTAIN POST-CLOSING COVENANTS. 7.1 Further Actions. From and after the Closing Date, the Shareholder and the Seller shall cooperate with the Purchaser and the Purchaser's affiliates and Representatives, and shall execute and deliver such documents and take such other actions as the Purchaser may reasonably request, for the purpose of evidencing the Transactions and putting the Purchaser in possession and control of all of the Assets. Without limiting the generality of the foregoing, from and after the Closing Date, the Seller shall promptly remit to the Purchaser any funds that are received by the Seller and that are included in, or that represent payment of receivables included in, the Assets. The Seller: (a) hereby irrevocably authorizes the Purchaser, at all times on and after the Closing Date, to endorse in the name of the Seller any check or other instrument that is made payable to the Seller and that represents funds included in, or that represents the payment of any receivable included in, the Assets; and (b) hereby irrevocably nominates, constitutes and appoints the Purchaser as the true and lawful attorney-in-fact of the Seller (with full power of substitution) effective as of the Closing Date, and hereby authorizes the Purchaser, in the name of and on behalf of the Seller, to execute, deliver, acknowledge, certify, file and record any document, to institute and prosecute any Proceeding and to take any other action (on or at any time after the Closing Date) that the Purchaser may deem appropriate for the purpose of (i) collecting, asserting, enforcing or perfecting any claim, right or interest of any kind that is included in or relates to any of the Assets, (ii) defending or compromising any claim or Proceeding relating to any of the Assets, or (iii) otherwise carrying out or facilitating any of the Transactions. The power of attorney referred to in the preceding sentence is and shall be coupled with an interest and shall be irrevocable, and shall survive the dissolution or insolvency of the Seller. 7.2 Publicity. The Shareholder and the Seller shall ensure that, on and at all times after the Closing Date: (a) no press release or other publicity concerning any of the Transactions is issued or otherwise disseminated by or on behalf of the Shareholder or the Seller without the Purchaser's prior written consent; (b) the Shareholder and the Seller continue to keep the terms of this Agreement and the other Transactional Agreements strictly confidential; and (c) the Shareholder and the Seller keep strictly confidential, and neither the Seller nor the Shareholder uses or discloses to any other Person, any non-public document or other information that relates directly or indirectly to the business of the Seller, the Purchaser or any affiliate of the Purchaser. 7.3 No Hiring or Solicitation of Employees. Shareholder agrees that, during the Noncompetition Period, Shareholder shall not, and shall not permit any of its Affiliates to: (a) hire any Employee of Purchaser, or (b) directly or indirectly, personally or through others, encourage, induce, attempt to induce, solicit or attempt to solicit (on the Shareholder's own behalf or on behalf of any other Person) or any Employee to leave his or her employment with the Purchaser or any of the Purchaser's other subsidiaries. (For purposes of this Section 7.3, "Employee" shall mean any individual who (i) is or was an employee of any of the Seller on the date of this Agreement or during the 180-day period ending on the date of this Noncompetition Agreement, and (ii) remains or becomes an employee of the Purchaser or any of the Purchaser's other subsidiaries on the date of this Agreement or at any time during the Noncompetition Period.) 8. MISCELLANEOUS PROVISIONS. 8.1 Joint And Several Liability. The Shareholder agrees that the Shareholder shall be jointly and severally liable with the Seller for the due and timely compliance with and performance of each of the covenants and obligations of the Seller set forth in the Transactional Agreements. The Shareholder's obligations and liability under this Agreement and the other Transactional Agreements shall not be limited in any way by: (i) any failure on the part of the Purchaser or any other Indemnitee to exercise any right or assert any claim against the Seller; (i) the dissolution or insolvency of, or the appointment of any receiver, conservator or liquidator for, or the commencement of any bankruptcy, reorganization, moratorium, arrangement or other proceeding by, against or with respect to, the Seller or the Shareholder; (iii) any merger or consolidation of the Seller with or into any other Entity; or (iv) the sale or other disposition by the Shareholder of any or all of the Shareholder's shares of the stock of the Seller. 8.2 Shareholder's and Seller's Representative. (a) The Shareholder and the Seller hereby irrevocably nominate, constitute and appoint Harry Kurtzman as the agent and true and lawful attorney-in-fact of the Shareholder and the Seller (the "Shareholder's Representative"), with full power of substitution, to act in the name, place and stead of the Shareholder and the Seller for purposes of executing any documents and taking any actions that the Shareholder's Representative may, in his sole discretion, determine to be appropriate in connection with any of the Transactional Agreements or any of the Transactions. Harry Kurtzman hereby accepts his appointment as Shareholder's Representative. (b) The Shareholder and the Seller hereby grant to the Shareholder's Representative full authority to execute, deliver, acknowledge, certify, file and record on behalf of the Shareholder and the Seller (in the name of the Shareholder, the Seller or otherwise) any and all documents that the Shareholder's Representative may, in his sole discretion, determine to be appropriate, in such forms and containing such provisions as the Shareholder's Representative may, in his sole discretion, determine to be appropriate (including any amendment to or waiver of rights under any of the Transactional Agreements). Notwithstanding anything to the contrary contained in any of the Transactional Agreements: (i) the Purchaser shall be entitled to deal exclusively with the Shareholder's Representative on all matters relating to the respective Transactional Agreements and the respective Transactions (including all matters relating to any notice to, or any Consent to be given or action to be taken by, the Shareholder or the Seller); and (ii) each Indemnitee shall be entitled to rely conclusively (without further evidence of any kind whatsoever) on any document executed or purported to be executed on behalf of the Shareholder or on behalf of the Seller by the Shareholder's Representative, and on any other action taken or purported to be taken on behalf of the Shareholder or on behalf of the Seller by the Shareholder's Representative, as fully binding upon the Shareholder and on the Seller. (c) The Shareholder and the Seller recognize and intend that the power of attorney granted in Section 8.2(a): (i) is coupled with an interest and is irrevocable; (ii) may be delegated by the Shareholder's Representative; and (iii) shall survive the dissolution of the Shareholder or Seller. (d) If the Shareholder's Representative shall die, become disabled or otherwise be unable to fulfill his responsibilities hereunder, the Shareholder's, within ten days after such death or disability, shall appoint a successor to the Shareholder's Representative and immediately thereafter notify the Purchaser of the identity of such successor. Any such successor shall succeed the Shareholder's Representative as Shareholder's Representative hereunder. (e) All expenses incurred by the Shareholder's Representative in connection with the performance of his duties as Shareholder's Representative shall be borne and paid by the Shareholder and the Seller. 8.3 Further Assurances. Each party hereto shall execute and/or cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the Transactions. 8.4 Fees and Expenses. (a) The Shareholder and the Seller shall bear and pay all fees, costs and expenses that have been incurred or that are in the future incurred by, on behalf of or for the benefit of the Shareholder or the Seller in connection with: (i) the negotiation, preparation and review of any letter of intent or similar document relating to any of the Transactions; (ii) the investigation and review conducted by the Purchaser and its Representatives with respect to the business of the Seller (and the furnishing of information to the Purchaser and its Representatives in connection with such investigation and review); (iii) the negotiation, preparation and review of this Agreement (including the Disclosure Schedule), the other Transactional Agreements and all bills of sale, assignments, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the Transactions; (iv) the preparation and submission of any filing or notice required to be made or given in connection with any of the Transactions, and the obtaining of any Consent required to be obtained in connection with any of the Transactions; and (v) the consummation and performance of the Transactions. (b) Subject to the provisions of Section 6.2 (including the indemnification and other obligations of the Seller and Shareholder thereunder) and Section 8.4(c), the Purchaser shall bear and pay all fees, costs and expenses (including all legal fees and expenses payable to Cooley Godward LLP) that have been incurred or that are in the future incurred by or on behalf of the Purchaser in connection with: (i) the negotiation, preparation and review of any letter of intent or similar document relating to any of the Transactions; (ii) the investigation and review conducted by the Purchaser and its Representatives with respect to the business of the Seller; (iii) the negotiation, preparation and review of this Agreement, the other Transactional Agreements and all bills of sale, assignments, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the Transactions; and (iv) the consummation and performance of the Transactions. 8.5 Attorneys' Fees. If any legal action or other legal proceeding relating to any of the Transactional Agreements or the enforcement of any provision of any of the Transactional Agreements is brought against any party to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). 8.6 Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): if to the Shareholder or to the Shareholder's Representative: Aura Systems, Inc. Attn: Harry Kurtzman, CEO 2335 Alaska Avenue El Segundo, CA 90245 Facsimile: 310-643-7585 if to the Seller: Aurasound, Inc. c/o Aura Systems, Inc. Attn: Steven Veen, CFO 2335 Alaska Avenue El Segundo, CA 90245 Facsimile: 310-643-8719 if to the Purchaser: Algo Technology, Inc. 47338 Fremont Blvd. Fremont, CA 94538 Facsimile: 510-770-3622 8.7 Time Of The Essence. Time is of the essence of this Agreement. 8.8 Headings. The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 8.9 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. 8.10 Governing Law; Venue. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in the County of Santa Clara, California. Each party to this Agreement: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in the County of Santa Clara, California (and each appellate court located in the State of California) in connection with any such legal proceeding; (ii) agrees that each state and federal court located in the County of Santa Clara, California shall be deemed to be a convenient forum; and (iii) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in the County of Santa Clara, California, any claim that such party is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. (c) The Shareholder and the Seller agree that, if any Proceeding is commenced against any Indemnitee by any Person in or before any court or other tribunal anywhere in the world, then such Indemnitee may proceed against the Shareholder and the Seller in or before such court or other tribunal with respect to any indemnification claim or other claim arising directly or indirectly from or relating directly or indirectly to such Proceeding or any of the matters alleged therein or any of the circumstances giving rise thereto. (d) Nothing in this Section 8.10 shall be deemed to limit or otherwise affect the right of any Indemnitee to commence any legal proceeding against the Shareholder or the Seller in any forum or jurisdiction. (e) The Shareholder irrevocably constitutes and appoints the Shareholder's Representative as its agent to receive service of process in connection with any legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement. 8.11 Successors And Assigns; Parties In Interest. (a) This Agreement shall be binding upon: the Seller and its successors and assigns (if any); the Shareholder and the Shareholder's personal representatives, executors, administrators, estate, heirs, successors and assigns (if any); and the Purchaser and its successors and assigns (if any). This Agreement shall inure to the benefit of: the Seller; the Shareholder; the Purchaser; the other Indemnitees (subject to Section 6.7); and the respective successors and assigns (if any) of the foregoing. (b) The Purchaser may freely assign any or all of its rights under this Agreement (including its indemnification rights under Section 6), in whole or in part, to any other Person without obtaining the consent or approval of any other Person. Neither the Seller nor the Shareholder shall be permitted to assign any of his or its rights or delegate any of his or its obligations under this Agreement without the Purchaser's prior written consent. (c) Except for the provisions of Section 6 hereof, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties to this Agreement and their respective successors and assigns (if any). Without limiting the generality of the foregoing, (i) no employee of the Seller shall have any rights under this Agreement or under any of the other Transactional Agreements, and (ii) no creditor of the Seller shall have any rights under this Agreement or any of the other Transactional Agreements. 8.12 Remedies Cumulative; Specific Performance. The rights and remedies of the parties hereto shall be cumulative (and not alternative). The Shareholder and the Seller agree that: (a) in the event of any Breach or threatened Breach by the Shareholder or the Seller of any covenant, obligation or other provision set forth in this Agreement, the Purchaser shall be entitled (in addition to any other remedy that may be available to it) to (i) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (ii) an injunction restraining such Breach or threatened Breach; and (b) neither the Purchaser nor any other Indemnitee shall be required to provide any bond or other security in connection with any such decree, order or injunction or in connection with any related action or Proceeding. 8.13 Waiver. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 8.14 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Purchaser, the Seller and the Shareholder's Representative. 8.15 Severability. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 8.16 Entire Agreement. The Transactional Agreements set forth the entire understanding of the parties relating to the subject matter thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter thereof. 8.17 Knowledge. For purposes of this Agreement, a Person shall be deemed to have "knowledge" of a particular fact or other matter if any Representative of such Person has knowledge of such fact or other matter. 8.18 Construction. (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. The parties to this Agreement have caused this Agreement to be executed and delivered as of December 1, 1999. AURA SYSTEMS, INC., a Delaware corporation By: Harry Kurtzman, CEO AURASOUND, INC., a Delaware corporation By: Steve Veen, Chief Financial Officer ALGO TECHNOLOGY, INC., a California corporation By: Arthur Liu, Chief Executive Officer ALGO SOUND, INC., a California corporation By: Raymond Yu, President EXHIBIT A CERTAIN DEFINITIONS For purposes of the Agreement (including this Exhibit A): Acquisition Transaction. "Acquisition Transaction" shall mean any transaction involving: (a) the sale or other disposition of all or any portion of the business or assets of the Seller (other than in the Ordinary Course of Business); (b) the issuance, sale or other disposition of (i) any capital stock or other securities of the Seller, (ii) any option, call, warrant or right (whether or not immediately exercisable) to acquire any capital stock or other securities of the Seller, or (iii) any security, instrument or obligation that is or may become convertible into or exchangeable for any capital stock or other securities of the Seller; or (c) any merger, consolidation, business combination, share exchange, reorganization or similar transaction involving the Seller. Affiliate. "Affiliate" shall mean with respect to any specified Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified Person. Agreement. "Agreement" shall mean the Asset Purchase Agreement to which this Exhibit A is attached (including the Disclosure Schedule), as it may be amended from time to time. Best Efforts. "Best Efforts" shall mean the efforts that a prudent Person desiring to achieve a particular result would use in order to ensure that such result is achieved as expeditiously as possible. Breach. There shall be deemed to be a "Breach" of a representation, warranty, covenant, obligation or other provision if there is or has been (a) any inaccuracy in or breach (including any inadvertent or innocent breach) of, or any failure (including any inadvertent failure) to comply with or perform, such representation, warranty, covenant, obligation or other provision, or (b) any claim (by any Person) or other circumstance that is inconsistent with such representation, warranty, covenant, obligation or other provision; and the term "Breach" shall be deemed to refer to any such inaccuracy, breach, failure, claim or circumstance. CERCLA. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act. Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. Comparable Entities. "Comparable Entities" shall mean Entities (other than the Seller) that are engaged in businesses similar to the business of the Seller. Consent. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization). Contract. "Contract" shall mean any written, oral, implied or other agreement, contract, understanding, arrangement, instrument, note, guaranty, indemnity, representation, warranty, deed, assignment, power of attorney, certificate, purchase order, work order, insurance policy, benefit plan, commitment, covenant, assurance or undertaking of any nature. Damages. "Damages" shall include any loss, damage, injury, decline in value, lost opportunity, Liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including any cost of investigation) or expense of any nature. Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated as of the date of the Agreement) delivered to the Purchaser on behalf of the Shareholder and the Seller, a copy of which is attached to the Agreement and incorporated in the Agreement by reference. Employee Benefit Plan. "Employee Benefit Plan" shall have the meaning specified in Section 3(3) of ERISA. Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest, claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, Order, proxy, option, right of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment, imperfection of title, condition or restriction of any nature (including any restriction on the transfer of any asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset). Entity. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, cooperative, foundation, society, political party, union, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974. ERISA Affiliate. "ERISA Affiliate" shall mean any Person that is, was or would be treated as a single employer with any of the Specified Entities under Section 414 of the Code. Excluded Assets. "Excluded Assets" shall mean the assets identified on Exhibit B (to the extent owned by the Seller on the Closing Date). GAAP. "GAAP" shall mean generally accepted accounting principles. Governmental Authorization. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. Governmental Body. "Governmental Body" shall mean any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); (d) multi-national organization or body; or (e) individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature. Hazardous Material. "Hazardous Material" shall include: (a) any petroleum, waste oil, crude oil, asbestos, urea formaldehyde or polychlorinated biphenyl; (b) any waste, gas or other substance or material that is explosive or radioactive; (c) any "hazardous substance," "pollutant," "contaminant," "hazardous waste," "regulated substance," "hazardous chemical" or "toxic chemical" as designated, listed or defined (whether expressly or by reference) in any statute, regulation or other Legal Requirement (including CERCLA and any other so-called "superfund" or "superlien" law and the respective regulations promulgated thereunder); (d) any other substance or material (regardless of physical form) or form of energy that is subject to any Legal Requirement which regulates or establishes standards of conduct in connection with, or which otherwise relates to, the protection of human health, plant life, animal life, natural resources, property or the enjoyment of life or property from the presence in the environment of any solid, liquid, gas, odor, noise or form of energy; and (e) any compound, mixture, solution, product or other substance or material that contains any substance or material referred to in clause "(a)", "(b)", "(c)" or "(d)" above. Immaterial Contract. "Immaterial Contract" shall mean any Seller Contract that: (a) was entered into by the Seller in the Ordinary Course of Business; (b) is identical in all material respects to one of the Standard Form Agreements; (c) has a term of less than 30 days or may be terminated by the Seller (without penalty) within 30 days after the delivery of a termination notice by the Seller to the other party thereto; and (d) does not contemplate or involve the payment of cash or other consideration in an amount or having a value in excess of $15,000.00. Indemnitees. "Indemnitees" shall mean the following Persons: (a) the Purchaser; (b) the Purchaser's current and future affiliates; (c) the respective Representatives of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of the Persons referred to in clauses "(a)", "(b)" and "(c)" above. June 14th Accounts Payable Amount. "June 14th Accounts Payable Amount" shall mean the sum of the list of accounts payable of Seller as at June 14, 1999, attached hereto as Exhibit ___. June 14th Accounts Receivable Amount. "June 14th Accounts Payable Amount" shall mean the sum of the list of accounts receivable of Seller as at June 14, 1999, attached hereto as Exhibit ___. Legal Requirement. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Body. Liability. "Liability" shall mean any debt, obligation, duty or liability of any nature (including any unknown, undisclosed, unmatured, unaccrued, unasserted, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles and regardless of whether such debt, obligation, duty or liability is immediately due and payable. Noncompetition Period. "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the fifth anniversary of the date of this Agreement. Order. "Order" shall mean any: (a) order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, subpoena, writ or award issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Body or any arbitrator or arbitration panel; or (b) Contract with any Governmental Body entered into in connection with any Proceeding. Ordinary Course of Business. An action taken by or on behalf of the Seller shall not be deemed to have been taken in the "Ordinary Course of Business" unless: (a) such action is recurring in nature, is consistent with the past practices of the Seller and is taken in the ordinary course of the normal day-to-day operations of the Seller; (b) such action is taken in accordance with sound and prudent business practices; (c) such action is not required to be authorized by the shareholders of the Seller, the board of directors of the Seller or any committee of the board of directors of the Seller and does not require any other separate or special authorization of any nature; and (d) such action is similar in nature and magnitude to actions customarily taken, without any separate or special authorization, in the ordinary course of the normal day-to-day operations of Comparable Entities. Person. "Person" shall mean any individual, Entity or Governmental Body. Proceeding. "Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Body or any arbitrator or arbitration panel. Proprietary Asset. "Proprietary Asset" shall mean any patent, patent application, trademark (whether registered or unregistered and whether or not relating to a published work), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset. Related Party. Each of the following shall be deemed to be a "Related Party": (a) each individual who is, or who has at any time been, an officer of the Seller; (b) each member of the family of each of the individuals referred to in clause "(a)" above; and (c) any Entity (other than the Seller) in which any one of the individuals referred to in clauses "(a)" and "(b)" above holds or held (or in which more than one of such individuals collectively hold or held), beneficially or otherwise, a controlling interest or a material voting, proprietary or equity interest. Representatives. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives. Seller Contract. "Seller Contract" shall mean any Contract: (a) to which the Seller is a party; (b) by which the Seller or any of its assets is or may become bound or under which the Seller has, or may become subject to, any obligation; or (c) under which the Seller has or may acquire any right or interest. Seller Proprietary Asset. "Seller Proprietary Asset" shall mean any Proprietary Asset owned by or licensed to the Seller or otherwise used by the Seller. Standard Form Agreements. "Standard Form Agreements" shall mean the forms of agreements attached as Appendices 2.14(A) and 2.14(B) to the Disclosure Schedule. Tax. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), that is, has been or may in the future be (a) imposed, assessed or collected by or under the authority of any Governmental Body, or (b) payable pursuant to any tax-sharing agreement or similar Contract. Tax Return. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information that is, has been or may in the future be filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax. Transactional Agreements. "Transactional Agreements" shall mean: (a) the Agreement; (b) the Assumption Agreement; (c) the License Agreement and (d) the Closing Certificate. Transactions. "Transactions" shall mean (a) the execution and delivery of the respective Transactional Agreements, and (b) all of the transactions contemplated by the respective Transactional Agreements, including: (i) the sale of the Assets by the Seller and the execution of the License Agreement by the Shareholder to the Purchaser in accordance with the Agreement; (ii) the assumption of the Assumed Liabilities by the Purchaser pursuant to the Assumption Agreement; and (iii) the performance by the Seller, the Shareholder and the Purchaser of their respective obligations under the Transactional Agreements, and the exercise by the Seller, the Shareholder and the Purchaser of their respective rights under the Transactional Agreements. TABLE OF CONTENTS (CONTINUED) PAGE iii. TABLE OF CONTENTS
1. SALE OF ASSETS; RELATED TRANSACTIONS.....................................................................1 1.1 Sale of Assets..................................................................................1 1.2 License Agreement...............................................................................2 1.3 Purchase Price..................................................................................2 1.4 Sales Taxes.....................................................................................4 1.5 Allocation......................................................................................4 1.6 Closing.........................................................................................4 2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER AND THE SELLER.........................................5 2.1 Due Organization; No Subsidiaries; Etc..........................................................5 2.2 Certificate of Incorporation and Bylaws; Records................................................5 2.3 Capitalization..................................................................................6 2.4 Financial Statements............................................................................6 2.5 Absence Of Changes..............................................................................6 2.6 Title To Assets.................................................................................7 2.7 Bank Accounts...................................................................................8 2.8 Receivables.....................................................................................8 2.9 Customers; Distributors.........................................................................8 2.10 Inventory.......................................................................................8 2.11 Equipment, Etc..................................................................................8 2.12 Real Property...................................................................................9 2.13 Proprietary Assets..............................................................................9 2.14 Contracts......................................................................................10 2.15 Liabilities....................................................................................11 2.16 Compliance with Legal Requirements.............................................................12 2.17 Governmental Authorizations....................................................................13 2.18 Tax Matters....................................................................................13 2.19 Employee And Labor Matters.....................................................................14 2.20 Benefit Plans; ERISA...........................................................................15 2.21 Environmental Matters..........................................................................16 2.22 Sale of Products...............................................................................17 2.23 Performance Of Services........................................................................17 2.24 Insurance......................................................................................17 2.25 Related Party Transactions.....................................................................18 2.26 Certain Payments, Etc..........................................................................18 2.27 Proceedings; Orders............................................................................19 2.28 Authority; Binding Nature Of Agreements........................................................19 2.29 Non-Contravention; Consents....................................................................20 2.30 Brokers........................................................................................21 2.31 The Shareholders...............................................................................21 2.32 Full Disclosure................................................................................21 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.........................................................21 3.1 Authority; Binding Nature Of Agreements........................................................21 3.2 Brokers........................................................................................22 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION TO CLOSE.............................................22 4.1 Accuracy Of Representations....................................................................22 4.2 Performance Of Obligations.....................................................................22 4.3 Consents.......................................................................................22 4.4 Additional Documents...........................................................................22 4.5 No Prohibition.................................................................................23 5. CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATION TO CLOSE...............................................23 5.1 Accuracy Of Representations....................................................................23 5.2 Purchaser's Performance........................................................................23 6. INDEMNIFICATION, ETC....................................................................................23 6.1 Survival Of Representations And Covenants......................................................23 6.2 Indemnification By The Shareholders And The Seller.............................................24 6.3 Indemnification By Purchaser...................................................................25 6.4 Setoff.........................................................................................26 6.5 Nonexclusivity Of Indemnification Remedies.....................................................26 6.6 Defense Of Third Party Claims..................................................................27 6.7 Exercise Of Remedies By Indemnitees Other Than Purchaser.......................................28 7. CERTAIN POST-CLOSING COVENANTS..........................................................................28 7.1 Further Actions................................................................................28 7.2 Publicity......................................................................................28 7.3 No Hiring or Solicitation of Employees.........................................................29 8. MISCELLANEOUS PROVISIONS................................................................................29 8.1 Joint And Several Liability....................................................................29 8.2 Shareholder's and Seller's Representative......................................................29 8.3 Further Assurances.............................................................................30 8.4 Fees and Expenses..............................................................................30 8.5 Attorneys' Fees................................................................................31 8.6 Notices........................................................................................31 8.7 Time Of The Essence............................................................................32 8.8 Headings.......................................................................................32 8.9 Counterparts...................................................................................32 8.10 Governing Law; Venue...........................................................................32 8.11 Successors And Assigns; Parties In Interest....................................................33 8.12 Remedies Cumulative; Specific Performance......................................................33 8.13 Waiver.........................................................................................33 8.14 Amendments.....................................................................................34 8.15 Severability...................................................................................34 8.16 Entire Agreement...............................................................................34 8.17 Knowledge......................................................................................34 8.18 Construction...................................................................................34
1. An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-10.19.2 3 AMENDMENT 12/22/99 TO ASSET PURCHASE AGREEMENT This document is to amend the Asset Purchase Agreement entered on December 1, 1999 by and among: AuraSound, Inc., A Delaware corporation (the "Seller"); Aura Systems, Inc., a Delaware corporation and Seller's sole shareholder (the "shareholder"); and Algo Technology, Inc., a California corporation ("Parent") and Algo Sound, Inc., a California corporation (the "Purchaser"), for the following items: Accounts Receivable as originally reported as of June 13, 1999 is adjusted from $1,455,109.69 to $423,950.35 based on subsequent collection and adjustments after ninety days. (Exhibit A) Accounts Payable as originally reported as of June 13, 1999 is adjusted from $1,607,446.43 to $2,187,795.37 based on subsequent settlement, reconciliation, and negotiation with the creditors. (Exhibit B) The Seller agrees to reduce the purchase price of the assets by $70,414.82 for the Purchaser's additional assumption of the accrued personal & vacation time liability as of November 30, 1999. (Exhibit C) The Purchaser agrees to give the Seller a credit in the amount of $53,906.95 for returns of products from Electrnics Boutique. The Purchase agrees to give the Seller credit for Seismic Systems' account receivable in the amount of $159,912.35 in exchange for the right to collect from Seismic Systems. The parties to this Agreement have caused this Agreement to be executed and delivered as December 22, 1999. Aura Systems, Inc. AuraSound, Inc. By ______________________ By ____________________ Harry Kurtzman, CEO Steve Veen, CFO Algo Technology, Inc. Algo Sound, Inc. By ______________________ By _____________________ Raymond Yu, VP Raymond Yu, CEO EX-10.19.3 4 ASSIGNMENT AND LICENSE AGREEMENT ASSIGNMENT AND LICENSE AGREEMENT This ASSIGNMENT AND LICENSE AGREEMENT is entered into effective as of July 15___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); Aura Systems, Inc., a Delaware corporation ("Parent") and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). RECITALS A. Algo, Algo Sub, Parent, and Seller intend to enter into an Asset Purchase Agreement (the "Asset Purchase Agreement") pursuant to which Seller agrees to sell to Algo Sub and Algo, and Algo Sub and Algo agree to purchase from Seller, all of its assets and certain specific liabilities. B. Parent and Seller wish to assign to Algo Sub certain Specific Trademark Rights and grant to Algo Sub (i) a license to certain of Parent and Seller's Speaker Technology for use in all fields; (ii) a license to all of Parent and Seller's Intellectual Property Rights for use in the Specific Fields; and (iii) an option to acquire all right, title and interest to certain Specific Patent Rights. C. Parent and Seller wish to grant to Algo Sub the licenses and option described above, and Algo Sub wishes to acquire from Parent and Seller the licenses and option described above, all on the terms and conditions set forth in this Agreement. Now, therefore, the parties agree as follows: AGREEMENT II. DEFINITIONS. As used in this Agreement: (a) "Encumbrance" means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest, claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, order, proxy, option, right of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment, imperfection of title, condition or restriction of any nature (including any restriction on the transfer of any asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset). (b) "Intellectual Property Rights" means all (a) Patent Rights, (b) copyrights, mask work rights, and other rights associated with works of authorship embodied or represented in such technology, (c) trade secret rights in such technology, (d) all trademarks, trade dress, and other identifying marks and (e) other forms of intellectual or industrial property rights and proprietary rights of any kind or nature applicable to such technology, including but not limited to know-how, processes, copyright, software programs, software source documents, models, sketches, drawings, works of authorship, and formulae, in each case under the laws of any jurisdiction in the universe, including rights under and with respect to all applications, registrations, extensions, renewals, continuations, combinations, divisions, and reissues of the foregoing if applicable. A list of all trademarks owned by Parent and/or Seller that are subject to the licenses and assignments of this Agreement, whether registered or unregistered, is attached hereto as Schedule B. (c) "Licensed Parent/Seller Technology" means all of Parent and Seller's Intellectual Property Rights, and any goods and/or services incorporating the Licensed Parent/Seller Technology, but not including the Specific Trademark Rights assigned to Algo Sub pursuant to this Agreement. (d) "Option" means the option described in Section IX. (e) "Patent Rights" means all the patents and patent applications and docketed/identified inventions (as of the effective date) of Parent and/or Seller (including the unfiled patent application titled "Radial Magnet Speaker" and having docket number 99-14), any "Patent Rights" means all the patents and patent applications of Parent, any reissue, re-examination, renewal, or extension thereof and any patent applications deriving from the parent case of such patents, and all provisionals, substitutions, divisionals, continuations, and continuations-in-part of the foregoing; and any patent corresponding to such patents, any reissue, re-examination, renewal, or extension thereof and any patent applications deriving from the parent case of such patents, and all provisionals, substitutions, divisionals, continuations, and continuations-in-part of the foregoing, including all foreign counterparts and cases claiming priority. (f) "Trademark Rights" means all trademarks of Parent and Seller listed in Schedule B, including foreign counterparts and/or trademarks. (g) "Speaker Technology" means all of Parent and Seller's Intellectual Property Rights directly or indirectly related to the business of Seller, and any goods and/or services incorporating the Speaker Technology. (h) "Specific Fields" means the fields of toys, sound, and entertainment applications. (i) "Specific Patent Rights" means those Patent Rights listed on Schedule A. (j) "Specific Trademark Rights" means all Trademark Rights designated in Schedule B, along with the goodwill of the business of the Parent and Seller related to those marks, as those which are assigned to Algo Sub pursuant to this Agreement. III. ASSIGNMENT OF SPECIFIC TRADEMARKS Parent and Seller hereby assign to Algo Sub all right, title, goodwill, and interest to the Specific Trademark Rights. To that end Parent and Seller will execute, verify and deliver such documents and perform such other acts (including appearances as a witness), including the document in the form set forth in Exhibit B, or as Algo Sub may otherwise reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Specific Trademark Rights and the assignment thereof throughout the world. Algo Sub shall reimburse Parent for its reasonable expenses incurred to comply with this provision. IV. LICENSE IN THE SPECIFIC FIELDS Except for those trademarks addressed in paragraph VI below, Parent and Seller hereby grant to Algo Sub a non-exclusive, worldwide, perpetual and irrevocable, fully-paid and royalty-free, license (with the right to sublicense through one or more tiers of sublicensees but only in conjunction with Algo Sub's sublicensing of the Specific Patent Rights), for any purpose whatsoever (e.g., to use, sell, display, offer for sale, make, have made, import, reproduce, distribute, modify, etc.) under all of the Licensed Parent/Seller Technology in connection with any activity in the Specific Fields. V. LICENSE REGARDING SPEAKER TECHNOLOGY Except for those trademarks addressed in paragraph VI below, Parent and Seller hereby grant to Algo Sub a non-exclusive, worldwide, perpetual and irrevocable, fully-paid and royalty-free, license (with the right to sublicense through one or more tiers of sublicensees but only in conjunction with Algo Sub's sublicensing of the Specific Patent Rights), for any purpose whatsoever (e.g., to use, sell, display, offer for sale, make, have made, import, reproduce, distribute, modify, etc.) under all of the Speaker Technology. VI. TRADEMARK LICENSE AND OBLIGATIONS. With respect to the trademarks of Schedule B that are not included in the Specific Trademark Rights, Parent and Seller hereby grant to Algo Sub a non-exclusive (subject to the exception below), worldwide, perpetual and irrevocable, fully-paid and royalty-free, license to use the Trademarks in connection with any activity in the Specific Fields and any activity with respect to the Speaker Technology. In addition, Algo Sub grants Parent the right to inspect the products for which the Trademarks of Schedule B that are not included in the Specific Trademark Rights are used and ensure commercially acceptable quality. In the current form, the products of Seller are considered to be of commercially acceptable quality. If Parent believes that future products are not of commercially acceptable quality, Parent will notify Algo Sub in writing, and Algo Sub will have the full opportunity for cure, and Algo Sub will have the right to continue its business without interference until such time that the quality meets the reasonable quality standards of Parent. In the event that no agreement is reached, the Parties shall enter mediation until cure is sustained. Parent and Algo Sub agree that they are obligated to work to prevent confusion of the Trademarks of this agreement. In addition, Parent hereby agrees that Parent will not license or assign to any other party in the field of Speaker Technology the Trademarks of Schedule B that are not part of the Specific Trademark Rights without prior written consent of Algo Sub which may be withheld for any reason VII. TRANSFER OF MATERIAL INFORMATION. Promptly (and in any event no later than ninety (90) days) after the Effective Date, Parent or Seller will cause to be provided to Algo Sub all materials and information relating to the Speaker Technology, and take all steps reasonably requested in an effort to enable Algo Sub to exploit the Speaker Technology. Parent or Seller will deliver these materials and information to Algo Sub in accordance with Algo Sub's instructions. VIII. ASSIGNMENT AND LICENSE FEES. As full consideration for the assignment of the Specific Trademark Rights, the Option (see paragraph IX below) and the granting of the licenses set forth above, Algo Sub agrees to pay Parent the sum of One Million Five Hundred Thousand U.S. Dollars ($1,500,000). Subject to Section XIV, said license fee shall be payable by Algo Sub to Parent as follows: (a) at the Closing, Algo shall pay to Parent a total of $500,000 in cash or by cancellation of any outstanding promissory notes due Algo from Parent; (b) on each of the first two (2) monthly anniversaries of the Closing Date, Algo shall pay to the Parent, in cash, the sum of $250,000; (c) subject to Section XIV, on each of the third (3rd) through seventh (7th) monthly anniversaries of the Closing Date, Algo shall pay to the Parent, in cash, the sum of $100,000; (d) subject to Section XIV, on each annual anniversary of the Closing Date until such time as the payment obligations of Sections 57(b) and (c) have been completed, Algo shall pay to the Parent, in cash, interest that has accrued on amounts unpaid under Sections 75(b) and (c). Interest shall accrue commencing on the Closing Date at the rate of eight percent (8%) per annum. IX. OPTION. (e) For a period of thirty-six months (36) months from the Effective Date, Parent further grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest in the Specific Patent Rights. (f) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the Specific Patent Rights to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option to acquire the Specific Patent Rights prior to expiration of the option period, nothing herein shall be construed to prevent Parent from subsequently licensing, on a non-exclusive basis, any invention covered by the Specific Patent Rights hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. (g) Algo may exercise the Option at any time prior to the third year anniversary of the Effective Date by providing Parent written notice of its desire to exercise such Option. As full consideration for the exercise of the Option, Algo shall pay to Parent the sum of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) payable as follows: (i) an initial payment of Eighty Thousand Dollars ($80,000) upon the filing of the Patent Assignments (as defined below) with the United States Patent and Trademark Office and (ii) subject to Section XIV, eighteen monthly payments of Sixty Five Thousand Dollars ($65,000). After Parent's receipt of the written notice and initial payment, Parent shall assist Algo Sub in every proper way to obtain, and from time to time enforce the Specific Patent Rights in any and all countries. To that end, Parent has executed the patent assignment, in substantially the form attached hereto as Exhibit A (the "Patent Assignment"), which Patent Assignment will be held in trust by Blakely, Sokoloff, Taylor, and Zafman and filed only following the written notice and initial payment referred to above. Parent will execute, verify and deliver such other documents and perform such other acts (including appearances as a witness) as Algo Sub may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Specific Patent Rights and the assignment thereof. Algo Sub shall reimburse Parent for its reasonable expenses incurred to comply with this provision. (h) Parent has executed the attached documents in Exhibit C for filing as public records to put third parties on notice of this Option. X. PATENT PROSECUTION AND MAINTENANCE Parent shall prosecute and maintain during the term of this Agreement the Patent Rights (but not including the Specific Patent Rights following exercise of the Option). The application filings, prosecution, maintenance and payment of all fees and expenses, including legal fees, relating to such Patent Rights shall be the responsibility of Parent; provided, however, that the foregoing shall become the responsibility of Algo Sub upon the exercise of the Option with respect to the Specific Patent Rights. Should Algo Sub determine or otherwise become aware of the lapse or anticipated lapse of the maintenance of any patent or patent applications within the Patent Rights, Algo Sub may elect to prosecute, maintain, or extend such patent or patent application, as the case may be, at Algo Sub's expense and such expenses shall be offset, at Algo and Algo Sub's discretion, (i) from amounts otherwise payable to Parent under this Agreement, (ii) from amounts payable to Parent under the Asset Purchase Agreement, or (iii) from any other amounts payable to Parent. If and until the Option is exercised or expires, Parent will provide to Algo Sub both quarterly status reports regarding the Specific Patent Rights and written notice before any of the Specific Patent Rights are abandoned. XI. ENFORCEMENT OF RIGHTS IN THE LICENSED PARENT/SELLER TECHNOLOGY (i) Filing of Claims. Parent will have the right, but not the obligation, to enforce the Patent Rights, including the Specific Patent Rights (prior to such time as Algo Sub exercises the Option). Algo Sub will cooperate with Parent, at Parent's reasonable request, in connection with any claim, suit, or action (a "Claim") filed by Parent against any such infringer. Each party will promptly notify the other in writing upon becoming aware of any known or suspected infringement of such patents; such notice will include the identity of the party or parties known or suspected to have infringed the patents and any available information that is relevant to such infringement. If Parent files a Claim, Parent will diligently prosecute the Claim until a final, non-appealable judgment has been rendered or the Claim has been settled; if Parent fails to prosecute the Claim diligently, Algo Sub may assume control of the prosecution of the Claim. Algo Sub's right to assume control of the prosecution of a Claim will be Algo Sub's sole remedy for any failure by Parent to prosecute a Claim diligently. If Parent fails to file a Claim within twenty-one (21) days after receipt of such notice from Algo Sub, or if and when Parent notifies Algo Sub in writing that Parent has decided not to file a Claim against any known or suspected infringer, Algo Sub will have the right to file a Claim itself. Parent will cooperate with Algo Sub, at Algo Sub's reasonable request, in connection with any Claim filed by Algo Sub. In no event will Parent settle a Claim relating to infringement of the Specific Patent Rights without the prior written approval of Algo Sub. (j) Costs and Damages. Algo Sub will be responsible for all costs, expenses, and legal fees (collectively, "Costs") incurred by Algo Sub in connection with any Claim (whether filed by Parent or Algo Sub), and Parent will be responsible for all Costs, incurred by Parent in connection with any Claim (whether filed by Parent or Algo Sub). Algo Sub will be entitled to all damages awarded as a result of, or agreed to in a monetary settlement of, any Claim (regardless of which party files or prosecutes the Claim) to the extent that such damages are attributable to infringement of the Specific Patent Rights. Parent will be entitled to all damages awarded as a result of, or agreed to in a monetary settlement of, any Claim (regardless of which party files or prosecutes the Claim) to the extent that such damages are attributable to infringement of the non-Specific Patent Rights. All damages not attributable to infringement will be shared between Algo Sub and Parent as follows: each party will be entitled to recover the Costs it incurred in connection with the Claim in proportion to the amount of Costs incurred, respectively, by Algo Sub and Parent (for example, if Parent incurred $700,000 in Costs and Algo Sub incurred $300,000, Parent would receive 70% of the damages and Algo Sub would receive 30%), and if and when all such Costs have been recovered, Algo Sub and Parent will each receive fifty percent (50%) of the remaining amount of damages. XII. TERM. This Agreement will take effect on the Effective Date and will remain in effect in perpetuity until and unless either Algo Sub or Parent dissolves and ceases to conduct business and there is no successor to such party's business that assumes such party's rights and obligations under this Agreement. All licenses granted in this Agreement will survive in perpetuity notwithstanding any termination of this Agreement. XIII. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Parent represents and warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Parent. (c) it has the corporate power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (d) it is the owner of the entire right, title and interest in and to the Patent Rights, that it has the sole right to grant licenses thereunder and that it has not granted licenses thereunder to any other entity that would restrict rights, including the Option, granted hereunder. (e) it is the owner of the entire right, title and interest in and to the Trademark Rights listed in Schedule B, that it has the full and sole right to assign such rights and grant licenses thereunder and that it has not granted licenses thereunder to any other entity that would restrict rights granted hereunder (f) all applicable maintenance fees pertaining to the Patent Rights due on or before the Effective Date have been timely paid. (g) the Intellectual Property Rights are owned by Parent free and clear of any Encumbrance as of the date hereof, and Parent shall not create or permit any Encumbrance with respect to the Specific Patent Rights or any Encumbrance with respect to the Licensed Parent/Seller Technology that would conflict with the rights granted hereunder. (h) the execution and delivery of the Agreement, and the performance of the obligations hereunder, will not contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Contract. to the best of its knowledge, no patent or patent application within the Patent Rights is the subject of any pending interference, opposition, cancellation or other protest proceeding. Parent further represents and warrants to the best of its knowledge on the Effective Date, it has not received and is not aware of any third party claims that the practice of the Patent Rights infringes any proprietary right of such third party. there are no in-bound licenses and only one out-bound license (to Yoskikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi, and Kazauake Masayoshi and pertaining to the Linaeum Loudspeaker Tweeters, but not the intellectual properties concerning or related to neo radial technology) regarding the Speaker Technology. Algo Sub represents and warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands. (b) the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Algo Sub. (c) it has the corporate power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (d) it shall not file the Patent Assignment executed and delivered by Parent with the United States Patent and Trademark Office or otherwise until such time as written notice has been given and the initial payment has been made in accordance with Section IX. XIV. INDEMNIFICATION BY PARENT. (k) Parent shall defend, hold harmless and indemnify each of Algo Sub and its affiliates, and their directors, officers, employees, and agents ("Indemnitees") from and against any and all claims, suits, losses, damages, costs, fees and expenses ("Indemnity Claim(s)") resulting from or arising out of any breach of any of the representations, warranties, or covenants made by Parent in this Agreement (regardless whether or not such Indemnity Claims relate to any third party claim). (l) In addition to any rights of setoff or other rights that the Algo or Algo Sub or any of the other Indemnitees may have at common law or otherwise, Algo and Algo Sub shall have the right to withhold and deduct any sum that may be owed to any Indemnitee under this Section XIV from any amount otherwise payable by any Indemnitee, including amounts payable pursuant to Section VIII(c) and (d), to Parent. The withholding and deduction of any such sum shall operate for all purposes as a complete discharge (to the extent of such sum) of the obligation to pay the amount from which such sum was withheld and deducted. From time to time, Algo Sub may give notice (a "Notice") to Parent specifying in reasonable detail the nature and dollar amount of any Indemnity Claim it may have under this Agreement; Algo Sub may make more than one claim with respect to any underlying state of facts. If Parent gives notice to Algo Sub disputing any Indemnity Claim (a "Counter Notice") within 30 days following receipt by Parent of the Notice regarding such Indemnity Claim, such Indemnity Claim shall be resolved as provided below. If no Counter Notice is received by Algo Sub within such 30-day period, then the dollar amount of damages claimed by Algo Sub as set forth in its Notice shall be deemed established for purposes of this Agreement and, at the end of such 30-day period, Algo or Algo Sub shall be entitled to withhold and deduct from payments owed to Parent the dollar amount claimed in the Notice. If a Counter Notice is given with respect to an Indemnity Claim, Algo or Algo Sub shall withhold and deduct from payment owed to Parent with respect thereto only (i) upon the mutual agreement of the parties or (ii) a final non-appealable order of a court of competent jurisdiction; provided, however, until such Indemnity Claim is resolved pursuant to (i) or (ii) above, Algo and Algo Sub's payment obligations under Sections 57(c) and (d) shall be suspended. Algo and Algo Sub's payment obligations will only resume upon such time as the Indemnity Claim is resolved. XV. GENERAL (m) Further Actions. From and after the Effective Date, each party will cooperate with the other parties, and will execute and deliver such documents and take such other actions as another party may reasonably request, for the purpose of giving effect to the licenses granted in this Agreement. (n) Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement must be in writing and will be deemed properly delivered, given and received (a) when delivered by hand, or (b) two business days after delivered by courier or express delivery service or by facsimile to the address or facsimile number set forth beneath the name of such party below (or to such other address or facsimile number as such party may have specified in a written notice to the other parties): if to Parent or Seller : if to Algo Sub or Algo: c/o Aura Systems, Inc. c/o Algo Technology, Inc. 2335 Alaska Avenue 47338 Fremont Blvd. El Segundo, CA 90245 Fremont, CA 94538 Attention: Zvi Harry Kurtsman, CEO Attention: Arthur Liu, CEO Facsimile: (310) 643-7585 Facsimile: (510) 770-3622 with a copy to: Cooley Godward LLP 3000 El Camino Real Five Palo Alto Square Palo Alto, CA 94306-2155 Attention: David T. Emerson Facsimile: (650) 857-0663 (o) Governing Law; Venue. This Agreement will be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in the County of Santa Clara, California. Each party to this Agreement: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in the County of Santa Clara, California (and each appellate court located in the State of California) in connection with any such legal proceeding; (ii) agrees that each state and federal court located in the County of Santa Clara, California will be deemed to be a convenient forum; and (iii) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in the County of Santa Clara, California, any claim that such party is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. (p) Assignment. Algo Sub may freely assign any or all of the rights that it has under this Agreement (including its rights under the licenses and sublicenses granted to it herein), in whole or in part, to any other party without obtaining the consent or approval of the other parties to this Agreement. Parent will not be permitted to assign or transfer any of the rights that it has under this Agreement or delegate any of its obligations under this Agreement without Algo Sub's prior written consent not to be unreasonably withheld. None of the provisions of this Agreement is intended to provide any rights or remedies to any third party. This Agreement will be binding upon each party hereto and its successors and assigns (if any). (q) Cumulative Remedies. The rights and remedies of the parties hereto will be cumulative (and not alternative). (r) Waiver. No failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, will operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy will preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party will be deemed to have waived any claim arising from this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; and any such waiver will not be applicable or have any effect except in the specific instance in which it is given. (s) Amendment. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the parties sought to be bound by any such amendment, modification, alteration or supplement. (t) Severability. If any provision of this Agreement, or the application of any such provision to any person or set of circumstances, is determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, will not be impaired or otherwise affected, and will continue to be valid and enforceable to the fullest extent permitted by law. (u) Independent Contractors. Algo Sub and Parent are independent contractors and neither will have the authority to act on behalf of the other or create any binding obligation for the other. This Agreement is not intended to establish any partnership, joint venture, employment, or other relationship between Algo Sub and Parent except that of independent contractors. (v) Construction. The section headings in this Agreement are for convenience of reference only, will not be deemed to be a part of this Agreement, and will not be referred to in connection with the construction or interpretation of this Agreement. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be applied in the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words "without limitation." Except as otherwise expressly indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. (w) Counterparts. This Agreement may be executed in several counterparts, each of which will constitute an original and all of which, when taken together, will constitute one agreement. (x) Entire Agreement. This Agreement, along with the Asset Purchase Agreement, and the Exhibits and Schedules attached hereto, sets forth the entire understanding of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the Effective Date. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title:
SCHEDULE A SPECIFIC PATENT RIGHTS Docket # Title US Serial US Patent Number Number (if issued) 91-11 Voice Coil Actuator I 07/740,068 5,321,762 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 92-14 Voice Coil Actuator II 07/925,085 cip of 91-11 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-05D Teardrop Speaker Motor Case 29/005,828 D364,167 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-07 Voice Coil Excursion and Amplitude Gain Control Device 08/062,807 5,418,860 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-21 Electromagnetic Transducer 08/086,622 5,424,592 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-25 Apparatus and Method for Assembly 08/140,231 5,598,625 cip of of Radial Magnet Voice Coil 91-11 Actuators - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-46-D Amplifier Housing 29/018,102 D364,162 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 93-49 Axially Focused Radial Magnet 08/285,405 5,539,262 Voice Coil Actuator - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 94-08 Voice Coil Actuator 08/286,597 5,434,458 (FWC of 92-14) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-01 Electromagnetic Transducer 08/374,939 5,624,155 (Div of 93-21) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-08 Voice Coil Actuator 08/476,491 5,536,984 (Div of 94-08) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-10 Dual Axial Magnet Speaker 08/491,250 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-19D Angled Speaker Enclosure 29/046,225 D394,063 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-20 Piezo Speaker 08/577,297 5,736,808 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 95-21 Polygon Magnet Structure for 08/576,801 5,786,741 Voice Coil Actuator - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-03D Speaker Basket 27/056,795 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-14 Audio Transducer With Controlled 07/154,945 4,903,308 Flexibility Diaphragm - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-15 Audio Transducer with Controlled 07/556,776 4,584,439 Flexibility Diaphragm - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-16 Audio Transducer with Controlled 07/436,914 5,198,624 Flexibility Diaphragm - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-17 Centering Device for Speaker 07/499,492 5,127,060 Diaphragm - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-19 Audio Transducer Improvements 07/708,924 5,249,237 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-20 Audio Transducer Improvements 07/730,172 5,230,021 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-21 Audio Transducer Improvements 07/882,144 5,450,497 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-26 Audio Transducer having Piezoelectric Device 08/236,209 5,727,076 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-27 Resonance Damper for Piezoelectric 08/286,625 5,652,801 Transducer - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-28 Single Magnet Audio Transducer and Method of 08/272,295 5,604,815 Manufacturing - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-29 Audio Transducer with Etched 08/322,108 5,446,797 Voice Coil - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 97-30 Audio Transducer with Flexible Foam Enclosure 08/384,380 5,570,429 - --------------------------------------------------------------------------------------------- 98-01D Speaker Basket 29/069,434 D396,723 Div of 97-03D - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 99-02 Piezoelectric Speaker 09/056,394 (CIP of 95-20) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 99-06D Tiltable Loudspeaker Enclosure 29/090,939 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 99-07D Tiltable Loudspeaker Enclosure (woofer) 29/090,938 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 99-14 Radial Magnet Speaker - ---------------------------------------------------------------------------------------------
SCHEDULE B TRADEMARKS RIGHTS The Specific Trademark Rights are denoted with an *. Those items marked with NL (Not Licensed) are not to be included in Trademark Rights. The Trademark Rights are denoted with an **.
- ------------------------------------------------------------------------------------------------ Docket Mark Serial Reg. Number Number Number - ------------------------------------------------------------------------------------------------ TM92-01 NL AuraFlux 74/322,660 293732 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM92-02 * AURASOUND 74/313,418 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM92-03 NL AuraScope 74/134,961 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM92-04 NL AuraScope 74/134,960 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-01 * Aurasound (w/logo) 74/349,974 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-02 ** Aura 74/369,064 2,196,818 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-03 NL Write your Congressman with a Phone Call 74/360,524 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-04 NL 21st Century Technologies 74/367,568 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-05 * Musical Chairs 74/385,179 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-06 * Vibrasonics 74/388,369 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-07 NL Power Tower 74/394,182 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-08 ** Radial Flux 74/408,601 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-09 ** Radial Mag 74/408,180 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-10 ** Radial Pole 74/408,209 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-11 * Radial Neo 74/408,445 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-12 ** Radial Power 74/408,205 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-13 ** Radial Ring 74/408,664 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-14 ** Radial Line 74/408,207 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-15 NL Linear Mag 74/408,619 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-16 NL Linear Flux 74/408,231 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-17 NL Linear Ring 74/408,211 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-18 ** Neo Flux 74/408,448 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-19 ** Neo Power 74/408,208 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-20 *** Neo Ring 74/408,671 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-21 ** Neo Mag 74,408,447 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-22 NL Linear Gap 74/408,446 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-23 ** Radial Gap 74/408,672 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-24 NL High Gap 74/408,244 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-25 NL Tall Gap 74/408,003 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-26 ** Neo Gap 74/408,206 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-27 ** Radial Stroke 74/408,178 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-28 NL Linear Stroke 74/408,243 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-29 ** Neo Stroke 74/408,179 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-30 NL High Stroke 74/408,232 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-31 * Pillow Sonics 74/408,242 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-32 * Theatre Sonics 74/408,210 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-33 * Aura Sonics 74/410,206 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-34 * Auto Sonics 74/417,408 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-35 * Interactor 74/425,395 1,920,753 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-36 NL Technologies of the 21st Century 74/431,065 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-37 NL Thunderbolt 74/437,049 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-38 NL RAINBOW (block letters) 74/439,107 1,970,336 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-39 NL Rainbow (w/logo) 74/446,644 2,044,009 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-40 NL Rainbow (stylized) 74/446,645 2,040,868 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM-93-41 NL Aurascope 74/466,053 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-42 ** Aura (stylized) 74/472,095 1,991,593 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-43 * Interactor (stylized) 74/472,097 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-01 * Virtual Reality Gamewear - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-02 * Soundplay 74/528,416 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-03. * Mag Force 74/528,276 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-04 NL Newcom (stylized) 75/033,934 2,030,034 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-05 NL Newtalk 74/618,797 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-01 ** Auraphile 74/639,340 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-02 * Bass Shaker 74/679,644 2,072,412 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-03 * NRT 74/706,754 2,144,980 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-04 * Neo-Radial Technology 74/706,753 2,067,789 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-05 * Neo-Radial 74/720,723 2,063,972 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-06 NL Net Talk 75/021,446 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-07 NL Net Fax 75/021,447 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-08 NL NewCom (Block Letters) 75/033,935 2,030,035 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-01 * Mobile Reference (Stylized) 75/123,840 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-02 * Neo-Radial Technology (Stylized) 75/123,841 2,111,403 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-03 * Mobile Reference 75/131,644 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-04 NL Aurapower 75/141,344 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-05 NL Auragen 75/141,345 443325 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-01 * Aspect 75/225,690 2,128,907 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-02 * Force 75/225,287 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-03 NL Radiance (NEVER FILED) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-04 NL EVA 75/225,341 2,181,910 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-05 NL FAS 75/225,289 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-06 NL Ferrodisk 75/225,288 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-07 NL FAR 75/225,280 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-08 * Force 150 75/229,617 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-09 * Force 250 75/229,616 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-10 * Force 340 75/229,720 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-11 * Force 560 75/229,719 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-12 * Force 400q 75/229,718 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-13 * Force 42 75/225,286 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-14 * Force 52 75/225,285 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-15 * Force 62 75/225,284 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-16 * Force 426 75/225,283 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-17 * Force 527 75/225,282 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-18 * Force 629 75/225,281 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-19 * Force 639 75/225,295 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-20 * Force 10 75/225,296 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-21 * Force 12 75/225,297 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-22 * Force 15 75/225,298 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-23 * Aura Virtual Sound 75/235,513 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-24 * AVS 75/235,817 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-25 * Do More Than Listen 75/235,512 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-26 NL Auragen of Power 75/237,652 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-27 NL Atlas Peripherals 75/256,929 2,179,587 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-28 * MR 75/252,086 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-29 * MR 52 75/252,087 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-30 * MR 62 75/252,088 2,170,440 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-31 * MR 5.1 75/252,089 2,219,543 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-32 * MR 6.1 75/252,090 2,188,518 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-33 * MR 629 75/252,091 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-34 * MR 1 75/252,085 2,170,439 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-01 NL Webpal 75/267,533 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-02 NL Navpal 75/267,532 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-03 NL Newpal 75/267,531 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------ TM98-04 * Linaeum 74/132,488 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------- TM98-05 * Line Source 75/291,967 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-06 * Force (stylized) 75/291,968 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-07 * Line Source (design) 75/330,407 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-08 NL Dash 3D 75/376,536 (NewCom) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-09 NL Simplified Technology For 75/382,016 All Walks of Life (NewCom) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-10 NL CINEMA II 75/425,789 (NewCom) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-11 NL EXTREME CINEMA 75/425,790 (NewCom) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 98-12 NL Aura (B&W) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 98-13 NL AURAGEN 75/977693 2,202,313 (div'l of TM96-05) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-01 NL AMA - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-02 NL AURA (Merchant & Gould) 75/559,987 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-03 NL RPM 75/579,192 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-04 *** Beyond Red Line 75/579,642 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-05 NL The Ultimate Upgrade 75/579,641 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-06 * Mobile Reference Platinum 75/579,640 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-07 NL HOME ACCESS (NewCom) 75/584,002 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM99-08 NL Auragen 75/594,235 Power. On The Go. (Stylized) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM99-09 NL The Compatibility Company 75/607,594 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM99-10 NL Thin Pal - ------------------------------------------------------------------------------------------------
EXHIBIT A PATENT ASSIGNMENT FORM OF PATENT ASSIGNMENT Attorney Docket No: PATENT I hereby certify that this correspondence is being deposited with the United States Postal Service with sufficient postage as first class mail in an envelope addressed to the Assistant Commissioner for Patents, Washington, D.C. 20231 on __________________, _____. By:______________________________ ASSIGNMENT OF PATENT RIGHTS Aura Systems, Inc., a corporation organized and existing under the laws of the state of Delaware, having a place of business at _______________________________ (hereinafter called "Assignor"), hereby assigns certain patent rights to Speaker Acquisition Sub, a corporation organized and existing under the laws of the Cayman Islands having a place of business at ___________________________________ (hereinafter called the "Assignee"): WHEREAS Assignor is the owner of the Letters Patents and Applications Listed on Schedule I attached hereto, AND WHEREAS Assignor has agreed with Assignee for the transfer to it of the whole right, title and interest in and to said Applications and to said Letters Patent, and inventions therein, NOW THIS ASSIGNMENT WITNESSETH that in pursuance of the said agreement and in consideration of the sum of One U.S. Dollar ($1.00) and such other good and valuable consideration paid by Assignee to Assignor (the receipt of which Assignor hereby acknowledges), Assignor, as beneficial owner, hereby assigns and transfers to Assignee said inventions, said Applications and said Letters Patent, and any and all Letters Patent or Patents in the United States of America and all foreign countries which may be granted therefor and thereon, and in and to any and all divisions, continuations, and continuations-in-part of said applications, or reissues or extensions of said Letters Patent, and all rights under the International Convention for the Protection of Industrial Property, and the full exclusive benefits thereof, and all rights, privileges and advantages appertaining thereto, including any and all rights to damages, profits or recoveries of any nature for past infringement of said Letters Patent, and the payment of any and all maintenance fees, taxes, and the like, TO HOLD the same unto and to the use of Assignee, its successors and assigns absolutely during the residue of the respective terms for which the said Letters Patent were granted and during any such terms, and for any and all rights extending from said applications and reissues. ASSIGNOR hereby covenants that Assignor has full right to convey the entire interest herein being assigned and represents that Assignor has not executed and will not execute any agreements inconsistent with this Assignment or to the detriment of the patents, applications, and inventions being assigned hereby. AND for the same consideration, Assignor hereby covenants and agrees to and with Assignee, its successor, legal representatives and assigns that, at the time of execution and delivery of these presents, Assignor is the sole and lawful owner of the entire right, title and interest in and to the said inventions and the application for Letters Patent above-mentioned, that the same are unencumbered, and that assignor has good and full right and lawful authority to sell and convey the same in the manner herein set forth. AND for the same consideration, Assignor hereby covenants and agrees to and with Assignee, its successors, legal representatives and assigns that Assignor will, whenever counsel of Assignee, or the counsel of its successors, legal representatives and assigns, shall advise that any proceeding in connection with said inventions, or that any division, continuation or continuation-in-part of any Letters Patent to be obtained therein, is lawful and desirable, sign all papers and documents, take all lawful oaths, and do all acts necessary or required to be done for the procurement, maintenance, enforcement and defense of Letters Patent for said inventions, without charge to Assignor, its successors, legal representatives and assigns, but at the cost and expense of the Assignee, its successors, legal representatives and assigns. Executed at __________________this __________ day of ______________,19__ Assignor: Signature: Printed Name: Title: State of _____________) Country of ______________) SS: Before me personally appeared said _______________________ And acknowledged the foregoing instrument to be his fee act and deed this __________, 1999. Seal __________________________ (Notary Public) SCHEDULE I Patents: 5,321,762 5,539,262 5,786,741 5,230,021 D364,167 5,434,458 4,903,308 5,450,497 5,418,860 5,624,155 4,584,439 5,727,076 5,424,592 5,536,984 5,198,624 5,652,801 5,598,625 D394,063 5,127,060 5,604,815 D364,162 5,736,808 5,249,237 5,446,797 D396,723 Patent Applications: 08/491,250 27/056,795 09/056,394 29/090,939 29/090,938 - -------------- EXHIBIT B TRADEMARK ASSIGNMENT ASSIGNMENT OF TRADEMARKS THIS ASSIGNMENT OF TRADEMARKS is made July ___, 1999 by and between Speaker Acquisition Sub, a Cayman Island corporation having a principal place of business located at ________________________ ("Algo Sub"), and Aura Systems, Inc., a Delaware corporation having its principal place of business at 2335 Alaska Avenue, El Segundo, California 90245 ("Aura Systems"), and Aura Systems' wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). WHEREAS, Algo Sub, Aura Systems, and Seller are parties to an Assignment and License Agreement of even date herewith (the "License Agreement"), under the terms of which Aura Systems and Seller will sell and transfer, and Algo Sub will purchase certain trademarks; and WHEREAS, Aura Systems and/or Seller are the owner of the trademarks set forth in Schedule 1 (as well as various foreign counterparts and trademarks) hereto (the "Trademarks"); and WHEREAS, pursuant to the License Agreement, Algo Sub desires to obtain all of Aura Systems' and Seller's right, title and interest in, to and under said Trademarks; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Aura Systems and Seller, Aura Systems and Seller hereby sell, convey, assign, transfer and deliver to Algo Sub, its successors and assigns, all of their right, title and interest throughout the world in and to the Trademarks, together with the goodwill of the business symbolized by the Trademarks, and the registrations thereof, together with the right to sue and recover damages for future infringements thereof and to stand in the place of Aura Systems and/or Seller in all matters related thereto. Aura Systems and Seller agree to take such further action and to execute such additional documents as may be necessary to perfect Algo Sub's title in and to the Trademarks. IN WITNESS WHEREOF, the parties hereto have caused this Assignment of Trademarks to be executed as of the day and year first written above. SPEAKER ACQUISITION SUB, a Cayman corporation By: ________________________________ Name:_______________________________ Title: ________________________________ AURA SYSTEMS, INC., a Delaware corporation AURASOUND, INC., a Delaware Corp. By: _________________________________ By: ________________________________ Name: _______________________________ Name: _____________________________ Title:__________________________________ Title:_______________________________ SCHEDULE 1 TO ASSIGNMENT OF TRADEMARKS By Aura Systems, Inc. and AuraSound, Inc. To Speaker Acquisition Sub
- ------------------------------------------------------------------------------------------------ Docket Mark Serial Reg. Number Number Number - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM92-02 * AURASOUND 74/313,418 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-01 * Aurasound (w/logo) 74/349,974 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-05 * Musical Chairs 74/385,179 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-06 * Vibrasonics 74/388,369 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-08 * Radial Flux 74/408,601 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-09 * Radial Mag 74/408,180 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-10 * Radial Pole 74/408,209 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-11 * Radial Neo 74/408,445 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-12 * Radial Power 74/408,205 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-13 * Radial Ring 74/408,664 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-14 * Radial Line 74/408,207 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-18 * Neo Flux 74/408,448 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-19 * Neo Power 74/408,208 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-20 * Neo Ring 74/408,671 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-21 * Neo Mag 74,408,447 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-23 * Radial Gap 74/408,672 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-26 * Neo Gap 74/408,206 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-27 * Radial Stroke 74/408,178 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-29 * Neo Stroke 74/408,179 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-31 * Pillow Sonics 74/408,242 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-32 * Theatre Sonics 74/408,210 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM93-33 * Aura Sonics 74/410,206 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-34 * Auto Sonics 74/417,408 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-35 * Interactor 74/425,395 1,920,753 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 93-43 * Interactor (stylized) 74/472,097 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-01 * Virtual Reality Gamewear - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-02 * Soundplay 74/528,416 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 94-03. * Mag Force 74/528,276 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-02 * Bass Shaker 74/679,644 2,072,412 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-03 * NRT 74/706,754 2,144,980 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-04 * Neo-Radial Technology 74/706,753 2,067,789 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM95-05 * Neo-Radial 74/720,723 2,063,972 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-01 * Mobile Reference (Stylized) 75/123,840 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-02 * Neo-Radial Technology (Stylized) 75/123,841 2,111,403 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM96-03 * Mobile Reference 75/131,644 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-01 * Aspect 75/225,690 2,128,907 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-02 * Force 75/225,287 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-08 * Force 150 75/229,617 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-09 * Force 250 75/229,616 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-10 * Force 340 75/229,720 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-11 * Force 560 75/229,719 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-12 * Force 400q 75/229,718 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-13 * Force 42 75/225,286 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-14 * Force 52 75/225,285 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-15 * Force 62 75/225,284 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-16 * Force 426 75/225,283 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-17 * Force 527 75/225,282 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-18 * Force 629 75/225,281 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-19 * Force 639 75/225,295 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-20 * Force 10 75/225,296 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-21 * Force 12 75/225,297 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-22 * Force 15 75/225,298 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-23 * Aura Virtual Sound 75/235,513 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-24 * AVS 75/235,817 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-25 * Do More Than Listen 75/235,512 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-28 * MR 75/252,086 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-29 * MR 52 75/252,087 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-30 * MR 62 75/252,088 2,170,440 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-31 * MR 5.1 75/252,089 2,219,543 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-32 * MR 6.1 75/252,090 2,188,518 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-33 * MR 629 75/252,091 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM97-34 * MR 1 75/252,085 2,170,439 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-04 * Linaeum 74/132,488 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------- TM98-05 * Line Source 75/291,967 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-06 * Force (stylized) 75/291,968 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM98-07 * Line Source (design) 75/330,407 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-04 * Beyond Red Line 75/579,642 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ TM 99-06 * Mobile Reference Platinum 75/579,640 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------- Mark US Serial US Reg. Number Number - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AURASOUND 74/313,418 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Aurasound (w/logo) 74/349,974 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Flux 74/408,601 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Mag 74/408,180 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Pole 74/408,209 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Neo 74/408,445 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Power 74/408,205 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Ring 74/408,664 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Line 74/408,207 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Flux 74/408,448 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Power 74/408,208 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Ring 74/408,671 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Mag 74,408,447 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Gap 74/408,672 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Gap 74/408,206 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radial Stroke 74/408,178 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo Stroke 74/408,179 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Interactor 74/425,395 1,920,753 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Aura (stylized) 74/472,095 1,991,593 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Interactor (stylized) 74/472,097 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Bass Shaker 74/679,644 2,072,412 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NRT 74/706,754 2,144,980 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo-Radial Technology 74/706,753 2,067,789 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo-Radial 74/720,723 2,063,972 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Mobile Reference (Stylized) 75/123,840 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Neo-Radial Technology (Stylized) 75/123,841 2,111,403 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Mobile Reference 75/131,644 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Aspect 75/225,690 2,128,907 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Aura Virtual Sound 75/235,513 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AVS 75/235,817 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 75/252,086 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 52 75/252,087 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 62 75/252,088 2,170,440 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 5.1 75/252,089 2,219,543 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 6.1 75/252,090 2,188,518 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 629 75/252,091 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MR 1 75/252,085 2,170,439 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Linaeum 74/132,488 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------- Line Source 75/291,967 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Line Source (design) 75/330,407 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Mobile Reference Platinum 75/579,640 - -------------------------------------------------------------------------------
EXHIBIT C DOCUMENTS REGARDING OPTION TO BE RECORDED OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patents listed below (as well as any foreign counterparts or cases that claim priority from the US patents listed below): 5,321,762 5,539,262 5,786,741 5,230,021 D364,167 5,434,458 4,903,308 5,450,497 5,418,860 5,624,155 4,584,439 5,727,076 5,424,592 5,536,984 5,198,624 5,652,801 5,598,625 D394,063 5,127,060 5,604,815 D364,162 5,736,808 5,249,237 5,446,797 5,570,429 D396,723 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patent application listed below (as well as any foreign counterparts or cases that claim priority from the US patent application listed below): 08/491,250 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patent application listed below (as well as any foreign counterparts or cases that claim priority from the US patent application listed below): 27/056,795 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patent application listed below (as well as any foreign counterparts or cases that claim priority from the US patent application listed below): 09/056,394 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patent application listed below (as well as any foreign counterparts or cases that claim priority from the US patent application listed below): 29/090,939 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: OPTION This option is entered into effective as of July ___, 1999 (the "Effective Date") between Speaker Acquisition Sub, a Cayman Island corporation ("Algo Sub"), and a wholly-owned subsidiary of Algo Technology, Inc., a California corporation ("Algo"); and Aura Systems, Inc., a Delaware corporation ("Parent"), and its wholly-owned subsidiary AuraSound, Inc., also a Delaware corporation ("Seller"). (a) For a period of thirty-six months (36) months from the Effective Date, Parent hereby grants to Algo Sub the irrevocable option (the "Option") to acquire all right, title and interest to the US patent application listed below (as well as any foreign counterparts or cases that claim priority from the US patent application listed below): 29/090,938 (b) During the thirty-six month period following the Effective Date, Parent shall not license, exclusively, non-exclusively, or otherwise encumber in any manner, any of the above to any third party without the prior written consent of Algo Sub. Should Algo Sub fail to exercise the Option, nothing herein shall be construed to prevent Parent from subsequently licensing, on s non-exclusive basis, any invention covered by the above hereunder to any other for the purpose of practicing any such invention. In the event Algo Sub elects not to exercise the Option, Algo Sub's non-exclusive license shall continue on the terms set forth herein without modification. SPEAKER ACQUISITION SUB AURA SYSTEMS, INC. By: _______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: _____________________________ Title: _____________________________ ALGO TECHNOLOGY, INC. AURASOUND, INC. By: By: Name: Name: Title: Title: EX-10.20.1 5 MYS ESCROW AGREEMENT OF 3/26/99 ESCROW AGREEMENT AGREEMENT made as of March 26, 1999 among Aura Systems, Inc. ("Seller"), a Delaware corporation with a place of business at 2335 Alaska Avenue, El Segundo, California 90245, Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi (jointly and severally, "Purchaser"), each having an address c/o Sadao Masayoshi, 990 West 190th, Suite 210, Torrance, California 90502, and WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP (the "Escrow Agent"), a New York limited liability partnership with a place of business at 270 Madison Avenue, New York, New York 10016. W I T N E S S E T H: WHEREAS, Seller has sold to Purchaser, and Purchaser has purchased from Seller, two hundred eighty (280) shares (the "Shares") of stock of MYS K.K. (the "Corporation"), in consideration of, inter, alia two (2) certain promissory notes (collectively, the "Note"), one in the original principal amount of $1,000,000 and one in the original principal amount of $3,200,000; and WHEREAS, Purchaser is delivering certificate(s) of stock representing the Shares into escrow, together with unattached stock power(s) duly endorsed by Purchaser in blank, as collateral to secure against a Default (as defined in the Note) by Purchaser under the Note; and WHEREAS, the parties are delivering into escrow such other instruments and agreements as are described in this Agreement; and WHEREAS, the Escrow Agent has agreed to act as escrow agent pursuant to the terms and conditions set forth in this Agreement. NOW, THEREFORE, thc parties agree as follows: 1. Deposit of the Shares and Other Items. 1.1 Initial Certificate(s). Simultaneously with the execution of this Agreement, Purchaser has deposited with the Escrow Agent the Shares, represented by certificate(s) of stock of the Corporation issued in the name of Purchaser, together with stock power(s) duly endorsed in blank (the "Stock Power"). 1.2 Subsequent Deposits. Any additional shares of stock of the Corporation hereafter issued with respect to the Shares, whether due to stock split, stock dividend or otherwise, or any certificates for shares of stock of the Corporation or another entity hereafter issued to replace or supplement the Shares, whether due to merger, consolidation, reorganization or otherwise, shall be deposited with the Escrow Agent, together with appropriate stock powers duly endorsed in blank and such stock shall be considered part of the Shares and such stock powers shall be considered part of the Stock Power. 1.3 Other Items. Simultaneously with the execution of this Agreement, thc following items (collectively, the "Other Escrow Items") are also being depositing with the Escrow Agent: 1.3.1 Resignations. Blank dated resignations (the "Resignations") from Purchasers with respect to their directorships, offices and employment with the Corporation, its subsidiaries and affiliates. 1.3.2 Bank Letters. Blank dated letters from the Corporation to its banks advising of the change of its authorized signatories (the "Bank Letters"). 2. Acceptance by the Escrow Agent. The Escrow Agent agrees to accept delivery of the Shares, the Stock Power and the Other Escrow Items (collectively. the "Escrow Items"), and agrees to hold the same in accordance with the terms and conditions of this Agreement. 3. Release from Escrow. The Escrow Agent will hold the Escrow Items in its possession until authorized hereunder to deliver the Escrow Items in accordance with one of the following provisions: 3.1 Delivery to Purchaser. Upon full payment of the amount due pursuant to the Note, including, without limitation, any accrued interest, an affidavit (the "Payment Affidavit") made by, or on behalf of, Purchaser setting forth that full payment has been made shall be delivered to the Escrow Agent. The Escrow Agent shall, promptly after actual receipt of the Payment Affidavit, give notice to Seller of the existence of the Payment Affidavit, which notice shall include a copy of the Payment Affidavit. Unless the Escrow Agent in fact receives an affidavit (the "Seller's Disputing Affidavit") by, or on behalf of, Seller of a dispute with respect to the recitation in the Payment Affidavit within twenty (20) days after the Escrow Agent gives notice to Seller of the existence of the Payment Affidavit, then, promptly after the expiration of such twenty (20) day period, the Escrow Agent shall deliver to Purchaser the Escrow Items. 3.2 Delivery to Seller. Upon Default, as defined in either Note (including the expiration of any grace period which must elapse before a Default arises), under either Note, an affidavit (the "Default Affidavit") made by, or on behalf of, Seller setting forth such Default shall be delivered to the Escrow Agent. The Escrow Agent shall, promptly after actual receipt of the Default Affidavit, give notice to Purchaser of the existence of the Default Affidavit, which notice shall include a copy of the Default Affidavit. Unless the Escrow Agent in fact receives an affidavit (the "Purchaser's Disputing Affidavit") by, or on behalf of, Purchaser of a dispute with respect to the recitation in the Default Affidavit within twenty (20) days after the Escrow Agent gives notice to Purchaser of the existence of the Default Affidavit, then, promptly after the expiration of such twenty (20) day period, the Escrow Agent shall deliver to Seller the Escrow Items to be held by Seller in accordance with the provisions of section 4. The monetary obligations which arise out of or relate to the Default which is the basis of the Default Affidavit, including, without limitation, any acceleration of principal and interest, any increase in the continuing interest rate, any right to recover costs or expenses or any penalties accruing under the Note, are hereinafter referred to as the "Obligations." 3.3 Dispute Resolution. In the event, of the Escrow Agent's timely receipt of either the Seller's Disputing Affidavit or the Purchaser's Disputing Affidavit, the Escrow Agent shall (except as provided in the remainder of this section 3.3 or in section 5) continue to hold the Escrow Items until the dispute is resolved. Any dispute that may arise under this Agreement shall be settled by one of the following methods: (1) mutual agreement of the parties concerned (evidenced by appropriate instructions in writing to the Escrow Agent, signed by all of the parties to such dispute), (2) a binding arbitration award pursuant to an agreement signed by the parties to such dispute to submit such dispute to arbitration or (3) by a final order, decree or judgment of a court of competent jurisdiction in the United States of America (the time for appeal having expired and no appeal having been perfected). The Escrow Agent shall be under no duty whatsoever to institute or defend any such proceedings, but may, in its discretion, deposit the Escrow Items and any funds or other documents held by it with a court of competent jurisdiction pending the resolution of any dispute. 4. Rights of the Parties in the Shares. 4.1 Dividends. Until the date of the receipt of the Default Affidavit by the Escrow Agent (the "Notice Date"), the Shares shall be treated as if they are owned outright by Purchaser and Purchaser shall be entitled to receive any and all dividends or other distributions which may be paid, provided that any such dividends or distributions, including, but not limited to those paid in stock, are to be deposited with the Escrow Agent as additional Other Escrow Items. 4.2 Voting. Until the Shares have been delivered from escrow to Seller (the "Delivery Date"), the Shares shall be treated as if they are owned outright by Purchaser and Purchaser shall be entitled to vote the Shares for all purposes. From and after the Delivery Date, Seller or its transferees shall have the right to vote the Shares for all purposes unless and until legal title to the Shares is re-conveyed to the Purchaser in resolution of a dispute pursuant to section 3.3 or after cure by Seller pursuant to section 4.5. 4.3 Sale. Subject to the right to cure hereinafter described, Seller may cause the Shares delivered to it pursuant to section 3.2 to be sold in a commercially reasonable manner upon ten (10) days written notice to Purchaser of such sale, setting forth the time and place thereof. Seller may be the purchaser at such sale. The monies so received by Seller shall be applied first to the payment of the cost and expense of such sale and then to the payment of the Obligations. Purchaser shall remain liable for any deficit, and any surplus monies shall be paid to Purchaser. Purchaser acknowledges and agrees that the ten (10) day notice provided in this section 4.3 constitutes reasonable notice of a proposed sale. 4.4 Right to Retain the Shares. Subject to the right to cure hereinafter described, Seller may elect to retain ownership of the Shares delivered to it pursuant to section 3.2 by giving thirty (30) days written notice to Purchaser of such election. Such retention shall be in full satisfaction of the Obligations. Purchaser acknowledges and agrees that the thirty (30) day notice provided in this section 4.4 constitutes reasonable notice of a proposed retention of the Shares. 4.5 Right to Cure. Prior to or during the ten (10) thirty day notice period described in section 4.3 or the thirty (30) day notice period described in section 4.4, or, if Seller does not sell or take title to the Shares upon the expiration of such ten (10) or thirty (30) day period, prior to such sale or taking title, Purchaser may cure the Default by making full payment to Seller with respect to all of the Obligations; in which event Seller shall deliver the Shares, the Stock Power and the Other Escrow Items to Purchaser free of this Agreement and any liens or interests of Seller relating to the Note or the Obligations. 4.6 Remedies Not Exclusive. The aforesaid remedies upon Default shall not be exclusive, and Seller shall have all other remedies permitted by law, including, without limitation, the right to bring suit against any Purchaser. 5. Concerning the Escrow Agent. 5.1 Reliance Upon Instrument. The Escrow Agent may act in reliance, and is protected in so relying, upon any writing, instrument or signature which it, in good faith, believes to be genuine, and may assume the validity and accuracy of any statement or assertion contained in such a writing or instrument, and may assume that any person purporting to give any writing, notice, advice or instructions in connection with the provisions hereof has been duly authorized to do so. 5.2 Reliance Upon Counsel. The Escrow Agent may act or refrain from acting in respect to any matter referred to herein in full reliance upon and by and with the advice of counsel selected by it, and shall be fully protected in so acting or in refraining from acting upon such advice of counsel. It is intended that the Escrow Agent, if an attorney or law firm, may choose to act as its own counsel. 5.3 Exclusive Duties. This Agreement sets forth exclusively the duties of the Escrow Agent with respect to any and all matters pertinent hereto, and no implied duties or obligations shall be read into this Agreement against the Escrow Agent. 5.4 No Representations. The Escrow Agent shall not be considered to have made any representations as to the validity, value, genuineness or collectibility of any instrument or other item held by or delivered to it. 5.5 Termination of Duties. Upon final delivery, in accordance with this Agreement, of the Escrow Items and any other items held by the Escrow Agent, the responsibilities of the Escrow Agent shall cease and terminate without any further obligation or liability on its part. 5.6 No Liability. The Escrow Agent shall not be responsible or liable for any mistake of fact or error of judgment, or for any act or omission on its part in the performance of its duties as escrow agent under this Agreement except as such mistake, error, act or omission constitutes intentional misconduct, bad faith, gross negligence or fraud. 5.7 Reimbursement. 5.7.1 In General. Seller and Purchaser each, jointly and severally, hereby agrees to reimburse all of the reasonable expenses (including legal fees), disbursements and advances incurred or made by the Escrow Agent in performance of its duties hereunder. Legal fees, as reimbursable hereunder, expressly include legal fees charged by the Escrow Agent itself. Seller and Purchaser shall be solely responsible to allocate such expenses among themselves and to seek such contribution among themselves as may be appropriate. Notwithstanding anything in this Agreement to the contrary, the Escrow Agent (1) shall have no obligation to release any of the Escrow Items or any other items held by the Escrow Agent unless and until it has been fully reimbursed or received adequate assurance (determined in its sole discretion) that it will be fully reimbursed for all of its reasonable expenses, (2) shall have no liability for any failure or refusal to release any of the Escrow Items or any other items held by the Escrow Agent in accordance with clause (1) of this sentence and (3) may pay itself from any cash held by it in escrow the amount of its reasonable expenses. 5.7.2 Indemnity. Except in cases of the Escrow Agent's intentional misconduct, bad faith, gross negligence or fraud, the other parties to this Agreement agree, jointly and severally, to indemnify the Escrow Agent and hold it harmless from any and all claims, liabilities, losses, actions, suits or proceedings at law or in equity, or any other expenses, fees or charges of any character or nature which the Escrow may incur or with which it may be threatened by reason of the Escrow Agent's actions as escrow agent under this Agreement, including, without limitation, reasonable attorneys' fees and expenses (including, but not limited to all fees and costs incident to any appeals which may result). Notwithstanding the foregoing, as between themselves, the other parties to this Agreement agree that the party responsible for any such loss to the Escrow Agent shall bear the full share thereof. 5.8 Actions by Escrow Agent/Indemnity. The Escrow Agent shall not be required to institute or defend any action involving any matters referred to herein or which affects its duties or liabilities hereunder unless or until requested to do so by a party to this Agreement and then only upon receiving full indemnity, in character satisfactory to the Escrow Agent, against any and all claims, liabilities and expenses in relation thereto (including, without limitation, reasonable attorneys fees). In the event of any dispute among the parties hereto with relation to the Escrow Agent or its duties, (1) the Escrow Agent may act or refrain from acting in respect to any matter referred to herein in full reliance upon and by and with the advice of counsel selected by it and shall be fully protected in so acting or in refraining from acting upon the advice of such counsel (it is intended that the Escrow Agent, if an attorney or law firm, may choose to act as its own counsel) or (2) the Escrow Agent may refrain from acting until required to do so by an order of a court of competent jurisdiction. 5.9 Substitution. The Escrow Agent may resign as escrow agent at any time provided that it first designates a substitute or successor escrow agent acceptable to Seller and Purchaser who agrees in writing to be bound by the terms of this Agreement and to assume the obligations of the Escrow Agent. The Escrow Agent may be removed as escrow agent at any time by notice from Seller and Purchaser specifying such removal and naming the substitute or successor escrow agent who has agreed in writing to be bound by the terms of this Agreement and to assume the obligations of the Escrow Agent. Upon delivery by the Escrow Agent of the Escrow Items and any other items held by the Escrow Agent to the substitute or successor Escrow Agent, such person shall be deemed for all purposes to be the Escrow Agent and the responsibilities of the predecessor Escrow Agent shall cease and terminate without any further obligation or liability on its part. 5.10 Escrow Agent as Counsel. The parties acknowledge that the Escrow Agent is a law firm that has previously represented Seller, including with respect to matters relating to the transactions underlying this Agreement. Notwithstanding Escrow Agent's function as escrow agent, the parties acknowledge and agree that the Escrow Agent may continue to represent Seller, including with respect to any dispute arising out of or relating to this Agreement or the transactions underlying this Agreement. 6. Entire Agreement. This Agreement represents the entire escrow agreement among the parties and cannot be modified or terminated, nor may any of its provisions be waived, except by a written instrument signed by all of the parties. Any waiver by any party of the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver thereof for the future, but shall be considered a waiver only in the particular instance, for the particular purpose, and at the time when and for which it is given. There are no other agreements and no other representations, warranties or covenants with respect to the subject matter of this Agreement except as expressly set forth in this Agreement. 7. Miscellaneous. 7.1 Captions. Headings contained in this Agreement have been inserted for reference purposes only and shall not be construed as part of this Agreement. 7.2 Governing Law/Consent to Jurisdiction. 7.2.1 Governing Law. This Agreement has been made and entered into in the State of California and shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of California, without regard to principles of conflicts of laws. 7.2.2 Consent to Jurisdiction. The parties irrevocably consent to the jurisdiction of the courts of the State of California (and the Federal courts having jurisdiction in the State of California) for purposes of any judicial proceeding which may be instituted in connection with any matter arising under or relating to this Agreement. 7.3 Notice. Any notice or other communication given or made pursuant to this Agreement must be in writing and shall be delivered to the person to whom intended at the address set forth above (or at such other address as such person may designate by proper notice) by personal delivery, by telecopier, by nationally), recognized courier (Federal Express, DHL, etc.) or by certified or registered mail, postage prepaid, and shall be deemed given when personally delivered or sent by telecopier or two (2) business days after deposit with a courier or five (5) business days after mailing. The Escrow Agent shall be given copies of all notices. 7.4 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement. 7.5 Successors in Interest. This Agreement shall be binding upon and inure to the benefit of the respective parties, their successors, assigns, heirs, legatees, executors, administrators and legal representatives ("Successors"). Whenever a party is referred to in this Agreement, such reference shall include reference to such party':; Successors. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument. This Agreement shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SELLER: PURCHASER: AURA SYSTEMS, INC. By: Name: Yoshikazu Masayoshi Title: Sadao Masayoshi Sachie Masayoshi Kazaki Masayoshi ESCROW AGENT: WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP By: A Partner EX-10.20.2 6 PROMISSORY NOTE $1,000,000 PROMISSORY NOTE $1,000,000 March 26, 1999 FOR VALUE RECEIVED, Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi (jointly and severally, the "Maker") promise to pay to the order of Aura Systems, Inc. (the "Initial Payee") One Million dollars ($1,000,000.00) at 2335 Alaska Avenue, El Segundo, California 90245 or such other address as the Initial Payee or any subsequent holder of this Note (the holder from time to time being the "Payee") may designate from time to time, together with interest in accordance with this Note. 1. Payment. The entire principal balance of this Note shall be payable in full, without interest, on April 15, 1999. 2. Prepayment. The Maker may prepay this Note in whole at any time without premium or penalty, but may not prepay this Note in part. 3. Default. 3.1 Definition. If the Maker shall fail to pay this Note in full on or before April 15. 1999, then this Note shall be deemed to be in "Default." 3.2 Post-Default Interest. If a Default shall occur, then, from and after April 15, 1999, the entire unpaid balance then due and payable pursuant to this Note shall accrue interest at a rate of 16% per annum, compounded monthly. Notwithstanding the prior sentence of this section 3.3 or any other provision of this Note, in no event shall interest be due or payable or accrued on this Note in excess of the maximum rate of interest permitted under applicable law. In the event that it should be determined that the Maker has paid excess interest, such excess shall instead be treated as a prepayment of principal. 3.3 Costs. The Maker hereby further promises to pay all costs and expenses incurred in connection with the collection and administration of this Note, including, without limitation, reasonable attorneys fees and court costs and special bank charges. 4. Collateral. As security for this Note, the Maker has granted the Payee a security interest in two hundred eighty (280) shares of the common stock of MYS K.K., as well as certain other instruments or agreements, pursuant to that certain Escrow Agreement among the Maker, the Initial Payee and Wolf Haldenstein Adler Freeman & HERZ LLP executed simultaneously with this Note, the terms of which Escrow Agreement are incorporated herein by this reference. 5. Set-Offs. The Maker may not assert any deduction for any claim, set-off, disability, counterclaim or recoupment of any kind whatsoever against this Note, but must assert the same in a separate action. The Payee may, at its option, withhold any payment which it owes at any time to the Maker and apply such payment against this Note as a prepayment hereof. 6. Waiver. The Maker hereby expressly waves presentment, demand, protest, notice of protest, notice of dishonor and any and all other notices or demands of whatever character to which the Maker might otherwise be entitled. Each Maker further consents to any extension granted by any holder as well as the release of :any collateral or any co-Maker and waives notice thereof. 7. Governing Law/Consent to Jurisdiction. 7.1 Governing Law. This Note has been made and entered into in the State of California and shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of California, without regard to principles of conflicts of laws. 7.2 Consent to Jurisdiction. Each Maker irrevocably consents to the jurisdiction of the courts of the State of California (and the Federal courts having jurisdiction in the State of California) for purposes of any judicial proceeding which may be instituted in connection with any matter arising under or relating to this Note. 8. Notices. Any notice required or permitted under this Note must be in writing and shall be considered given when delivered personally or sent by telecopier or two (2) days after it is sent by nationally recognized courier (Federal Express, DHL, etc.) to the party for which intended, in each event at the following addresses or telecopy numbers (or at such address or numbers as either party may specify by notice to the other hereunder): To the Maker: c/o Sadao Masayoshi 990 West 190th, Suite 210 Torrance, California 90502 Telecopier No.: (310) 527-7148 [REMAINDER OF PAGE INTENTIONALLY' LEFT BLANK] To the Payee: At the address established for payment. IN WITNESS WHEREOF, the Maker has duly ,executed this Note on the date and year first above written. Yoshikazu Masayoshi Sadao Masayoshi Sachie Masayoshi Kazuaki Masayoshi EX-10.20.3 7 PROMISSORY NOTE $3,200,000 PROMISSORY NOTE $3,200,000 March 26, 1999 FOR VALUE RECEIVED, Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi (jointly and severally, the "Maker") promise to pay to the order of Aura Systems, Inc. (the "Initial Payee") Three Million Two Hundred Thousand Dollars ($3,200,000.00) at 2335 Alaska Avenue, E1 Segundo, California 90245 or such other address as the Initial Payee or any subsequent holder of this Note (the holder from time to time being the "Payee") may designate from time to time, together with interest in accordance with this Note. 1. Payment. Principal and interest shall be payable in twelve (12) equal monthly installments of $290,000.00 commencing May 15, 1999 and continuing on the first business day of each month thereafter. 2. Prepayment. The Maker may prepay this Note in whole at any time by paying the full amount of all installments remaining unpaid (that is (i) $290,000.00 multiplied by (ii)(x) twelve (12) minus (y) the number of installments previously paid), and may not otherwise prepay this Note. 3. Default. 3.1 Acceleration. If any "Default" (as defined in section 3.2) shall occur, including the expiration of any grace period provided for in section 3.2, then, without further demand or notice, the entire unpaid balance of principle and interest pursuant to this Note shall become immediately due and payable, and the Payee shall have all the rights and remedies available to it under applicable law. 3.2 Definition. Thc occurrence of any of the following events shall constitute a "Default" pursuant to this Note: 3.2.1 Thc Maker shall fail to pay any installment due under this Note within three (3) business days of its due date or any check given in payment of an installment shall be returned as uncollected; or 3.2.2 Any Maker shall make an assignment for the benefit of his creditors or admit in writing his inability to pay his debts as they become due; or 3.2.3 Any Maker shall be adjudicated a bankrupt, or a custodian, trustee or receiver shall be appointed for his or of all or a substantial part of his property, and such adjudication or appointment shall not be discharged, vacated or stayed on appeal within thirty (30) days; or any court shall take jurisdiction of all or a substantial part of the property of any Maker in any involuntary proceeding for the reorganization, dissolution, liquidation or winding up of such Maker, and such proceeding shall not be discharged or such jurisdiction relinquished or vacated or stayed on appeal within thirty (30) days; or any Maker shall file a petition, or an answer consenting to or acquiescing in a petition against him, in bankruptcy or under the Federal Bankruptcy Code or any similar law, state, federal or foreign, whether now or hereafter existing or any such petition filed against such Maker shall be approved or not vacated or stayed within thirty (30) days. 3.2.4 A Default (as defined therein) by the Maker pursuant to that certain Promissory Note in the original principal amount of $1,000,000 of even date herewith payable to the order of the Initial Payee. 3.3 Post-Default Interest. In view of the acceleration of principal and interest following a Default, the Maker shall not be liable for any additional accrual of post-Default interest from the date of such Default through May 15, 2000, the date through which interest on this Note is computed. If a Default shall occur and full payment has not been made by May 15, 2000, then, from and after such date, the entire unpaid balance of principal and interest then due and payable pursuant to this Note shall accrue interest at a rate of 16% per annum, compounded monthly. Notwithstanding the prior sentences of this section 3.3 or any other provision of this Note, in no event shall interest be due or payable or accrued on this Note in excess of the maximum rate of interest permitted under applicable law, In the event that it should be determined that the Maker has paid excess interest, such excess shall instead be treated as a prepayment of principal. 3.4 Costs. The Maker hereby further promises to pay all costs and expenses incurred in connection with the collection and administration of this Note, including, without limitation, reasonable attorneys fees and court costs and special bank charges. 4. Collateral. As security for this Note, the Maker has granted the Payee a security interest in two hundred eighty (280) shares of the common stock of MYS K.K., as well as certain other instruments or agreements, pursuant to that certain Escrow Agreement among the Maker, the Initial Payee and Wolf Haldenstein Adler Freeman & HERZ LLP executed simultaneously with this Note, the terms of which Escrow Agreement are incorporated herein by this reference, 5. Set-Offs. The Maker may not assert any deduction for any claim, set-off. disability, counterclaim or recoupment of any kind whatsoever against this Note, but must assert the same in a separate action. The Payee may, at its option, withhold any payment which it owes at any time to the Maker and apply such payment against this Note as a prepayment hereof. 6. Waiver. The Maker hereby expressly waives presentment, demand, protest, notice of protest, notice of dishonor and any and all other notices or demands of whatever character to which the Maker might otherwise be entitled. Each Maker further consents to any extension granted by any holder as well as the release of any collateral or any co-Maker and waives notice thereof. 7. Governing Law/Consent to Jurisdiction. 7.1 Governing Law. This Note has been made and entered into in the State of California and shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of California, without regard to principles of conflicts of laws. 7.2 Consent to Jurisdiction. Each Maker irrevocably consents to the jurisdiction of the courts of the State of California (and the Federal courts having jurisdiction in the State of California) for purposes of any judicial proceeding which may be instituted in connection with any matter arising under or relating to this Note. 8. Notices. Any notice required or permitted under this Note must be in writing and shall be considered given when delivered personally or sent by telecopier or two (2) days after it is sent by nationally recognized courier (Federal Express, DHL etc.) to the party for which intended, in each event at the following addresses or telecopy numbers (or at such address or numbers as either party may specify by notice to the other hereunder): To the Maker: c/o Sadao Masayoshi 990 West 190th, Suite 210 Torrance, California 90502 Telecopier No.: (310) 527-7148 To the Payee: At the address established for payment. IN WITNESS WHEREOF, the Maker has duly executed this Note on the date and year first above written. Yoshikazu Masayoshi Sadao Masayoshi Sachie Masayoshi Kazuaki Masayoshi EX-10.20.4 8 MYS STOCK PURCHASE AGREEMENT 10.20.4 STOCK PURCHASE AGREEMENT AGREEMENT made March 26, 1999, between Aura Systems, Inc. ("Seller"), a Delaware corporation with a place of business at 2335 Alaska Avenue, E1 Segundo, California 90245, and Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi (jointly and severally, "Purchaser"), each having an address c/o Sadao Masayoshi, 990 West 190th, Suite 210, Torrance, California 90502. W I T N E S S E T H: WHEREAS, Seller owns Two Hundred Eighty (280) shares (the "Shares") of voting common stock, (Y)50,000 par value per share, of MYS K K., a Japanese corporation (the "Corporation"); and WHEREAS, Purchaser desires to purchase the Shares from Seller, and Seller desires to sell the Shares to Purchaser, pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Sale of the Shares. 1.1 In General. Seller hereby sells to Purchaser, and Purchaser hereby purchases from Seller, the Shares for the price and upon the terms and conditions set forth in this Agreement. 1.2 Exclusion of Linaeum Loudspeaker Tweeters. Notwithstanding anything in this Agreement to the contrary, Seller will retain all the intellectual properties concerning and relating to "Linaeum" loudspeaker "tweeters" (the "Linaeum Technology"). 1.2.1 In keeping with such retention, the Corporation has previously assigned the Linaeum Technology to Seller. In furtherance of such assignment, the Corporation and Purchaser each further agrees at any time and from time to time to execute such other documents and take such other actions as may be necessary or desirable (as determined in Seller's reasonable judgment) to perfect, confirm or evidence Seller's ownership of the Linaeum Technology. 1.2.2 The Corporation, however, is hereby granted, conditioned on Purchaser's performance of their obligations pursuant to this Agreement, a fully-paid, perpetual, non-exclusive license from Seller for the manufacture, sale and distribution of the Linaeum Technology for OEM channels. 1.2.3 For purposes of clarification, the parties and the Corporation acknowledge and agree that the intellectual properties concerning or relating to NRT have at all times been, and shall continue to be, the exclusive property of Seller, and no license or other rights with respect to such properties has been or is hereby granted to the Corporation. 2. Purchase Price/Assumption of Liabilities: 2.1 Purchase Price. The aggregate cash consideration (the "Price") to be paid by Purchaser for the Shares is $4,200,000, plus interest as provided in this section 2. The Price shall be paid as follows: 2.1.1 First Installment By April 15 I999. $1,000,000, without interest, to be paid in lawful funds of the United States on or before April 15, 1999, which obligation is evidenced by a promissory note being executed and delivered simultaneously with this Agreement. 2.1.2 Subsequent Installments. $3,200,000, with interest, to be paid in lawful funds of the United States in twelve (12) equal monthly installments of $290,000 each (principal and interest) commencing on May 15, 1999 and continuing through April 15, 2000, which obligation is evidenced by a promissory note being executed and delivered simultaneously with this Agreement. 2.2 Assumption of Liabilities. As additional consideration for the Shares, Purchaser and the Corporation agree to assume all liabilities accruing from the Corporation or the operation of its business from March 1, 1996 through the date of this Agreement (including, but not limited to, any and all liabilities arising out of or relating to that certain judgment against defendants in an action entitled Stutz, et. al v. Aura Systems Inc., et al in the Circuit Court of the State of Oregon bearing case No. 9903-(12302), and each Purchaser and the Corporation agree, jointly and severally, to indemnify and hold Seller harmless from and against any and all such liabilities. 3. Security. 3.1 Escrow. To secure payment of the Price as well as the performance of the other obligations of Purchaser pursuant to this Agreement, the Shares are being delivered to Wolf Haldenstein Adler Freeman & Herz LLP (the "Escrow Agent"), to be held in escrow pursuant to that certain Escrow Agreement (the "Escrow Agreement") executed simultaneously with the execution of this Agreement. To accomplish such delivery, Purchaser will deliver to the Escrow Agent the certificate(s) for the Shares together with stock power(s) executed in blank. Also being held in this escrow are blank dated letters of resignation from each Purchaser and blank dated letters from the Corporation to its banks. 3.2 Remedies. In the event of any default, Seller shall have a right of action for full performance against each Purchaser jointly and severally, and shall not be required to first pursue any remedies available pursuant to the Escrow Agreement. 4. Deliveries at Closing. 4.1 Delivery of the Shares. Seller has simultaneously herewith delivered the Shares to Purchaser. To accomplish such delivery, Seller has tendered the certificate for the Shares together with the necessary stock power. 4.2 Deliveries of Escrow Agreement and Escrow Items. Seller, Purchaser and the Escrow Agent have simultaneously herewith executed and delivered the Escrow Agreement among one another and the appropriate parties have delivered to the Escrow Agent the items to be held in escrow as described in section 3 and the Escrow Agreement. 5. Additional Terms and Conditions. 5.1 Conduct of Business. From and after the date of this Agreement, and continuing until receipt by Seller of the full Price, the Corporation will conduct its business only in the ordinary course. Without limiting the generality of the prior sentence, the Corporation agrees that during the described period it will not dispose of, transfer, assign or encumber any asset or take any other action with respect to any matter outside of the ordinary course of business nor will it pay dividends or otherwise make distributions to its shareholders. 5.2 Appointment of Representative Director. From and after the date of this Agreement, and continuing until receipt by Seller of the full Price, Seller shall have the right to appoint one Representative Director of the Corporation. Each Purchaser agrees to vote the Shares owned by him in favor of the election of the Representative Director designated by Seller. 5.3 Confidentiality. Seller, on one hand, and Purchaser, on the other hand, each agree that this Agreement and its contents shall be maintained in confidence and that neither this Agreement nor its contents shall be disclosed to any third parties, except that disclosure may be made on a "need to know" basis to each party's counsel, accountants, shareholders, potential financing sources and investment bankers, provided that such third parties in turn agree to retain the disclosed information in confidence. 5.4 Public Announcements. Neither party shall, without the prior written consent of the other party, make any public release of information regarding the matters contained in or contemplated by this Agreement, except (1) each party may communicate with its employees, customers, suppliers, lenders, lessors, shareholders and other particular groups as may be legally required or necessary for an appropriate business purpose and not inconsistent with the best interests of the other party or the prompt performance of the obligations contemplated by this Agreement and (2) as required by law. Neither party shall issue any press releases or similar announcement regarding this Agreement or the transactions contemplated by this Agreement without the prior written approval of the other party which approval shall not be unreasonably withheld or delayed. 5.5 Expenses of the Transaction. Each party, for its own behalf, shall be solely responsible for and shall bear all of its own expenses, including, but not limited to expenses of counsel, accountants and other advisers, incurred at any time in connection with the transactions contemplated by this Agreement. 6. Representations. 6.1 Seller. Seller represents and warrants to Purchaser that: 6.l.1 It has full power and authority to execute, deliver and perform this Agreement, and this Agreement is binding upon it. 6.1.2 No brokers, finders or agents, were involved in connection with this Agreement. 6.2 Purchaser. Purchaser represents and warrants to Seller that: 6.1.2 They each have full power and authority to execute, deliver and perform this Agreement, and this Agreement is binding upon each of them. 6.2.2 Each of them is fully familiar with the business and operations of the Corporation, including, but not limited to, the business and operations of its subsidiaries and affiliates, has made such investigation of the Corporation as he has deemed advisable and believes that the Price is fair and reasonable. Each of them understands and acknowledges that there are no representations being made by Seller with respect to the Corporation, its subsidiaries or affiliates. 6.2.3 No brokers, finders or agents were involved in connection with this Agreement. 6.3 Survival. The representations, warranties and covenants contained in this Agreement, including, but not limited to, those set forth in section 5 and this section 6, shall survive the closing. Each party hereby agrees to indemnify and hold harmless the other party from and against any loss, liability or expense (including, without limitation, reasonable attorneys fees) which such other party may incur due to the breach of any representation, warranty or covenant of the indemnifying party. 7. Governing Law/Consent to Jurisdiction. 7.1 Governing Law. This Agreement has been made and entered into in the State of California and shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of California, without regard to principles of conflicts of laws. 7.2 Consent to Jurisdiction. The parties irrevocably consent to the jurisdiction of the courts of the State of California (and the Federal courts having jurisdiction in the State of California) for purposes of any judicial proceeding which may be instituted in connection with any matter arising under or relating to this Agreement. 8. Miscellaneous. 8.1 Captions. Headings contained in this Agreement have been inserted for reference purposes only and shall not be construed as part of this Agreement. 8.2 Entire Agreement. This Agreement represents the entire agreement between Seller and Purchaser regarding the subject matter hereof, and supercedes any and all prior understandings, whether oral or written, with respect thereto, including, but not limited to, that certain binding letter of intent dated March 19, 1999. This Agreement cannot be modified or terminated, nor may any of its provisions be waived, except by a written instrument signed by Seller and Purchaser. There are no representations, warranties or covenants except as expressly set forth in this Agreement. 8.3 Notices. Any notice or other communication given or made pursuant to this Agreement must be in writing and shall be delivered to the person to whom intended at the address set forth above (or at such other address as such person may designate by proper notice) by personal delivery, by telecopier, by nationally recognized courier (Federal Express, DHL, etc.) or by certified or registered mail, postage prepaid, and shall be deemed given when personally delivered or sent by telecopier or two (2) business days after deposit with a courier or five (5) business days after mailing. 8.4 Severability. This Agreement shall be enforced to the fullest extent permitted under applicable law and with each of its provisions regarded as severable. 8.5 Rights and Remedies Cumulative. The rights and remedies of the parties pursuant to this Agreement and under applicable law shall be cumulative. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SELLER: PURCHASER: AURA SYSTEMS, INC. By: Name: Yoshikazu Masayoshi Title: Sadao Masayoshi Sachie Masayoshi Kazuaki Masayoshi AGREED TO: MYS K.K. By: Name: Title: EX-10.21.1 9 RST AMENDMENT TO SECURITY AGREEMENT 10.21.1 FIRST AMENDMENT TO SECURITY AGREEMENT THIS FIRST AMENDMENT TO SECURITY AGREEMENT, dated as of October 22, 1999 (the "Amendment") is entered into between and among RGC INTERNATIONAL INVESTORS, LDC, a Cayman Islands limited duration company ("Secured Party"), and AURA SYSTEMS, INC., a Delaware corporation ("Debtor"). Preliminary Statement WHEREAS, Debtor and Secured Party are parties to that certain Security Agreement, dated as of October 7, 1998, (the "Existing Security Agreement") pursuant to which Debtor has granted a lien on, and security interest in, certain of its assets as security for, among other things, the repayment of that certain Convertible Senior Secured Note, dated as of October 7, 1998 and amended and restated effective as of October 22, 1999, payable from Debtor to the order of Secured Party (the "Note"); and WHEREAS, Debtor has requested, and Secured Party has agreed, to amend the Existing Security Agreement in certain respects to effect such requested modifications. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the Debtor and Secured Party hereby amend the Existing Security Agreement, but only to the extent and on the terms and conditions specifically set forth herein. All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to them in the Existing Security Agreement. 1. Amendment to the Existing Security Agreement. (a) Section 3.5 - Section 3.5 of the Existing Security Agreement is hereby amended by deleting the section in its entirety and substituting "[RESERVED]" in place thereof. (b) Section 3.9 - Section 3.9 of the Existing Security Agreement is hereby amended by deleting the first sentence thereof in its entirety. (c) Section 7 - Section 7 of the Existing Security Agreement is hereby amended by deleting the definition of "Permitted Liens" contained therein in its entirety and substituting in place thereof the following definition: "Permitted Liens" shall mean (a) any liens for current taxes, assessments, and other governmental charges not yet due and payable; (b) any mechanic's, materialman's, carrier's, warehousemen's or similar liens for sums not yet due; (c) easements, rights-of-way, restrictions and other similar encumbrances on the real property or fixtures of the Debtor incurred in the ordinary course of business which individually or in the aggregate are not substantial in amount and which do not in any case materially detract from the value or marketability of the property subject thereto or interfere with the ordinary conduct of the business of the Debtor; (d) liens (other than liens imposed on any property of the Debtor pursuant to ERISA or Section 412 of the Code) incurred or deposits made in the ordinary course of business, including liens in connections with workers' compensation, unemployment insurance and other types of social security and liens to secure performance of tenders, statutory obligations, surety and appeal bonds (in the case of appeal bonds such lien shall not secure any reimbursement or indemnity obligation in an amount greater than $100,000), bids, leases that are not capital leases, performance bonds, sales contracts and other similar obligations, in each case, not incurred in connection with the obtaining of credit or the payment of a deferred purchase price; (e) liens on and security interests in the Collateral created in favor of the Secured Party; (f) purchase money liens to secure the deferred purchase price of property not to exceed the lower of the cost or fair market value of the property that is purchased in the ordinary course of business consistent with past practice; (g) liens evidenced by perfected security interests existing on October 1, 1999 and listed in the "lien searches" attached hereto as Schedule 7.2(a) and made a part hereof and liens evidenced by judgments entered against the Debtor prior to October 1, 1999 and listed in Schedule 7.2(b) and made a part hereof; and (h) liens existing after October 1, 1999 so long as no such lien (excluding judgment liens), individually, evidences indebtedness of more than $100,000 and so long as all such liens (including judgment liens), in the aggregate, evidence indebtedness of not more than $500,000. (d) Section 7.1 - Section 7.1 of the Existing Security Agreement is hereby amended by deleting the section in its entirety and substituting in place thereof the following: "7.1 Except as otherwise permitted by Section 1.3 of the Notes, sell, assign (by operation of law or otherwise), or otherwise dispose of any of the Collateral except sales or inventory in the ordinary course of business." (e) Section 10 - Section 10 of the Existing Security Agreement is hereby amended by inserting the following language at the end of the last sentence thereof: "; provided, however, that in connection with any disposition of assets by Aura Ceramics, Inc., MYS Corporation, Aura Sound, Inc. or Electrotec Productions, Inc. in accordance with Section 1.3 of the Notes, the Secured Party Agrees to execute termination statements with respect to such dispositions as reasonably requested by Debtor on or after the consummation of such transactions." 2. Effect of Amendment. This Amendment amends the Existing Security Agreement only to the extent and in the manner herein set forth, and in all other respects the Existing Security Agreement is ratified and confirmed. 3. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures hereto were upon the same instrument. 4. Governing Law. This Amendment and all rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed in the State of Delaware (without regard to principles of conflict of laws). Both parties irrevocably consent to the jurisdiction of the United States federal courts and the state courts located in Delaware with respect to any suit or proceeding based on or arising under this Amendment, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. Both parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. Both parties further agree that service of process upon a party mailed by first class mail shall be deemed in every respect effective service of process upon the party in any such suit or proceeding. Nothing herein shall affect either party's right to serve process in any other manner permitted by law. Both parties agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. IN WITNESS WHEREOF, Debtor and Secured Party have caused this First Amendment to Security Agreement to be executed by their proper corporate officers thereunto duly authorized as of the day and year first above written. AURA SYSTEMS, INC. By:______________________________ Name: Title: RGC INTERNATIONAL INVESTORS, LDC By: Rose Glen Capital Management, L.P., Investment Manager By: RGC General Partner Corp., as General Partner By: ______________________________ Wayne D. Bloch Managing Director 1 EX-10.21.2 10 SETTLEMENT AGREEMENT 10/22/99 RGC INTERNATIONAL SETTLEMENT AGREEMENT AND COMPLETE RELEASE OF ALL CLAIMS This Settlement Agreement and Complete Release of All Claims ("Agreement") dated as of October 22, 1999, is made and entered into by RGC International Investors, LDC, a Cayman Islands limited duration company (?RGC?), and AURA SYSTEMS, INC.( the "Company"). W I T N E S S E T H: WHEREAS, the Company has previously issued to RGC Convertible Debentures in the original aggregated principal amount of $21,500,000 (the ?Convertible Debentures?) and has issued Warrants (?Warrants?) to RGC, which Convertible Debentures and Warrants are presently owned by RGC; and WHEREAS, the Company has previously issued to RGC its Convertible Senior Secured Note dated October 7, 1998, in the original principal amount of $3,000,000 (the ?Secured Note?); and WHEREAS, the Secured Note is secured by a certain Security Agreement between the Company and RGC (the ?Aura Security Agreement?); and WHEREAS, in order to provide for additional security for the repayment of the Secured Note, certain subsidiaries of the Company entered into a Guaranty Agreement (the ?Guaranty Agreements?) in favor of RGC, which Guaranty Agreements were secured by Security Agreements between each of such subsidiaries and RGC (the ?Subsidiary Security Agreements?); and WHEREAS, pursuant to a certain Securities Purchase Agreement, annexed hereto as Exhibit ?A,? RGC proposes to sell its interests in the Convertible Debentures; WHEREAS, RGC and the Company have agreed that outstanding Warrants owned by RGC will be exchanged for 1,000,000 new warrants (the ?New Warrants?) and that the terms of the Secured Notes, the Aura Security Agreement and the Subsidiary Security Agreements will be amended as of the Closing under the Securities Purchase Agreement; and WHEREAS, RGC and the Company desire to enter into this Agreement, to be effective upon (i) the Closing of the purchase and sale of the Convertible Notes under the Securities Purchase Agreement, (ii) the amendment of the Secured Notes, the Aura Security Agreement and the Subsidiary Security Agreements, and (iii) the issuance of the New Warrants in exchange for the outstanding Warrants owned by RGC. NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, it is hereby agreed by and between the parties as follows: 1. Release by RGC. Effective as of the ?Effective Date? (as such quoted term is hereafter defined) RGC, for itself and for its employees, agents, predecessors and successors-in-interest, hereby irrevocably and unconditionally releases and forever discharges the Company and each of its subsidiaries, and each of their respective officers, directors, employees, agents, attorneys, and shareholders, former officers, directors, and employees, agents, attorneys and shareholders, predecessors, and successors-in-interest and each of them from any and all claims, causes of action, demands, damages, attorneys fees, or charges of whatever kind or nature known or unknown, suspected or unsuspected, fixed or contingent, which they now have, own, hold, or claim to have, or claim to own, or which they at any time, heretofore had, owned, held, or claimed to have or claimed to own, or which they at any time hereafter may, own, hold or claimed to have, or claimed to own, provided however, that nothing in this Paragraph 1 shall affect the rights of RGC under the Secured Note, the Aura Security Agreement, the Subsidiary Security Agreements, the Guarantee Agreements or the Securities Purchase Agreement (as each such agreement may be amended as contemplated in the ?Whereas? clauses set forth above). 2. Release by the Company. Effective as of the ?Effective Date? (as such quoted term is hereafter defined) the Company, for itself, its subsidiaries and for their respective employees, agents, predecessors and successors-in-interest, hereby irrevocably and unconditionally releases and forever discharges RGC and its investment manager and each of their respective officers, directors, employees, partners, agents, attorneys, and shareholders, former officers, directors, employees, partners, agents, attorneys and shareholders, predecessors, and successors-in-interest and each of them from any and all claims, causes of action, demands, damages, attorneys fees, or charges of whatever kind or nature known or unknown, suspected or unsuspected, fixed or contingent, which they now have, own, hold, or claim to have, or claim to own, or which they at any time, heretofore had, owned, held, or claimed to have or claimed to own, or which they at any time hereafter may, own, hold or claimed to have, or claimed to own, provided however, that nothing in this Paragraph 2 shall affect the rights of the Company under the Secured Note, the Aura Security Agreement, the Subsidiary Security Agreements, the Guarantee Agreements or the Securities Purchase Agreement (as each such agreement may be amended as contemplated in the ?Whereas? clauses set forth above). 3. Waiver of Defaults. RGC hereby waives any and all defaults existing on the Effective Date (as hereafter defined) (including events, facts and circumstances existing on the Effective Date (as hereafter defined) which with notice or passage of time or both could become events of default) under the Secured Note, the Aura Security Agreement, the Subsidiary Security Agreements, or the Guarantee Agreements. Notwithstanding the foregoing, the waiver set forth in this Section 3 shall not be applicable to any defaults existing on the Effective Date which have not been disclosed to RGC in writing if such defaults are both (i) material, and (ii) relate to breaches of covenants in the Secured Notes, the Aura Security Agreement or the Subsidiary Security Agreements which covenants are not being eliminated in their entirety by the amendments to the foregoing documents as of the Effective Date. 4. Effect of General Release. It is the intention of the parties that this Agreement shall be effective as a full and final accord and satisfactory relief of each and every matter as specifically or generally referred to. In furtherance of that intention, the parties hereby acknowledge that they are familiar with Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in its favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." The parties hereby waive and relinquish all rights and benefits which they have or may have under Section 1542 of the California Civil Code or the law of any other state or jurisdiction to the same or similar affect to the full extent that they may lawfully waive all such rights and benefits pertaining to the subject matter of this Agreement. 5. Subsequent Discoveries. The parties acknowledge that there is a risk that subsequent to the execution of this Agreement, they will discover facts, which are unknown or unanticipated at the time this Agreement is executed, which if known by them on a date that this Agreement is executed, may have materially affected their decisions to execute this Agreement. The parties expressly assume the risk of discovery of such unknown and unanticipated facts and that this Agreement shall be fully valid notwithstanding the discovery of any such facts. 6. No Assignment of Claims. Each party represents and warrants that they have not assigned or otherwise transferred or subrogated any interest in any claims which are the subject matter hereto, and agrees to indemnify, defend, and hold the other party harmless from any liability, loss, claims, demands, damages, costs, expenses or attorneys fees incurred by it as a result of any person or entity, including but not limited to, underwriters and insurance carriers, asserting such assignment, transfer, or subrogation. 7. Covenant Not to Sue. The parties covenant and agree not to sue or bring any action, whether federal, state, or local, judicial or administrative, now or at any future time, against each other or any of the released parties, with respect to any claim released hereby. The parties represent and warrant and represent that they have not commenced any such action or proceeding as of the execution date of this Agreement. 8. Legal Fees. If any party files a lawsuit based on legal claims that either party has released, the party filing a lawsuit will pay for all costs incurred by the defending party, including reasonable attorneys fees, in defending against the claims asserted by that party. 9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs, administrators, executors, successors, and the assignees of each of the parties. 10. Miscellaneous. Whenever this Agreement so requires, the singular number shall include the plural, the plural shall include the singular, and the masculine gender shall include the feminine and neuter genders. 11. Severability. If any portion of this Agreement shall be held to be illegal or invalid by a court of competent jurisdiction, the validity of the remainder of this Agreement shall not be affected. 12. Entire Agreement. This Agreement and the agreements referenced herein memorializes and constitutes the entire agreement and understanding between the parties and supersedes and replaces all prior negotiations, proposed agreements and agreements whether written or unwritten. Each of the parties to this Agreement acknowledges that no other party nor any agent or attorney of any other party has made any promise, representation, or warranty whatsoever, express or implied, which is not expressly referred to in this Agreement. 13. Governing Law. This Agreement shall be deemed to have been made in the State of California and shall, for all purposes be governed by and construed exclusively in accordance with the laws thereof, regardless of where any court action or proceeding is brought in connection with this Agreement. 14. Counterparts. This Agreement may be executed in two or more counterparts, and an executed facsimile copy or counterpart shall be binding and enforceable in the same manner as the original. 15. Effective Date of Agreement. This Agreement shall become effective upon the consummation of all of the following events: (i) the Closing of the purchase and sale of the Convertible Debentures pursuant to the Securities Purchase Agreement, and (ii) the amendment of the Secured Notes, the Aura Security Agreement and the Subsidiary Security Agreements, and (iii) the issuance of the New Warrants in exchange for the outstanding Warrants owned by RGC (the ?Effective Date?). If the Effective date shall not have occurred by October 22, 1999, this Agreement shall become null and void, and each of the respective parties shall be restored to their positions prior to entering into this Agreement. IN WITNESS THEREOF, the parties have executed this Agreement as of the date first written above. AURA SYSTEMS, INC. By:____________________________ Zvi Kurtzman, CEO RGC INTERNATIONAL INVESTORS, LDC By: Rose Glen Capital Management, L.P., Investment Manager By: RGC General Partner Corp., as General Partner By:____________________________ Wayne D. Bloch, Managing Director EX-10.21.3 11 STOCK PURCHASE WARRANT ISSUED TO RGC INTERNATIONAL THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. Right to Purchase 1,000,000 Shares of Common Stock, par value $0.005 per share STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, RGC INTERNATIONAL INVESTORS, LDC ("RGC") or its registered assigns, is entitled to purchase from AURA SYSTEMS, INC., a Delaware corporation (the "Company"), at any time or from time to time during the period specified in Paragraph 2 hereof, One Million (1,000,000) fully paid and nonassessable shares of the Company's Common Stock, par value $0.005 per share (the "Common Stock"), at an exercise price of $0.375 per share (the "Exercise Price"). The term "Warrant Shares," as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment as provided in Paragraph 4 hereof. This Warrant is subject to the following terms, provisions, and conditions: 1. Manner of Exercise; Issuance of Certificates; Payment for Shares. Subject to the provisions hereof, this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the "Exercise Agreement"), to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), and upon (i) payment to the Company in cash, by certified or official bank check or by wire transfer for the account of the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant Shares by the holder is not then registered pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), delivery to the Company of a written notice of an election to effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant Shares specified in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such shares (or an election to effect a Cashless Exercise has been made) as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding two (2) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise a number of Warrants (or portions thereof) in excess of the number of Warrants (or portions thereof) upon exercise of which the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised Warrants and the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (ii) the number of shares of Common Stock issuable upon exercise of the Warrants (or portions thereof) with respect to which the determination described herein is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (i) hereof. 2. Period of Exercise. This Warrant is exercisable at any time or from time to time on or after October 22, 1999 (the "Issue Date") and before 5:00 p.m., New York City time on the fifth (5th) anniversary of the Issue Date (the "Exercise Period"). 3. Certain Agreements of the Company. The Company hereby covenants and agrees as follows: (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. (b) Reservation of Shares. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant. (c) Listing. The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of the Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (d) Certain Actions Prohibited. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (e) Successors and Assigns. During the Exercise Period, the Company shall maintain its corporate existence and shall not merge, consolidate or sell all or substantially all of the Company's assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company's assets, where (i) the successor or acquiring entity and, if an entity different from the successor or acquiring entity, the entity whose securities for which the Warrant shall become entitled to purchase pursuant to Section 4(e), assumes the Company's obligations hereunder and under the agreements and instruments entered into in connection herewith and (ii) the entity whose securities for which the Warrant shall become entitled to purchase pursuant to Section 4(e), is a publicly traded corporation whose Common Stock is listed for trading on Nasdaq, Nasdaq SmallCap, NYSE or AMEX. 4. Antidilution Provisions. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4. In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent. (a) Adjustment of Exercise Price and Number of Shares upon Issuance of Common Stock. Except as otherwise provided in Paragraphs 4(c) and 4(e) hereof, if and whenever on or after the Issue Date of this Warrant, the Company issues or sells, or in accordance with Paragraph 4(b) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Market Price (as hereinafter defined) on the date of issuance (or deemed issuance) of such Common Stock (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise Price will be reduced to a price determined by multiplying the Exercise Price in effect immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance divided by the Market Price in effect immediately prior to the Dilutive Issuance, and (ii) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately after the Dilutive Issuance. (b) Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the following will be applicable: (i)Issuance of Rights or Options. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Market Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options. (ii Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Market Price on the date of issuance of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (iii)Change in Option Price or Conversion Rate. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv)Treatment of Expired Options and Unexercised Convertible Securities. If, in any case, the total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Exercise Price then in effect will be readjusted to the Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued. (v) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company. (vi) Exceptions to Adjustment of Exercise Price. No adjustment to the Exercise Price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of issuance of this Warrant; (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan of the Company now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the independent members of the Board of Directors of the Company or a majority of the members of a committee of independent directors established for such purpose; (iii) upon the exercise of the Warrants; or (iv) upon aggregate issuance of up to $10,000,000 of Common Stock in a private placement undertaken by the Company at a price per share greater than or equal to $0.27. (c) Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased. (d) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Paragraph 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. (e) Consolidation, Merger or Sale. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to insure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless prior to the consummation thereof, the successor or acquiring entity (if other than the Company) and, if an entity different from the successor or acquiring entity, the entity whose capital stock or assets the holders of the Common Stock of the Company are entitled to receive as a result of such consolidation, merger or sale or conveyance assumes by written instrument the obligations under this Paragraph 4 and the obligations to deliver to the holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder of this Warrant may be entitled to acquire. (f) Distribution of Assets. In case the Company shall declare or make any distribution of its assets (including cash) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining stockholders entitled to such distribution, but prior to the date of distribution, the holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have been payable to the holder had such holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such distribution. (g) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the chief financial officer of the Company. (h) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. (i) No Fractional Shares. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise. (j) Other Notices. In case at any time: (i)The Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution (including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock; (ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 30 days prior to the record date or the date on which the Company's books are closed in respect thereto. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above. (k) Certain Events. If any event occurs of the type contemplated by the adjustment provisions of this Paragraph 4 but not expressly provided for by such provisions, the Company will give notice of such event as provided in Paragraph 4(g) hereof, and the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so that the rights of the holder of this Warrant shall be neither enhanced nor diminished by such event. (l) Certain Definitions. (i) "Common Stock Deemed Outstanding" shall mean the number of shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (x) pursuant to Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum total number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any. (ii) "Market Price," as of any date, (i) means the average of the last reported sale prices for the shares of Common Stock on the Nasdaq National Market ("Nasdaq") for the five (5) trading days immediately preceding such date as reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holder of this Warrant and the Company ("Bloomberg"), or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, at the option of a majority-in-interest of the holders of the outstanding Warrants by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the corporation. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. (iii) "Common Stock," for purposes of this Paragraph 4, includes the Common Stock, par value $0.005 per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, par value $0.005 per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(e) hereof, the stock or other securities or property provided for in such Paragraph. 5. Issue Tax. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant. 6. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 7. Transfer, Exchange, and Replacement of Warrant. (a) Restriction on Transfer. This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary. (b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender. (c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. (d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the holder hereof or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7. (e) Register. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant. (f) Exercise or Transfer Without Registration. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first holder of this Warrant, by taking and holding the same, represents to the Company that such holder is acquiring this Warrant for investment and not with a view to the distribution thereof. 8. [Intentionally Omitted]. 9. Notices. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to such holder at the address shown for such holder on the books of the Company, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 2335 Alaska Avenue, El Segundo, California 90245 Attention: President, or at such other address as shall have been furnished to the holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 9, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be. 10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THE STATE OF DELAWARE (WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS). BOTH PARTIES IRREVOCABLY CONSENT TO THE JURISDICTION OF THE UNITED STATES FEDERAL COURTS AND THE STATE COURTS LOCATED IN DELAWARE WITH RESPECT TO ANY SUIT OR PROCEEDING BASED ON OR ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY AND IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH SUIT OR PROCEEDING MAY BE DETERMINED IN SUCH COURTS. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. 11. Miscellaneous. (a) Amendments. This Warrant and any provision hereof may only be amended by an instrument in writing signed by the Company and the holder hereof. (b) Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof. (c) Cashless Exercise. Notwithstanding anything to the contrary contained in this Warrant, if the resale of the Warrant Shares by the holder hereof is not then registered pursuant to an effective registration statement under the Securities Act, this Warrant may be exercised by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the holder hereof shall surrender this Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the then current Market Price per share of the Common Stock and the Exercise Price, and the denominator of which shall be the then current Market Price per share of Common Stock. (d) Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holder hereof by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the holder hereof shall be entitled, in addition to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure any breaches of the provisions of this Warrant and to enforce specifically the terms and provisions of this Warrant, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. AURA SYSTEMS, INC. By: _____________________________ Name: _____________________________ Title: _____________________________ Dated as of October 22, 1999 1-PH/1096751.3 FORM OF EXERCISE AGREEMENT Dated: ________ __, 199_ To: Aura Systems, Inc. The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase ________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in cash or by certified or official bank check in the amount of, or, if the resale of such Common Stock by the undersigned is not currently registered pursuant to an effective registration statement under the Securities Act of 1933, as amended, by surrender of securities issued by the Company (including a portion of the Warrant) having a market value (in the case of a portion of this Warrant, determined in accordance with Section 11(c) of the Warrant) equal to $_________. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to: Name: ___________________________________ Signature: ________________________________ Address: ________________________________ Note: The above signature should correspond exactly with the name on the face of the within Warrant. and, if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash. FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, to: Name of Assignee Address No of Shares , and hereby irrevocably constitutes and appoints ______________ ________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises. Dated: ________ __, 199_ In the presence of: - ------------------------- Name: ____________________________________ Signature: _________________________________ Title of Signing Officer or Agent (if any): Address: __________________________________ Note: The above signature should correspond exactly with the name on the face of the within Warrant. EX-10.21.4 12 AMENDED AND RESTATED CONVERTIBLE NOTE 10/7/98 10.21.4 THE CONVERTIBLE SENIOR SECURED NOTE DATED OCTOBER 7, 1998 MADE BY AURA SYSTEMS, INC. IN FAVOR OF RGC INTERNATIONAL INVESTORS, LDC (THE "CONVERTIBLE SENIOR SECURED NOTE"), IS HEREBY AMENDED AND RESTATED EFFECTIVE AS OF OCTOBER 22, 1999. ALL LIABILITIES AND OBLIGATIONS OF AURA SYSTEMS, INC. UNDER THE CONVERTIBLE SENIOR SECURED NOTE SHALL HEREAFTER BE EVIDENCED BY THIS NOTE. AMENDED AND RESTATED CONVERTIBLE SENIOR SECURED NOTE El Segundo, California $3,000,000.00 October 7, 1998 FOR VALUE RECEIVED, Aura Systems, Inc., a Delaware corporation (hereinafter called the "Borrower"), hereby promises to pay to the order of RGC International Investors, LDC or registered assigns (the "Holder") the principal amount of Three Million Dollars ($3,000,000.00) in equal quarterly installments of $283,679.00 beginning on the 22nd day of January, 2000 and continuing on the 22nd day of each successive April, July, October and January until payment in full of the principal amount; provided, however, that if at any time such quarterly payments are less frequent than any regularly scheduled payments of principal or interest to the holders of unsecured claims ("Unsecured Scheduled Payments") pursuant to any plan of reorganization, repayment or restructuring between the Borrower and that certain Unofficial Creditors' Committee of Borrower, organized as of July 26, 1999, or any similarly situated committee, then, following payment of the next quarterly installment due after the date of the first Unsecured Scheduled Payment, this Note shall be thereafter payable in equal monthly installments of $94,009.00 on the 22nd day of each month until payment in full of the principal amount. Any remaining unpaid principal balance of this Note, together with accrued but unpaid interest, shall be due and payable in full on October 22, 2002 (the "Maturity Date"). The Borrower may prepay the principal and interest on this Note, without premium or penalty, at any time prior to the Maturity Date. Interest shall accrue on the unpaid principal balance hereof at the rate of eight percent (8%) per annum from October 22, 1999 (the "Issue Date") until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise, and shall be computed on the basis of a 365-day year and the actual number of days elapsed. Accrued interest hereunder shall be payable in arrears on the date for principal payments as set forth above. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of sixteen percent (16%) per annum (or such lesser amount as is allowed by law) from the due date thereof until the same is paid ("Default Interest"), such Default Interest to be payable upon demand. All payments of principal and accrued interest shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement, dated October 7, 1998, pursuant to which this Note was originally issued (the "Purchase Agreement"). This Note is a secured obligation and is subject to the terms of (i) that certain Security Agreement, dated as of October 7, 1998 and amended as of October 22, 1999, by and between the Holder and the Borrower, (the "Borrower Security Agreement"), (ii) those certain Guarantee Agreements, dated as of October 7, 1998, by and between each of the Borrower's subsidiaries and the Holder (the "Guarantee Agreements), and (iii) those certain Security Agreements, dated as of October 7, 1998, and amended as of October 22, 1999, by and between each of the Borrower's subsidiaries and the Holder (the "Subsidiary Security Agreements" and, together with the Borrower Security Agreement and the Guarantee Agreements, the "Security Agreements"). All terms, covenants, conditions and agreements contained in the Security Agreements are hereby made a part of this Note as if they were fully set forth herein, and Borrower promises and agrees to keep, observe and perform the same in accordance with the terms thereof. The Convertible Senior Secured Note dated October 7, 1998 made by Aura Systems, Inc. in favor of RGC International Investors, LDC (the "Convertible Senior Secured Note") is amended and restated effective as of October 22, 1999. All liabilities and obligations of the Borrower under the Convertible Senior Secured Note shall hereafter be evidenced by this Note. Upon the occurrence of an Event of Default (as defined herein), the entire unpaid principal indebtedness of this Note, together with all interest accrued and Default Interest together with all other charges provided for herein or in the Security Agreements, shall, at the option of Holder, become due and payable immediately, without presentation, demand, protest or further notice (all of which are expressly waived by Borrower), and payment of same may be enforced and recovered in whole or in part at any time by the Holder. Borrower agrees to pay on demand any costs, indemnification claims, or other expenses arising under the Security Agreements and all costs of collection, including without limitation attorneys' fees, incurred by the Holder hereof with respect to any default by Borrower hereunder; such amounts, until paid by Borrower, shall be added to the principal hereof and be secured by the Security Agreements. Any and all payments received by the Holder hereof following a default by Borrower may, at the Holder's option, be applied to any and all sums payable by Borrower hereunder in whatever order and manner the Holder may elect, including, without limitation, the following: first to the payment of any and all costs and expenses incurred by the Holder with respect to such default, second to payments overdue hereunder (in whatever order the Holder may elect), third to accrued interest and fourth to principal. The Holder may make such application notwithstanding any contrary request or purported conditional payment by Borrower. The granting by the Holder hereof, with or without notice, of any forbearance or any extension of time for payment of any sum or for the performance of any covenant, condition or agreement due hereunder or under the Security Agreements, or the granting of any other indulgence, or the taking or releasing or subordinating of any security or additional security for the indebtedness evidenced hereby, or any other modification or amendment of this Note or the Security Agreements, shall in no way release or discharge the liability of Borrower on this Note, whether or not granted or done with the knowledge or consent of Borrower. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT OF RECORD WITHIN THE STATE OF DELAWARE OR ELSEWHERE TO APPEAR FOR BORROWER AND IN CASE ANY DEFAULT HAS OCCURRED HEREUNDER OR UNDER THE SECURITY AGREEMENTS, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, TO CONFESS AND ENTER JUDGMENT, OR A SERIES OF JUDGMENTS, AGAINST BORROWER IN FAVOR OF THE THEN HOLDER OF THIS NOTE AS OF ANY TERM, FOR THE UNPAID BALANCE OF THE PRINCIPAL DEBT HEREOF (INCLUDING WITHOUT LIMITATION ALL SUMS ADVANCED OR PAID BY ANY HOLDER TO OR ON BEHALF OF BORROWER OR ADDED TO THE PRINCIPAL HEREOF PURSUANT TO THE TERMS OF THIS NOTE OR THE SECURITY AGREEMENTS) TOGETHER WITH UNPAID INTEREST AND DEFAULT INTEREST THEREON, COSTS OF SUIT AND REASONABLE ATTORNEY'S FEES AND COSTS. THIS NOTE OR A COPY VERIFIED BY AFFIDAVIT SHALL BE SUFFICIENT WARRANT FOR ANY SUCH ATTORNEY TO SO PROCEED. ON SUCH JUDGMENT OR JUDGMENTS ONE OR MORE EXECUTIONS MAY ISSUE FORTHWITH. THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL CONTINUE AND MAY BE EXERCISED FROM TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER AND UNDER THE SECURITY AGREEMENTS, ANY LAW, RULE OF COURT OR CUSTOM NOTWITHSTANDING. Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission) or sent by courier or three (3) days after being deposited in the United States mail, certified, with postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the address of the Holder shall be c/o Rose Glen Capital Management, L.P., 3 Bala Plaza East, Suite 200, Bala Cynwyd, Pennsylvania 19004, facsimile number: (610) 617-0570 and the address of the Borrower shall be Aura Systems, Inc., 2335 Alaska Avenue, El Segundo, California 90245, facsimile number: (310) 643-8719. Both the Holder and the Borrower may change the address for service by service of written notice to the other as herein provided. This Note is transferrable at the Holder's option and shall be binding upon Borrower and its successors and assigns. The rights under and benefits of this Note shall inure to Holder and its successors and assigns. Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term "Note" and all references thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. If any term or provision of this Note or the application thereof to any person or circumstance shall be invalid, illegal or unenforceable in any respect, the remainder of this Note shall be construed without such provision, and the application of such term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable, as the case may be, shall not be affected thereby, and all other terms and provisions of this Note shall be valid and enforceable to the fullest extent permitted by law and equity. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed in the State of Delaware (without regard to principles of conflict of laws). Both parties irrevocably consent to the jurisdiction of the United States federal courts and the state courts located in Delaware with respect to any suit or proceeding based on or arising under this Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. Both parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. Both parties further agree that service of process upon a party mailed by first class mail shall be deemed in every respect effective service of process upon the party in any such suit or proceeding. Nothing herein shall affect either party's right to serve process in any other manner permitted by law. Both parties agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. The following additional terms shall apply to this Note: ARTICLE I - CERTAIN COVENANTS 1.1 Distributions on Capital Stock. So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder's written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of the Borrower's common stock, par value $0.005 per share (the "Common Stock"), solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock. 1.2 Restriction on Stock Repurchases. So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder's written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares; provided, however, that this Paragraph 1.2 shall not be deemed to prohibit (a) the repurchase by the Borrower of (i) that certain Convertible Term Debenture, due June 27, 1999, issued to JNC Opportunity Fund, Ltd., (ii) that certain Convertible Debenture issued on December 31, 1997 to CEFEO Investments, Ltd., (iii) that certain note issued to Isosceles Fund Ltd. on October 27, 1998, or (iv) those certain Variable Interest Convertible Notes of the Company issued on September 30, 1997, and held by Infinity Investors Ltd. and certain other funds that are advised by H.W. Finance, in each case on terms no more favorable than those given to Holder pursuant to that certain Securities Purchase Agreement, dated as of October 13, 1999, by and between the Holder and Algo Technologies, Inc., a California corporation (the "Algo Purchase Agreement"), or (b) the issuance by the Borrower of shares of Common Stock to each of Excalibur Limited Partnership, P.R.I.F., L.P. and Gundyco in trust for RRSP 50-9886-19 (collectively, the "NewCom Investors") in an amount not in excess of the shares to which such parties are entitled pursuant to those certain "Aura Repricing Rights" contained in those certain Subscription Agreements, each dated as of November 30, 1998, between NewCom, Inc. and the NewCom Investors (as amended by that certain Amendment Agreement, dated December 28, 1998, between NewCom, Inc. and the NewCom Investors). 1.3 Sale of Assets. So long as Borrower shall have any obligation under this Note, the Borrower shall not, and shall not permit any of its Significant Subsidiaries (as defined in Section 2.3 herein) to, sell, lease or otherwise dispose of any of its or their assets outside the ordinary course of business without the Holder's written consent; provided, however, that this Paragraph 1.3 shall not be deemed to prohibit (a) any such disposition of assets the entire proceeds of which are used to repay this Note, (b) any such disposition of assets by Aura Ceramics, Inc. or (c) any such disposition of assets effected prior to October 1, 1999 by MYS Corporation, AuraSound, Inc. and Electrotec Productions, Inc. 1.4 Advances and Loans. So long as Borrower shall have any obligation under this Note, the Borrower shall not without the Holder's written consent lend money, give credit or make advances to, or otherwise make an investment in, any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the Issue Date and which the Borrower has informed the Holder in writing prior to the date hereof, and (b) made in the ordinary course of business (including intercompany transactions consistent with past practice). 1.5 Contingent Liabilities. So long as Borrower shall have any obligation under this Note, the Borrower shall not without the Holder's written consent assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection and except assumptions, guarantees, endorsements and contingencies (a) in existence or committed on the Issue Date and which the Borrower has informed the Holder in writing prior to the date hereof, and (b) similar transactions in the ordinary course of business. 1.6 Seniority of Note. So long as Borrower shall have any obligation under this Note, the Borrower shall not incur any obligation with respect to indebtedness which is senior in right of payment to this Note (including, without limitation, making any obligation outstanding as of the Issue Date senior in right of payment to this Note) other than obligations with respect to indebtedness incurred in connection with a Permitted Lien (as defined in the Borrower Security Agreement); provided, however, that the foregoing language shall not be deemed to restrict or otherwise limit Borrower's ability to make payments with respect to indebtedness which is junior in right of payment to this Note to the extent that (i) at the time of such payment, the Borrower is not otherwise in default under the terms of this Note and (ii) the making of such payment by the Borrower would not result in the Borrower's inability to make payments of principal and interest hereunder. ARTICLE II - EVENTS OF DEFAULT The Borrower shall be in default under this Note if any one or more of the following events (each an "Event of Default") occurs: 2.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or interest thereon when due, whether at maturity, upon acceleration or otherwise, and such failure continues uncured for a period of (10) days; 2.2 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note or Sections 2, 3, 4, 5, 6 or 7 of the Security Agreement or any subsidiary of the Borrower breaches any material covenant or other material law or condition contained in Sections 2, 3, 4, 5, 6 or 7 of any Subsidiary Security Agreement, and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder; 2.3 Receiver or Trustee. The Borrower or any Significant Subsidiary (as defined below) of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed. For purposes hereof, the term "Significant Subsidiary" shall mean any subsidiary of the Borrower which on the Issue Date fits (based upon the financial statements of the Borrower dated as of and for the periods ending September 30, 1999) or which may in the future fit within the definition set forth in Rule 1-02(w) of Regulation S-X promulgated under the Securities Act of 1933, as amended, but shall specifically exclude NewCom, Inc.; 2.4 Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any Significant Subsidiary of the Borrower or any of its property or other assets for more than $1,000,000, and shall remain unvacated, unbonded or unstayed (by court order or by the written agreement of the judgment creditor) for a period of twenty (20) days unless otherwise consented to by the Holder in its sole discretion; provided, however, that the existing judgment against the Borrower and certain of its subsidiaries in favor of NEC Technologies, Inc. entered in Case No. YC033592, Los Angeles Superior Court, pursuant to a Settlement Agreement, dated December 17, 1998, in the amount of $2,951,854 (plus interest) shall not constitute an Event of Default under this Paragraph 2.4; 2.5 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any Significant Subsidiary of the Borrower; provided, however, that in the case of an involuntary bankruptcy, such involuntary bankruptcy shall continue undischarged or undismissed for a period of sixty (60) days; 2.6 Sale of Assets, Merger. The sale, conveyance or disposition of all or substantially all of the assets of the Borrower or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor. "Person" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization. IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this 22nd day of October, 1999. AURA SYSTEMS, INC. By:_____________________________________ Name: Title: ACKNOWLEDGED AND AGREED TO BY: RGC INTERNATIONAL INVESTORS, LDC By: Rose Glen Capital Management, L.P., Investment Manager By: RGC General Partner Corp., as General Partner By: ______________________________ Wayne D. Bloch Managing Director EX-10.22 13 SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS 12/1/99 SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS This Settlement Agreement and Release of Claims ("Agreement") dated as of December 1, 1999, is made and entered into by JNC OPPORTUNITY FUND, LTD., a Cayman Islands company ("JNC"), and AURA SYSTEMS, INC., a Delaware company (the "Company"). W I T N E S S E T H: WHEREAS, the Company has previously issued to JNC a Convertible Debenture dated June 27, 1997, in the original principal amount of $4,000,000 (the "Convertible Debenture") pursuant to a certain Securities Purchase Agreement between JNC and the Company dated as of June 27, 1997, as amended by an agreement dated as of November 21, 1997 (the Securities Purchase Agreement, as amended is referred to herein as the "Purchase Agreement"), and has issued Warrants ("Warrants") to JNC, which Convertible Debenture and Warrants are presently owned by JNC; and WHEREAS, on October 21, 1998, JNC filed a Complaint against the Company, entitled JNC Opportunity Fund v. Aura Systems, Inc. (CA98-595) (the "Action"), seeking damages of not less than $3,584,983 arising out the alleged breach of the Purchase Agreement by the Company; and WHEREAS, the parties desire to enter into this Agreement in order to terminate the Action and to provide for (i) a cash payment by the Company to JNC of $430,000, (ii) the issuance to JNC of Three Million Five Hundred Thousand (3,500,000) shares of the Company's Common Stock (the "Shares") pursuant to the Convertible Debenture, (iii) the issuance by the Company to JNC of a warrant, in the form attached hereto, entitling JNC from time to time to purchase One Hundred Thirteen Thousand (113,000) shares of Company's Common Stock at an exercise price of $0.375 per share (the "Settlement Warrant"), and (iv) the surrender and cancellation of the Convertible Debenture and the Warrants; and WHEREAS, contemporaneously with the execution of this Agreement the parties are entering into an Escrow Agreement (the "Escrow Agreement") with Robinson Silverman Pearce Aronsohn & Berman LLP, as escrow agent ("Escrow Agent") to facilitate the consummation of the transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, it is hereby agreed by and between the parties as follows: 1. The Exchange. Within three business days of the date of execution of this Agreement, the parties shall deliver to the Escrow Agent, 1290 Avenue of the Americas, New York, NY 10104, to hold in escrow pending the consummation of the exchange contemplated by this Section 1, the following: (A) the Company shall deliver (i) a stock certificate evidencing the Shares, which are being issued as a partial conversion of the Debenture, registered in the name of JNC, free and clear of any restrictive legends, together with a legal opinion to the effect that such shares have been validly issued and may be resold under Rule 144 promulgated under the Securities Act of 1933 and a certification that such opinion has been accepted by the transfer agent for the Common Stock for such purchase, (ii) the sum of Four Hundred Thirty Thousand Dollars ($430,000) (the "Cash Payment"), in immediately available funds to the account specified prior thereto for such purpose by Escrow Agent, (iii) the Settlement Warrant, registered in the name of JNC, and (iv) two executed originals of this Agreement; and (B) JNC shall deliver (i) the Convertible Debenture and Warrant, and (ii) two executed originals of this Agreement. 2. Closing. Subject to and in accordance with the Escrow Agreement, Escrow Agent shall notify each of the Company and JNC when it shall have received all of the items required to have been delivered by the parties pursuant to Section 1 (each a "Closing Item," and collectively, the "Closing Items"). Promptly thereafter, Escrow Agent shall deliver without liability or other risk to any party, which is hereby waived, (A) to the Company: the Convertible Debenture, the Warrant and one executed original of this Agreement and (B) to or as directed by JNC: the Cash Payment, the Settlement Warrant, the Shares (and the related Rule 144 opinion) and one executed original of this Agreement (the date that all of the Closing Items are received is the "Closing Date"). JNC agrees that within two business days of the Closing Date it will cause the Action to be dismissed with prejudice. If Escrow Agent shall not have received all of the Closing Items in satisfactory form and when required under this Agreement, this Agreement may be terminated by the non-defaulting party as if it never existed and Escrow Agent's sole duties and obligations shall be as set forth in the Escrow Agreement 3. Warranties of JNC. JNC represents and warrants to the Company as follows: (a) Authorization; Enforcement. JNC has all requisite power and authority to enter into and perform this Agreement and to consummate the exchange contemplated hereby. This Agreement has been duly and validly authorized by JNC. This Agreement has been duly executed by JNC and upon full delivery of the Closing Items will constitute the valid and binding obligation of JNC enforceable against it in accordance with its terms. (b) Information; Acknowledgment of Risk. The Company has furnished JNC and its advisors, if any, with all materials relating to the business, finances and operations of the Company which have been requested by JNC and its advisors. JNC has been afforded the opportunity to ask questions of the Company and has received satisfactory answers to such questions concerning the terms of the securities offered, sold or exchanged hereby. JNC is aware that the Shares and the Settlement Warrant are speculative, that an investment in the Company involves a high degree of risk, that it may lose its entire investment and JNC can afford to bear the risks of an investment in the Company. JNC is a sophisticated investor with considerable experience in investments of this nature. JNC acknowledges that the Company makes no representations or warranties with respect to the Company, the Shares or the Settlement Warrant other than those representations or warranties set forth in this Agreement, and JNC has in no way relied upon any other statement made or information provided by the Company. (c) Accredited Investor. JNC is an "accredited investor" within the meaning of Regulation D of the Securities Act of 1933 (the "Securities Act"). (d) Non-Affiliate Status. JNC is not presently or at any time within the past three months, and on the Closing Date will not be, an "affiliate" of the Company as such quoted term is defined in the Securities Act. 4. Warranties of the Company. The Company represents and warrants to JNC as follows: (e) (a) Authorization; Enforcement. The Company has all requisite power and authority to enter into and perform this Agreement and to consummate the exchange contemplated hereby. This Agreement has been duly and validly authorized by the Company. This Agreement has been duly executed by the Company and upon full delivery of the Closing Items will constitute the valid and binding obligation of the Company enforceable against it in accordance with its terms. (b) Ownership of Shares. On the Closing Date the Shares, when delivered to JNC in accordance with the terms of this Agreement (i) will be free and clear of any security interests, liens, claims or other encumbrances, (ii) will have been duly and validly authorized and delivered, fully paid and nonassessable and will be valid and binding obligations of the Company, (iii) will not have been, individually and collectively, issued or sold in violation of any preemptive or other similar rights of the holders of any securities or obligations of the Company, (iv) will not subject the JNC to personal liability by reason of being a shareholder, and (v) will be eligible for sale under Rule 144(k) of the Securities Act. (c) No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the exchange contemplated hereby do not and will not (i) conflict with or violate any provision of the company's certificate of incorporation or bylaws, or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, acceleration or cancellation (with or without notice, lapse of time or both ) of, any agreement or other obligation of the Company, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations). (d) Filing, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court, other governmental authority, person or entity in connection with the execution, delivery and performance by the Company of this Agreement other than the filing of a Form D pursuant to the Securities Act of 1933. (e) Other Arrangements. The Company has negotiated settlements with certain of its investors in connection with a general restructuring of the Company by such investors, i.e. RGC International Investors, LDC ("RGC"), and the investors represented by HW Partners, L.P. The Company has not yet reached an agreement with the Isosceles Fund. Schedule One to this Agreement sets forth the amount of cash and securities issued or proposed to be issued to RGC and HW Investors, L.P. The Company understands that the accuracy and completeness of this representation and warranty is a material inducement to JNC's willingness to enter into this Agreement. 5. Release by JNC. Effective as of the Closing Date JNC, for itself and for its employees, agents, predecessors and successors-in-interest, hereby irrevocably and unconditionally releases and forever discharges the Company and each of its subsidiaries, and each of their respective officers, directors, employees, agents, attorneys, and shareholders, former officers, directors, and employees, agents, attorneys and shareholders, predecessors, and successors-in-interest and each of them from any and all claims, causes of action, demands, damages, attorneys fees, or charges of whatever kind or nature known or unknown, suspected or unsuspected, fixed or contingent, which they now have, own, hold, or claim to have, or claim to own, or which they at any time, heretofore had, owned, held, or claimed to have or claimed to own, from the beginning of the world through the date of this Agreement, including claims arising out of the Action. 6. Release by the Company. Effective as of the Closing Date the Company, for itself, its subsidiaries and for its and their respective employees, agents, predecessors and successors-in-interest, hereby irrevocably and unconditionally releases and forever discharge JNC and each of its officers, directors, employees, agents, attorneys, and shareholders, former officers, directors, and employees, agents, attorneys and shareholders, predecessors, and successors-in-interest and each of them from any and all claims, causes of action, demands, damages, attorneys fees, or charges of whatever kind or nature known or unknown, suspected or unsuspected, fixed or contingent, which they now have, own, hold, or claim to have, or claim to own, or which they at any time, heretofore had, owned, held, or claimed to have or claimed to own, from the beginning of the world through the date of this Agreement, including claims arising out of the Action. 4. 7. Effect of General Release.It is the intention of the parties that this Agreement shall be effective as a full and final accord and satisfactory relief of each and every matter as specifically or generally referred to. In furtherance of that intention, the parties hereby acknowledge that they are familiar with Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in its favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." The parties hereby waive and relinquish all rights and benefits which they have or may have up to the date of this Agreement under Section 1542 of the California Civil Code or the law of any other state or jurisdiction to the same or similar affect to the full extent that they may lawfully waive all such rights and benefits pertaining to the subject matter of this Agreement. 8. Subsequent Discoveries. The parties acknowledge that there is a risk that subsequent to the execution of this Agreement, they will discover facts, which are unknown or unanticipated at the time this Agreement is executed, which if known by them on a date that this Agreement is executed, may have materially affected their decisions to execute this Agreement. The parties expressly assume the risk of discovery of such unknown and unanticipated facts and that this Agreement shall be fully valid notwithstanding the discovery of any such facts. 9. No Assignment of Claims. Each party represents and warrants that they have not assigned or otherwise transferred or subrogated any interest in any claims which are the subject matter hereto. 10. Covenant Not to Sue. The parties covenant and agree not to sue or bring any action, whether federal, state, or local, judicial or administrative, now or at any future time, against each other or any of the released parties, with respect to any claim released hereby. The parties represent and warrant and represent that they have not commenced any such action or proceeding as of the execution date of this Agreement except the Action. 11. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs, administrators, executors, successors, and the assignees of each of the parties. 12. Miscellaneous. Whenever this Agreement so requires, the singular number shall include the plural, the plural shall include the singular, and the masculine gender shall include the feminine and neuter genders. 13. Severability. If any portion of this Agreement shall be held to be illegal or invalid by a court of competent jurisdiction, the validity of the remainder of this Agreement shall not be affected. 14. Entire Agreement. This Agreement and the agreements referenced herein memorializes and constitutes the entire Agreement and understanding between the parties and supersedes and replaces all prior negotiations, proposed Agreements and Agreements whether written or unwritten. Each of the parties to this Agreement acknowledges that no other party nor any agent or attorney of any other party has made any promise, representation, or warranty whatsoever, express or implied, which is not expressly contained in this Agreement. Each party further acknowledges that it has not executed this Agreement in reliance upon a collateral promise, representation, or warranty. 15. Governing Law. This Agreement shall be deemed to have been made in the State of California and shall, for all purposes be governed by and construed exclusively in accordance with the laws thereof, regardless of where any court action or proceeding is brought in connection with this Agreement. 16. Counterparts. This Agreement may be executed in two or more counterparts, and an executed facsimile copy or counterpart shall be binding and enforceable in the same manner as the original. [REMAINER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS THEREOF, the parties have executed this Agreement effective as of the date first written above. AURA SYSTEMS, INC. By:____________________________ Zvi Kurtzman, CEO JNC OPPORTUNITY FUND, LTD. By:____________________________ Name: Title: Schedule One RGC International Investors, LDC: Five Million Dollars ($5,000,000) Cash, One Million (1,000,000) Warrants exercisable at $.037 per share, An additional Five Hundred Thousand (500,000) Warrants to be issued If HW Partners, LP receives a more favorable settlement, in exchange for three Unsecured convertible notes and outstanding warrants. Three Million Dollar ($3,000,000) Secured Note modified to eliminate all accrued interest and convertibility feature, and payment terms changed to 8% interest, amortized over three years. HW Partners, LP: Three Million Dollars ($3,000,000) cash, 1,111,111 shares of Common Stock, and new secured Note in the principal amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000), interest only at 8%, principal due and payable in three years, no conversion right unless the company is in default, in which case the conversion price is $0.60, which Note is prepayable at a discount, initially 20%, declining on a straight line basis over the life of the Note; Issued in exchange for outstanding Note and outstanding Warrants. EX-10.23 14 PAYMENT AGREEMENT WITH CMA 10.23 PAYMENT AGREEMENT THIS PAYMENT AGREEMENT ("Agreement"), dated as of January 1, 2000 is between AURA SYSTEMS, INC., a Delaware corporation ("Debtor"), and CREDIT MANAGERS ASSOCIATION OF CALIFORNIA, a California non-profit mutual benefit corporation, as collection agent (the "Agent") for and on behalf of those creditors of the Debtor listed on Exhibit A attached hereto who vote to accept the Debtor's plan for repayment of its creditors pending as of the date of this Agreement and such additional creditors of the Debtor who vote to accept the Debtor's plan for repayment of its creditors pending as of the date of this Agreement (collectively, the "Parties," and individually, a "Party"). Exhibit A shall be amended from time to time by the Agent as necessary to reflect the names and current addresses of, and amounts owed to, all Parties under this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties hereby agree as follows: 1. Definitions. When used herein, the capitalized terms below shall have the meanings indicated: (a) Obligations. "Obligations" means: (i) all account obligations of Debtor to one or more of the Parties, arising prior to July 26, 1999, including, without limitation, the amount set forth opposite each Party's name on Exhibit A hereto; and (ii) all expenditures made or incurred by the Agent or by any Party on or after July 26, 1999 to enforce the rights of the Parties under this Agreement. (b) Restructure. The phrase "Restructure" means the written announcement by the Debtor that it has achieved all of those agreements and consents necessary to achieve the debt for equity exchange, and the investment of up to $10 Million in new capital into the Debtor in accordance with the general terms of the restructure plan proposed by the Debtor in the package of materials provided by the Debtor to Creditors at the general meeting of July 26, 1999, with modifications: (i) thereafter requested by a committee of creditors elected by meeting attendees to represent their interests (the "Committee") and accepted by Debtor; (ii) proposed to the Committee by the Debtor on October 1, 1999 and accepted by the Committee on October 1, 1999; proposed to the Committee by the Debtor and accepted by the Committee on or about November 11, 1999; proposed to the Committee by the Debtor and accepted by the Committee on or about December 23, 1999; and (iii) as may be subsequently accepted by the Committee. 2. Monthly Installment Payments. Debtor hereby agrees to pay to the Agent for the benefit of the Parties, as follows: (1) On or before the first business day of each calendar month beginning January 1, 2000, an amount equal to 1/36 of the total of the amounts set forth on Exhibit "A" hereto, plus such additional amounts as may be required upon reconciliation of Exhibit "A" to the ballots accepting the Debtor's Plan for repayment, plus interest on the total amounts unpaid at the rate of 8% per annum running from July 26, 1999, on a fully amortized basis. Interest accruing from July 26, 1999 through the date the first installment shall be paid by CMA to creditors, shall be paid as a last, thirty-seventh (37th) monthly installment payment; (2) To those Creditors on Exhibit "A" whose claims are less than $5,000 or by their ballot have agreed to reduce their claim to $5,000, one installment in the allowed amount listed on Exhibit "A" as soon as claims in such category have been reconciled. Following the occurrence of an Event of Default under Paragraph 4(a) hereof, the principal balance of the Obligations shall bear interest thereafter at the default rate of 12% per annum until all delinquent amounts, including default rate interest, are paid. 3. Quarterly Reporting. The Debtor hereby agrees to provide the Agent for the benefit of the Parties quarterly financial reports including income statements and balance sheets, on or before June 5th, July 20th, October 20th and January 20th, for the preceding quarter, with the first quarterly reports due on or about February 15, 2000. 4. Events of Default. Debtor shall be in default under this Agreement upon the happening of any of the following events or conditions ("Events of Default"): (a) default in the payment on the due date therefor of any monthly installment payment due under Paragraph 2 above, which has not been cured within fifteen (15) calendar days after the due date thereof; (b) dissolution, termination of existence of, appointment of a receiver for any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy, reorganization, arrangement, insolvency or other law relating to the relief of debtors by or against, Debtor or any guarantor or surety for Debtor under any of the Obligations; (c) default in providing quarterly reports due under Paragraph 3 above, which has not been cured within fifteen (15) calendar days after notice that such report is due. 5. Remedies Upon The Occurrence Of Any Event of Default. Upon the occurrence of an Event of Default, and with the consent of the Committee, the Agent may, without notice to or demand on Debtor, declare any of the Obligations immediately due and payable and this Agreement in default, whereupon the Parties shall be free to pursue collection of the Obligations, with interest as provided herein. 6. Appointment of Agent. (a) Each Party hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder, with such powers as are expressly delegated to the Agent under this Agreement, together with such other powers as are reasonably incidental thereto. (b) If the Agent receives notice of the occurrence of an Event of Default under this Agreement or any other notice, request or other communication from the Debtor under this Agreement, the Agent shall give prompt notice thereof to the Parties. The Agent shall take such action with respect to such notice, request or other communication as may be directed by a Majority-in-Interest of the Parties. With the approval of a Majority-in-Interest of the Parties, the Agent may consent to any modifications, supplement or waiver under this Agreement, provided, however, that without the prior written consent of all Parties, the Agent shall not modify or amend this Paragraph 6(b). (c) In the event that Credit Managers Association of California becomes unable or unwilling to serve as Agent, a Majority-in-Interest of the Parties shall promptly designate another person or entity to serve as Agent hereunder. 7. General (a) No default shall be waived by the Agent except in writing and with prior consent of the Committee, and no waiver of any payment or other right under this Agreement shall operate as a waiver of any other payment or right. (b) Any consent, notice or other communication required or contemplated by this Agreement shall be in writing. If intended for Debtor, it shall be deemed given upon receipt by Debtor, or three days after deposit if mailed, postage prepaid, to Debtor at the address set forth below or at such other address given by notice as herein provided. If intended for a Party, it shall be deemed given only if actually received by the Agent at the address set forth below or at such other address given by notice as herein provided. Debtor: AURA SYSTEMS, INC. 2335 Alaska Avenue El Segundo, California 90245 Fax No.: (310) 643-8719 Agent: CREDIT MANAGERS ASSOCIATION OF CALIFORNIA 40 E. Verdugo Avenue Burbank, California 91502-1931 Fax No.: (818) 972-5301 (c) This Agreement shall be construed under and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. (d) This Agreement may be executed in any number of counterparts, and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. (e) All of the rights of each Party under this Agreement shall be cumulative and shall inure to the benefit of the successors and assigns of such Party. All obligations of Debtor hereunder shall be binding upon the successors and assigns of Debtor. All provisions of this Agreement concerning the relationship between the Agent and the Parties are for the benefit of such parties, and shall not be enforceable by or inure to the benefit of the Debtor. (f) This Agreement may be modified by the parties hereto upon the receipt by the Agent of written instructions authorizing and directing such modification from a majority of the members of the informal committee representing the interests of unsecured creditors consenting to the Restructure (the "Informal Committee") and the written agreement of the Debtor thereto. The members of the Informal Committee are: Please See The Attached EXECUTED on the dates set forth below, to be effective for all purposes as of the date first above written. DEBTOR: AURA SYSTEMS, INC. By:___________________________ Name: Gerald S. Papazian Title: President Date:___________________________ AGENT: CREDIT MANAGERS ASSOCIATION OF CALIFORNIA, as collateral and collection agent for the parties listed on Exhibit A By:_______________________________ Name: Robert Hoder Title: Date:_______________________________ EX-21.1 15 AURA SYSTEMS, INC. AND SUBSIDIARY 21.1 Exhibit 21.1 Aura Systems, Inc. (Delaware) Aura Ceramics, Inc. (Delaware) Aura Realty, Inc. (Delaware) AuraSound, Inc. (Delaware) Electrotec Productions, Inc. (California) MYS Corporation (Osaka, Japan) NewCom, Inc. (Delaware) EX-27 16 FINANCIAL DATA SCHEDULE
5 12-MOS FEB-28-1999 MAR-01-1998 FEB-28-1999 3,822,210 0 8,380,414 0 18,477,058 36,489,862 47,976,699 (10,994,734) 90,143,392 41,359,738 0 218,693,245 0 0 0 90,143,392 81,518,162 81,518,162 158,024,723 244,680,069 17,825,237 0 12,198,858 (149,170,931) 570,651 (149,741,582) 0 0 (406,574) (150,148,156) (1.74) (1.74)
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