-----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, OPD6zLR11OkkCDcHulBzd60z2bl2zbIH/255iG4u8TDW0ZYn6pM+4Fm3lQs0mdDu /fmYHJqCzvjL6lpwTC3b4w== /in/edgar/work/20000615/0000826253-00-500002/0000826253-00-500002.txt : 20000919 0000826253-00-500002.hdr.sgml : 20000919 ACCESSION NUMBER: 0000826253-00-500002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AURA SYSTEMS INC CENTRAL INDEX KEY: 0000826253 STANDARD INDUSTRIAL CLASSIFICATION: [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: 655360 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 0001.txt 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 29, 2000 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 |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| On June 12, 2000 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $68,875,417. The aggregate market value has been computed by reference to the last trading price of the stock on June 12, 2000. On such date the Registrant had 239,361,352 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. As a result, the Company expanded its 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. In Fiscal 2000, the Company sold MYS to MYS management. In September 1997, NewCom completed an initial public offering, decreasing Aura's ownership in NewCom down to a majority interest 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 the cessation of NewCom operations in early Fiscal 2000. 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 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 by 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 further development of certain electro-magnetic projects, including the electromagnetic valve actuator ("EVA"). In Fiscal 2000 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. Subsequent to Fiscal 2000 the Company sold its Aura Ceramics division. See "Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations. 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 vehicle 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 is being distributed and sold through dealers, distributors and OEMs. The Company intends to continue to focus its business on the AuraGen line of products (See "Description of Business - Magnetic Technology"). In addition, the Company is entitled to receive royalties from Daewoo Electronics Co., Ltd. ("Daewoo") for its electro-optics technology ("AMA") licensed to Daewoo in 1992 (See "Description of business - Electro-Optical Technology"). II. DESCRIPTION OF BUSINESS A. Technology 1. 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 exceptional high force levels in a device of relatively small volume and weight. As this concept extended from a linear actuator to a rotary actuator, an electrical induction 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) Actuators are used in a wide range of applications, including high speed, precision 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. 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. 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 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. 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. 2. 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). The AMA(TM) utilizes an array of micro actuators in order to control tiny mirrors whose position change is used to cause a variation in intensity. The Company expects this device could have a major impact on applications where light efficiency is paramount, such as in large screen television, movie and exhibition displays, and the testing of electro-optical devices for military or civilian use. 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 potentially offer the combination of increased display intensity at a competitive production cost. The Company believes that the AMATM technology has a technical advantage over other technologies in achieving higher contrast, more intensity and longer lived elements. 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 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 1. 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 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, Sports Utility Vehicle (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 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 two years 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 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. 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 is positioning itself in the market place as a turn key mobile power solution that is safer, more reliable, more convenient, with better quality 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 (except normal belt wear and tear) 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. 2. 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 the timing chain, camshaft and rockerarms 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) for the purpose of 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 further 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. The Company is totally dependent on Daewoo Electronics for exploiting the AMA technology. Certain of these risk factors are discussed below. 1. 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 tests. The Company has recently delivered to the U.S. Army 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 may incorporate the required changes into the Electronic Control Unit ("ECU"). While the Company expects 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 or if the changes 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 working 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 concept vehicles. No assurances can be given that the Company's AuraGen will be offered by General Motors as an OEM option. 2. Actuated Mirror Array (AMA(TM)) The Company licensed its AMA technology to Daewoo Electronics, Co., Ltd of Korea ("Daewoo"). 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. Due to Daewoo's financial crisis, no assurances can be given as to the future plans of the AMA technology at Daewoo. 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 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, 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 ("Gensets") 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. 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 5000 EG5000X EX5500 5CKM G5000 - ------------------------- ------------------- ----------------- ------------------- ----------------- ----------------- Rated Power 5,000 W 4,500 W 5,000 W 5,000 W 5,000 W Weight 258 lbs/117.3 kg 146 lbs/66.4 kg 393 lbs/178.6 kg 268 lbs/122 kg 68 lbs/30.9 kg Cubic Feet/ Cubic Meters 6.72/.19 5.39/.15 26.80/.76 3.71/0.11 0.25/0.01 Output 120 V 120/240 V 120/240 V 120/240 V 120/240 V Engine RPM @ Rated Output 1,800 3,600 3,600 1,800 1,300 Noise (db @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 United States including 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 Higher 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 (Watts) 2500 2600 2800 4800 5000 2. Weight (LBS) 56 70 75 110 68 2A. Weight Battery Pack Add/No Add/No Add/No No 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 Modified Modified Yes Modified Yes 6. Battery Discharge Operation Yes Yes Yes No No 7. Vehicle Engine Noise (db @ 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 5,000 units per month per operating shift. The Company leases an approximate 38,000 square foot ceramic facility in New Hope, Minnesota. Subsequent to year end the Company sold its ceramics division and no longer leases this facility. 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 has established a Quality Management system, and is in pursuit of both ISO and QS 9000 registration. Elements include a 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 SPC, In-Process Inspection and Functional Test on its AuraGen assembly line. G. Product Development Expenditures During the fiscal years ended February 29, 2000, February 28, 1999, and February 28, 1998 the Company spent approximately $ 0.1 million, $ 2.0 million and $ .5 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 29, 2000 the Company employed approximately 85 persons. 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 29, 2000, ceramics products were the largest single source of revenue on a consolidated basis, constituting approximately $2.9 million or 40% of net revenues. Sound related products totaled approximately $.6 million or 8% of net revenues. License fees for sound related patents constituted $1.5 million or 21% of revenues. For the year ended February 28, 1999, multi-media products and modems were approximately $46.8 million or 57.4% of net revenues, sound related products were approximately $29 million or 35.6% of net revenues. With the sale of the sound related operations in Fiscal 2000, and the sale of the ceramics facility subsequent to Fiscal 2000, the principal source of revenue going forward will be related to the Company's AuraGen technology. K. Significant Customers The Company sold ceramics related products to a single significant customer during Fiscal 2000 for a total of approximately $2.1 million or 29.7% of net revenues. After Fiscal 2000 this customer will not be a significant customer as the Company has sold the ceramics division. 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 to year end the Company sold its ceramics division and no longer leases this facility. 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 finally approved in or about April, 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.The deferral resulted from the limitation on the number of shares authorized. the final distribution of stock and warrants to class members occured in April and May 2000. NewCom Related Litigation 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 set for May, 2000 was suspended by the panel without yet scheduling a new hearing date. 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 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 Repricing Rights. The parties have agreed to submit this matter to mediation on June 28, 2000. 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 4,400 stockholders of record as of June 12, 2000. Period High Low 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 Fiscal 2000 First Quarter ended May 31, 1999 $0.50 $0.22 Second Quarter ended August 31, 1999 $0.28 $0.06 Third Quarter ended November 30, 1999 $0.51 $0.06 Fourth Quarter ended February 29, 2000 $0.42 $0.17 On June 12, 2000, the average high and low reported sales price for the Company's Common Stock was $0.315. 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 For information regarding equity securities sold or issued in restructuring transactions by the Company during Fiscal 2000, see debt restructuring in Liquidity and Capital Resources. ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data has been taken or derived from the audited consolidated financial statements of the Company and should be read in conjunction with and is qualified in its entirety by the full consolidated financial statements, related notes and other information included elsewhere herein. The data for Fiscal 2000, 1999 and 19998 has been restated to reflect discontinued operations. The data for Fiscal 1997 and 1996 hs not been revised as the change in the scope of the Company's operations would not provide additional relevant comparison.
AURA SYSTEMS, INC. AND SUBSIDIARIES February 29, February 28, February 28, February 28, February 29, 2000 1999 1998 1997 1996 Net Revenues $ 5,788,221 $53,650,025 $103,939,641 $109,950,202 $ 77,088,850 ------------- ----------- ------------ ------------ ------------ Cost of goods and overhead 13,424,304 130,437,194 71,774,522 86,350,828 71,849,204 Expenses: Research and development 148,443 1,996,198 475,992 6,022,586 5,225,735 Impairment of long-lived assets -- 5,838,466 -- -- -- Selling, general and administrative expenses 10,725,397 64,131,072 35,266,048 18,542,840 26,399,794 ------------- ---------- ---------- ----------- ---------- Total costs and expenses 24,298,144 202,402,930 107,516,562 110,916,254 103,474,733 ------------- ---------- ---------- ----------- ----------- (Loss) From Operations (18,509,922) (148,752,905) (3,576,921) (966,052) (26,385,883) Other (Income) and Expense Interest expense (income) 4,476,690 11,577,990 6,450,741 1,415,934 289,793 Termination of License Agreements -- -- 3,114,030 -- -- Loss on Disposal of Assets and Investments (259,724) 5,809,811 -- -- -- Gain on Sale and Issuance of Subsidiary Stock -- (811,657) (12,632,265) (250,000) -- Class Action Litigation and Other Settlements 2,777,762 7,717,518 1,700,000 -- -- Equity in Losses of Unconsolidated Joint Ventures -- 6,268,384 1,937,747 -- -- Other (1,101,279) 406,576 (220,291) 40,642 -- Provision (benefit) for taxes -- 566,635 (1,275,555) 570,484 -- Minority interests -- (36,934,376) 946,405 -- -- Loss in excess of basis of subsidiary -- (8,080,695) -- -- -- -------------- ---------- ----------- --------- --------- Loss from continuing operations (24,403,371) (135,273,091) (3,597,733) (2,880,111) (26,087,090) Discontinued Operations: Loss from Discontinued Operations, Net of taxes (4,l31,501) (14,875,065) (8,038,807) -- -- Extraordinary Item Gain on extinguishment of debt obligations, net of income taxes 19,068,916 -- -- -- -- ----------- ----------- ---------- ---------- ----------- Net loss $(9,465,956) $(150,148,156) $(11,636,540) $(2,880,111) $(26,097,090) =========== ============= ============ =========== ============ NET (LOSS) PER COMMON SHARE $ (0.08) $ (1.74) $ (.15) $ (.04) $ (.48) ============== ============= ============== ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 124,293,861 85,831,688 79,045,290 68,433,521 53,860,527 =========== ============ ========== ========== ========== Working capital (deficit) 1,376,215 (4,869,876) 78,143,895 62,310,715 71,362,882 Total assets 56,122,478 90,143,392 227,302,629 182,528,399 134,080,568 Total liabilities and deferrals 54,959,832 103,797,049 110,400,761 57,050,812 34,917,462 Net stockholders' equity (deficit) 1,162,646 (13,653,657) 116,901,868 125,477,587 99,163,106
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Statements in this report, including those concerning our expectations of future sales revenues, gross profits, research and development, sales and marketing, and administrative expenses, product introductions and cash requirements include forward-looking statements. As such, our actual results may vary materially from our expectations. Factors which could cause our actual results to differ from expectations include, but are not limited to, the following risks and contingencies: changed business conditions in the industrial and automotive industries and the overall economy; increased marketing and manufacturing competition and accompanying price pressures; contingencies in initiating production at new factories along with their potential underutilization, resulting in production inefficiencies and higher costs and start-up expenses and; inefficiencies, delays and increased depreciation costs in connection with the start of production in new plants and expansions. Relating to the above are potential difficulties or delays in the development, production, testing and marketing of products, including, but not limited to, a failure to ship new products and technologies when anticipated. There might exist a difficulty in obtaining raw materials, supplies, natural resources and any other items needed for the production of Company and other products, creating capacity constraints limiting the amounts of orders for certain products and thereby causing effects on the Company's ability to ship its products. Manufacturing economies may fail to develop when planned, products may be defective and/or customers may fail to accept them in the marketplace. In addition to these factors, risks and contingencies may exist as to the amount and rate of growth in the Company's selling, general and administrative expenses, and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. Furthermore, any financing or other financial incentives by the Company under or related to major infrastructure contracts could result in increased bad debt or other expenses or fluctuation of profit margins from period to period. The focus by the Company's business on any large order could entail fluctuating results from quarter to quarter. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and social and economic conditions, such as trade restrictions impose yet other constraints on any Company statements. The cost and other effects of legal and administrative cases and proceedings present another factor which may or may not have an impact. Overview During the Fiscal Year ended 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 early Fiscal 2000. 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 which was consummated in May 2000. 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 fourth 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 restructured 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. 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 converted into common stock upon the restructuring of the 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 2000 as Compared to Fiscal 1999 Revenues Net revenues in Fiscal 2000 declined to $5.8 million from $53.7 million in Fiscal 1999, a decrease of 89.2%. In Fiscal 1999, net revenues included the revenues from the Company's Newcom subsidiary in which it held an approximate 41% interest at February 28, 1999. Newcom ceased operations shortly after the end of Fiscal 1999, resulting in no revenue being recorded for Newcom in the current Fiscal year. Included in Fiscal 2000 revenues are license fees pertaining to sound related patents of $1.5 million or 25.9% of revenues. License fees have a pronounced effect on the results of operations since there is little or no cost involved. Cost of Goods and Overhead Cost of goods and overhead decreased to $13.4 million from $130.4 million in the prior Fiscal year primarily as a result of the sale and shutdown of the Company's subsidiaries previously mentioned. Cost of goods and overhead for these subsidiaries totaled approximately $142 million in Fiscal 1999. Included in cost of goods and overhead for Fiscal 2000 is approximately $4.9 million in depreciation related to the AuraGen product. Gross Profit and Net Loss Gross profit for Fiscal 2000 was a negative 131.9% compared to a negative 143% in Fiscal 1999. The negative gross profit in the prior Fiscal year was primarily a result of the Company's Newcom subsidiary. The current year negative gross profit is a result of insufficient sales in the Company's remaining business to cover the overhead costs associated with the ongoing operations. Research and Development Research and development expense for Fiscal 2000 decreased to $.1 million from $2.0 million in Fiscal 1999. This is a result of the Company focusing its efforts on marketing and selling the AuraGen. Selling, General and Administrative Selling, general and administrative expenses decreased to $10.7 million in Fiscal 2000 from $64.1 million in Fiscal 1999. The primary reason for the decrease is the sale and shutdown of the Company's subsidiaries as previously mentioned. The Company also reduced the number of employees at the Company's headquarters in conjunction with the restructuring the Company has undergone in the current Fiscal year. Included in selling, general and administrative expenses for Fiscal 2000 are legal costs and expenses of approximately $1.7 million, and depreciation and amortization of approximately $950,000. Bad Debt Expense Bad debt expense decreased to approximately $163,000 in Fiscal 2000 from $12.8 million in the prior Fiscal year. Interest Expense Interest expense for Fiscal 2000 declined to approximately $ 4.5 million from $12.2 million in Fiscal 1999. This was primarily a result of the elimination of interest expense from the subsidiaries that were either sold or shutdown, and a result of the conversion of debt into equity and the forgiveness of debt. Discontinued Operations Effective March 1, 1999, the Company sold its MYS group of subsidiaries to the management of MYS and in June 1999, the Company sold the assets of its AuraSound division. Accordingly, the results of these operations have been classified as a single item as a discontinued operation. Fourth Quarter Adjustments Certain events occurred in the fourth quarter of Fiscal 2000 which impact the financial statements. The primary item that occurred was the forgiveness of debt by certain of the Company's creditors in the approximate amount of $19.1 million. Fiscal 1999 as Compared to Fiscal 1998 The Company continued its activity in development of commercial applications of its proprietary magnetic technologies. 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 $53.6 million from $103.9 million, a decrease of 48.4%. 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 $130.4 million in Fiscal 1999 from $71.8 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 Profit and Net Loss Gross profit for Fiscal 1999 was a negative 143% compared to 30.95% in Fiscal 1998, primarily due to the substantial drop in gross profit 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 profit was 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 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 Research and Development Research and development expense for Fiscal 1999 increased to $2.0 million from $.5 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 $64 million in Fiscal 1999 from $35.3 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. Liquidity and Capital Resources The working capital deficit decreased by approximately $4 million to a deficit of approximately $900,000 at Fiscal 2000 year end, with the current ratio improving slightly to .95:1 from .88:1. The principal differences in the Company's accounts from February 28, 1999 to February 29, 2000 are a decrease in cash and equivalents of $3.6 million, a decrease in net receivables of $5.9 million, a decrease in inventories of $7.3 and a decrease in accounts payable and accrued expenses of $25 million. The primary reason for these changes is the sale of the Company's MYS Corporation subsidiary and the sale of the speaker assets of AuraSound Inc. The Company's cash balances were $260,437 at February 29, 2000, $3,822,210 at February 28, 1999 and $6,079,411 at February 28, 1998. In Fiscal 2000 the Company received net proceeds of $7.4 million in a private placement and proceeds of $24,800 from the exercise of warrants. The net cash used in operating activities of $(15,568,917) million decreased by $8,745,083 million due primarily to the decrease in the loss incurred in addition to the decreases in accounts receivable, inventory and accounts payable as a result of the cessation of NewCom's business. Spending for property and equipment amounted to $15,938 in Fiscal 2000, $4,053,848 in Fiscal 1999 and $18,006,394 in Fiscal 1998. Of the Fiscal 2000, 1999 and 1998 amounts, nil, $1,910,611 and $16,096,180 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, and the sale of assets. No assurances can be provided that these funding sources will be available in the future, or at the times and in the amounts necessary. 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, equity, sale of non-essential assets 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 effect 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 and New Hope, Minnesota. Minimum monthly rents under the leases approximate $55,000. Rent expense was approximately $.9 million for Fiscal 2000, $1.8 million, for Fiscal 1999, and $1.3 million for Fiscal 1998. At February 29, 2000, the Company has no long term operating leases. Debt Restructuring Following is a description of the principal 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 and 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 were convertible into a maximum of 46,500,000 shares of the Company's Common Stock unless Aura failed to complete the restructuring with Infinity. The holder of the RGC Debentures converted a portion of the RGC Debentures into 46,500,000 shares of Common Stock and canceled the remaining outstanding principal and interest owed under the RGC Debentures as of the consummation of the restructuring of approximately $17.4 million of outstanding Debentures held by 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 was due and payable in 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 Warrants exercisable at $0.375 per share expiring December 1, 2002. 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 February 2000 the Company consummated an agreement with these holders and a third party to exchange (the "Exchange") the Debentures for $3 million in cash, 1,111,111 shares of common stock, 100,000 Warrants exercisable at $0.375 per share, and new Secured Notes (the "New Secured Notes") in the aggregate principal amount of $12.5 million. The New Secured Notes are secured by a lien on the Company's assets, 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 an uncured default under the New Secured Notes, 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. 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. 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. Director Name Age Since Title Zvi Kurtzman 53 1987 Chief Executive Officer, Chairman, Board of Directors, member of Nominating Committee Harvey Cohen 66 1993 Director, member of Audit Committee Salvador Diaz-Verson, Jr. 47 1997 Director, member of Compensation Committees Stephen A. Talesnick 50 1999 Director, member of Compensation and Nominating Committees Norman Reitman 76 2000 Director, member of Audit Committee David F. Hadley 35 2000 Director, member of Compensation and Nominating Committees Sanford R. Edlein 56 2000 Director, member of Audit Committee Business Experience of Directors and Nominees During the Past Five Years 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 and 1971, respectively, and completed all course requirements for a Ph.D. in theoretical physics at the University of California, Riverside. He was employed as a senior scientist with the Science Applications International Corp. a scientific research company in San Diego, from 1984 to 1985 and with Hughes Aircraft Company, a scientific and aerospace company, from 1983 to 1984. Prior thereto, Mr. Kurtzman was a consultant to major defense subcontractors in the areas of computers, automation and engineering. 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. 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. 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. Norman Reitman is a director of the Company and has served in this capacity since March 6, 2000. He previously served as a director of the Company from January 1989 to September 1998. Mr. Reitman obtained his B.B.A. degree in business administration from St. Johns University in 1946 and became licensed as a public accountant in New York in 1955. Mr. Reitman is the retired Chairman of the Board and President of Norman Reitman Co., Inc., insurance auditors, where he served from 1979 until June 1990. Mr. Reitman was a senior partner in Norman Reitman Co., a public accounting firm, where he served from 1952 through 1979. Mr. Reitman served on the Board of Directors and was a Vice President of American Family Life Assurance Co., a publicly held insurance company, from 1966 until April 1991. David F. Hadley is a director of the Company and has served in this capacity since March 6, 2000. He is the founder and president of D.F. Hadley & Co., Inc. ("DFH&Co"). DFH&Co is a boutique financial services firm that provides consulting and advisory services to emerging growth companies located in the western United States. The principals of DFH&Co also seek to invest as principals in the equity securities of DFH&Co clients. Prior to founding DFH&Co in August 1999, Mr. Hadley was a managing director in the global investment banking group of BT Alex. Brown Inc., focusing on the media and communications sector. Mr. Hadley was employed by subsidiaries of Bankers Trust Corporation from 1986 to June 1999. He received his MSc. In Economic History (with distinction) from the London School of Economics and his A.B. from Dartmouth College (summa cum laude). Sanford R. Edlein, is a director of the Company and has served in this capacity since March 6,2000. He is a Certified Public Accountant, Certified Turnaround Professional, and has served as a consultant and senior executive for privately held and public companies for more than thirty years and has assisted in financial and operating matters, corporate governance, crisis management and mergers and acquisitions. He has served on the boards of public companies including Sport Supply Group, Inc., BSN Corporation, Tennis Lady, Escalade Corporation and American Equity Financial Corporation. Since 1998 he has been employed with Glass & Associates, Inc. a firm that specializes in turnaround and crisis management. From 1996 to 1998 he was president of Edlein & Associates, LLC. a consulting firm. From 1994 to 1996 he was CEO, COO and a member of the board of directors of Sport Supply Group, Inc. From 1965 through 1980 and 1989 through 1994, respectively, Mr. Edlein served as a partner and then managing partner of Grant Thornton LLP (Boston office). Mr. Edlein has a AAS degree from Bronx Community College and a BBA degree from City University of New York. MANAGEMENT Listed below are Executive Officers of the Company who are not directors or nominees, their ages, titles and background information. All the officers listed below hold their offices at the pleasure of the Board of Directors. Name Age Title Gerald S. Papazian 44 President, Chief Operating Officer Arthur J. Schwartz, Ph.D. 52 Executive Vice President Cipora Kurtzman-Lavut 43 Senior Vice President, Corporate Communications Neal B. Kaufman 55 Senior Vice President, Management Information Systems Steven C. Veen 44 Senior Vice President, Chief Financial Officer Michael I. Froch 38 Senior Vice President, General Counsel and Secretary Keith O. Stuart 43 Senior Vice President, Sales and Marketing Ronald J. Goldstein 58 Senior Vice President, Sales and Marketing Jacob Mail 49 Senior Vice President, AuraGen Operations Richard E. Van Allen 53 Senior Vice President, Industrial and Special Programs 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. Arthur J. Schwartz, Ph.D. has been the Executive Vice President 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 for the Company since 1988. 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 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. 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 in 1981. 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. Keith O. Stuart is Senior Vice President, Sales and Marketing and has served in this capacity since November, 1999. Previously he served as President of the Company's Tech Center division, from 1995 to 1999 and has been in charge of hardware development for Aura since 1988. Mr. Stuart obtained his B.S. and M.S. degrees in electrical engineering from the University of California Los Angeles in 1978 and 1980, respectively. Mr. Stuart worked for Cyphermaster, Inc. during 1986 and was employed by Hughes Aircraft Company, a scientific and aerospace company, prior thereto. Mr. Stuart has designed and fabricated digitally controlled, magnetically supported gimbals that isolate the seeker portion of a United States Space Defense Initiative and has also developed a multi-computer automated test station for the evaluation of sophisticated electro-optical devices. Ronald J. Goldstein is Senior Vice President, Sales and Marketing, serving in this capacity since November, 1999. He is responsible for the marketing and sales of AuraGen to worldwide government agencies and the military 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 was responsible for all marketing and business development activities for the Company and served since 1995 as President of the Automotive/Industrial division of 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. Jacob Mail is Senior Vice President, AuraGen 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. Dr. Richard E. Van Allen is Senior Vice President, Industrial and Special Programs, serving in this capacity since June 1999. He is currently the Program Manager for the military version of the commercial AuraGen generator. In addition, Dr. Van Allen manages ongoing electromagnetic actuator projects. He joined the company in 1990 and previously was Manager and Vice President of the AuraSound Division, and before that was Division manager of the Magnetics Division. In these positions, Dr. Van Allen has been involved in the development and manufacture of virtually every electromagnetic system produced by Aura Systems. Prior to joining Aura, he was a Laboratory Manager in Advanced Government Programs at the Hughes Aircraft Company Space and Communications Group. Before joining Hughes, Dr. Van Allen served as the Navigation Team Leader for the Voyager outer planets exploration program at the Jet Propulsion Laboratory. He received his B.S. degree in Aeronautical and Astronautical Engineering, along with an M.S. and Ph.D. in Aerospace Engineering, from Purdue University Family Relationships. Cipora Kurtzman-Lavut, a Senior Vice President, Corporate Communications, is the sister of Zvi Kurtzman, who is the Chief Executive Officer and a director of the Company. Jacob Mail, Senior Vice President, AuraGen 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 29, 2000, all filing requirements applicable to its officers, directors, and ten percent beneficial owners were satisfied except that Harvey Cohen, Zvi Kurtzman, Keith Stuart, and Dr. Richard Van Allen failed to timely file a single Form 5 and Norman Reitman failed to file a single Form 3. 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 29, 2000.
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) 2000 $386,232 0 $ 0 Chief Executive Officer 1999 384,290 1,000,000 1998 245,018 0 Gerald S. Papazian (1) 2000 $217,777 0 $2,392 President and Chief Operating 1999 203,025 100,000 Officer 1998 154,737 0 Arthur J. Schwartz (1) 2000 $210,192 0 $ 0 Executive Vice President 1999 204,895 500,000 1998 172,115 0 Steven C. Veen(1) 2000 $205,469 0 $2,257 Senior Vice President and 1999 196,412 100,000 Chief Financial Officer 1998 150,127 0 Cipora Kurtzman-Lavut 2000 $203,942 0 $ 0 Senior Vice President 1999 199,221 500,000 1998 162,225 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 2000, 1999 and 1998, respectively, were as follows: Zvi Kurtzman - $385,000, $385,000, $200,000; Gerald S. Papazian - $210,000, $210,000, $140,000; Arthur J. Schwartz - $205,000, $205,000, $160,000; Steven C. Veen - $200,000, $200,000, $150,000; Cipora Kurtzman-Lavut - $195,000, $195,000, $150,000. Of the compensation paid in Fiscal 2000, $144,561, $34,781, $78,201, $44,918 and $58,520 was paid in the form of restricted common stock of the Company to Mr. Kurtzman, Mr. Papazian, Mr. Schwartz, Mr. Veen and Ms. Kurtzman-Lavut, respectively. (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 29, 2000. No cash bonuses or restricted stock awards were granted to the above individuals during the fiscal years ended February 29, 2000, February 28, 1999 and February 28, 1998. 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 Gerald S. Papazian 166,000 60,000 $ 0 $ 0 Arthur J. Schwartz 515,000 300,000 $ 0 $ 0 Steven C. Veen 215,000 210,000 $ 0 $ 0 Cipora Kurtzman-Lavut 515,000 300,000 $ 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 29, 2000. No options were exercised by the above individuals during the fiscal year ended February 29, 2000. 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. 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. 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 2000 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 Member Salvador Diaz-Verson, Jr. Compensation Committee Interlocks and Insider Participation The Compensation Committee for the Fiscal year ended February 29, 2000 comprised of Salvador Diaz-Verson, Jr. and Brigadier Ashok Dewan. Decisions regarding compensation of executive officers for the Fiscal year ended February 29, 2000 were made unanimously by the outside, disinterested, directors of the Board of Directors, after reviewing recommendations of the Compensation Committee. As of March 6, 2000, the Compensation Committee of the Board of Directors is comprised of Salvador Diaz-Verson, Jr., David F. Hadley, and Stephen A. Talesnick. Audit Committee Fraud Detection Program In August 1998 a lawsuit captioned Collins v. Kurtzman et al. was filed in U.S. District Court in the Central District of California, which purported to be a derivative shareholder suit on behalf of Aura against members of the Board of Directors of the Company. Aura believes that the action was without merit. In April 1999 a final settlement was entered into by the parties which called for a dismissal of the action and no payments by any of the defendants. In consideration of the plaintiff dismissing its lawsuit Aura agreed to adopt and implement a fraud detection program (the "Program") under the auspices of the Audit Committee, after consulting with the Company's outside legal counsel and independent auditors. The purpose of the Program is to detect and prevent fraud, maintain accurate books and records for financial transactions, establish procedures to ensure the recording of transactions to be in accordance with generally accepted accounting principles, and to ensure that the Company's SEC filings comply with SEC rules and regulations. The Audit Committee is responsible for monitoring the Program on an ongoing basis, with the assistance of the Company's outside legal counsel and its independent auditors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the Company's Common Stock owned as of May 31, 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 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 19,980,436 8.3% Zvi (Harry) Kurtzman 3,391,314 (1)(2) 1.4% Arthur J. Schwartz 2,544,838 (1)(3)(4) 1.1% Cipora Kurtzman Lavut 1,874,512 (5) * Neal B. Kaufman 1,736,870 (1)(7) * Harvey Cohen 468,287 (6) * Salvador Diaz-Verson, Jr. 1,006,037 * Stephen A. Talesnick 2,787,698 1.2% Gerald S. Papazian 443,810 (8) * Steven C. Veen 659,763 (9) * Michael I. Froch 342,735 (10) * Keith O. Stuart 161,188 (11) * Ronald Goldstein 207,579 (12) * Jacob Mail 278,841 (13) * Norman Reitman 587,142 (14) * Sanford R. Edlein 0 * David F. Hadley 600,000 * Richard Van Allen 91,973 (15) * All executive officers and directors 17,182,587 7.2% as a group (16 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 May 31, 2000. (3) Includes 515,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of May 31, 2000. (4) Includes 32,000 shares held by Dr. Schwartz as custodian for his children, and 74,000 owned by Dr. Schwartz' 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 May 31, 2000. (6) Includes 31,250 shares beneficially owned, and 265,000 shares which may be purchased pursuant to options within 60 days of May 31, 2000 of which 100,000 are beneficially owned. (7) Includes 470,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (8) Includes 166,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (9) Includes 215,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000, and 20,000 shares held by Mr. Veen as custodian for his children, to which Mr. Veen disclaims any beneficial ownership. (10) Includes 130,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (11) Includes 150,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (12) Includes 140,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (13) Includes 150,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (14) Includes 345,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000 and 12,500 shares owned by Mr. Reitman's wife, as to which 12,500 shares he disclaims any beneficial ownership. (15) Includes 24,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000, and 3,000 shares held by Dr. Van Allen as custodian for his children to which Dr. Van Allen disclaims any beneficial ownership. The mailing address for Gardner Lewis Asset Management, L.P. is 285 Wilmington - West Chester Pike, Chadds Ford, Pa. 19317. The mailing address for the others is c/o Aura Systems, Inc., 2335 Alaska Avenue, El Segundo, CA 90245. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS December 1998 Private Placement In December 1998 the Company completed a private placement of Units, each Unit consisting of 10 shares of Common Stock and Warrants to purchase four shares of Common Stock at an exercise price of $1.00 per share for five years. The original subscription price was $10.00 per Unit. Of the total gross offering proceeds of approximately $1.8 million, $100,000 was invested by the mother of Zvi Kurtzman, and $440,000 was invested by Stephen Talesnick, who subsequently became a member of the Board of Directors in 1999. The terms of the offering called for, among other things, the prompt registration of the purchased securities with the SEC. As a result principally of delays in completing the Company's audit for the fiscal year ended February 1999, the Company was unable to timely file the required registration. Consequently in amendments to the offering terms which culminated in March 2000, the Company agreed to increase the number of shares received by each investor based upon an agreed price of $0.33 per share and the investors agreed to surrender the Warrants and their right to receive interest from the Company. Convertible Note Exchange As part of the Company's financial restructuring in Fiscal 1999 the Company offered to exchange convertible notes issued to investors in 1993 for Common Stock. As a result of the restructuring the Company converted the notes at a price of $0.27 per share. These investors among others included Zvi Kurtzman and Arthur J. Schwartz, whose notes entitled them to receive from the Company $100,000 and $80,000, respectively, plus accrued and unpaid interest. Both Messrs. Kurtzman and Schwartz exchanged their notes for Common Stock in March 2000. 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 29, 2000. 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(10) AuraSound Asset Purchase 10.19.1(10) Asset Purchase Agreement dated December 1, 1999 among AuraSound, Inc., Aura Systems, Inc., AlgoSound, Inc., and Algo Technology, Inc. 10.19.2(10) Amendment dated December 22, 1999 to Asset Purchase Agreement dated December 1, 1999. 10.19.3(10) Assignment and License Agreement as of July 15, 1999 between Speaker Acquisition Sub, Algo Technology, Inc., Aura Systems, Inc., AuraSound Inc. 10.20(10) MYS Stock Purchase 10.20.1(10) 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(10) 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(10) 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(10) Stock Purchase Agreement dated March 26, 1999 between the Company and Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.21(10) Agreement with RGC International Investors, LDC 10.21.1(10) First Amendment to Security Agreement dated October 22, 1999 between RGC International Investors, LDC and the Company. 10.21.2(10) Settlement Agreement and Complete Release of all Claims dated October 22, 1999 between RGC International Investors, LDC, and the Company 10.21.3(10) Stock Purchase Warrant issued to RGC International Investors, LDC by the Company. 10.21.4(10) 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(10) Settlement Agreement and Release of Claims dated as of December 1, 1999 between JNC Opportunity Fund, Ltd., and the Company. 10.23(10) Payment Agreement by and between Credit Managers Association of California and Aura Systems, Inc. 10.24 Release from Infinity Investors Limited et al. to Aura Systems, Inc. 10.25 Release from Aura Systems, Inc. to Infinity Investors Limited et al. 10.26 Exchange Agreement dated as of February 22, 2000, by and among Aura Systems, Inc., Infinity Investors Limited et al. 10.27 Guaranty dated as of February 22, 2000, by Aura Systems, Inc. and certain of its subsidiaries. 10.28 Stock Pledge Agreement dated as of February 22, 2000, between Aura Systems, Inc. and HW Partners, L.P. as agent. 10.29 Security Agreement dated as of February 22, 2000, between Aura Systems, Inc., certain subsidiaries of Aura Systems, Inc. and HW Partners L.P. 10.30 Secured Note dated February 22, 2000, from Aura Systems, Inc. to Infinity Investors Limited. 10.31 Secured Note dated February 22, 2000, from Aura Systems, Inc. to Global Growth Limited. 10.32 Secured Note dated February 22, 2000, from Aura Systems, Inc. Summit Capital Limited. 10.33 General Assignment and Bill of Sale dated February 29, 2000, between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.34 Assignment and Assumption of Specified Liabilities dated as of May 3, 2000, by and between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.35 Assignment and Assumption of Lease dated as of May 3, 2000, by and between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.36 Revolving Credit and Term Loan Agreement dated as of May 2000, by and between Alpha Ceramics, Inc. and Excel Bank. 10.37 Asset Purchase Agreement dated February 29, 2000,between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.38 Subordination Agreement dated as of May 2000, by Aura Ceramics, Inc. and Aura Systems, Inc. 10.39 Escrow Agreement dated March 6, 2000, by and among Guzik & Associates, Aura Systems, Inc. and Isosceles Fund Limited. 10.40 Subscription Agreement from Isosceles Fund Limited to Aura Systems, Inc. 10.41 Stock Purchase Warrant of Aura Systems, Inc. issued to Isosceles Fund Limited. 10.42 Settlement Agreement and Release of Claims dated as of March 6, 2000, between Aura Systems, Inc. and Isosceles Fund Limited. 21.1 Subsidiaries of Aura Systems, Inc. EX-27 Data Schedule (1) Incorporated by reference to the Exhibits to the Company's Statement on Form S-1 (File No. 33-19530). (2) Incorporated by reference to the Exhibits in the Company'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 Company's Registration Statement on Form S-1 (File No. 33-27164). (4) Incorporated by reference to the Exhibits to the Company's Statement on Form S-8 (File No. 33-32993). (5) Incorporated by Reference to the Exhibit to the Company's Statement on Form S-1 (File No. 35-57 454). (6) Incorporated by reference to the Company's Current Report in Form 10-Q dated November 30, 1993. (7) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1 (File No.-33-57454). (8) Incorporated by reference to the Exhibits to the Company's Annual Report Form 10-K for the fiscal year ended February 28, 1994 (File No. 0-17249). (9) Incorporated by reference to the Company's Annual Report Form 10-K for the fiscal year ended February 29, 1996 (File No. 0-17249) (10) Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal year ended February 28, 1999 (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: 13, 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 June 13, 2000 Zvi Kurtzman (Principal Executive Officer) /s/Steven C. Veen Senior Vice President, June 13, 2000 Steven C. Veen Chief Financial Officer (Principal Financial and Accounting Officer) /s/Sanford R. Edlein Director June 13, 2000 Sanford R. Edlein /s/Norman Reitman Director June 13, 2000 Norman Reitman /s/David F. Hadley Director June 13, 2000 David F. Hadley /s/Salvador Diaz-Verson, Jr. Director June 13, 2000 Salvador Diaz-Verson, Jr. /s/ Stephen A. Talesnick Director June 13, 2000 Stephen A. Talesnick /s/Harvey Cohen Director June 13, 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 29, 2000 and February 28, 1999 F-3 to F-4 Consolidated Statements of Operations and Comprehensive Loss- Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-5 Consolidated Statements of Stockholders' Equity (Deficit) -Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-6 Consolidated Statements of Cash Flows-Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-7 to F-9 Notes to Consolidated Financial Statements F-10 to F-24 Consolidated Financial Statement Schedule: II Valuation and Qualifying Accounts F-25
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 29, 2000, and February 28, 1999 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 29, 2000 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 29, 2000, and February 28, 1999 and the results of their operations and their cash flows for each of the three years in the period ended February 29, 2000, 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. As the Company has suffered recurring losses from operations, there is 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 June 12, 2000
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 29, February 28, 2000 1999 ASSETS CURRENT ASSETS: Cash and equivalents $ 260,437 $ 3,822,210 Receivables, net 2,459,200 8,380,414 Inventories 11,189,227 18,477,058 Prepayments -- 3,435,645 Other current assets 360,177 2,124,535 Note receivable 3,557,007 250,000 ------------- ------------- Total current assets 17,826,048 36,489,862 ------------- ------------- PROPERTY AND EQUIPMENT, AT COST 42,219,417 47,976,699 Less accumulated depreciation and amortization (15,184,362) (10,994,734) -------------- -------------- Net property and equipment 27,035,055 36,981,965 LONG-TERM Investments 2,123,835 2,923,835 long-term receivables 1,250,000 2,500,000 Patents and trademarks-Net 4,615,769 5,293,278 GOODWILL-NET -- 5,383,208 OTHER ASSETS 3,271,771 571,244 ------------- ------------- Total $ 56,122,478 $ 90,143,392 ============= ============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 29, February 28, LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999 ----------- ------- CURRENT LIABILITIES: Notes payable $ 9,899,531 $ 8,787,113 Convertible note, unsecured 1,250,000 2,000,000 Accounts payable 4,216,004 22,515,842 Accrued expenses and other 1,634,300 8,056,783 ------------- ------------- Total current liabilities 16,999,835 41,359,738 ------------- ------------- NOTES PAYABLE AND OTHER LIABILITIES 37,606,695 25,955,529 ------------- ------------- CONVERITBLE NOTES-SECURED -- 4,000,000 ------------- ------------- CONVERTIBLE NOTES-UNSECURED -- 32,481,782 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock par value $.005 per share and additional paid in capital. Issued and outstanding 196,975,392 and 107,752,042 234,196,092 218,693,245 shares respectively. Common Stock Not Issued 9,132,774 -- Cumulative currency translation adjustment (CTA) (365,932) (365,932) Accumulated deficit (241,496,926) (231,980,970) -------------- -------------- Total stockholders' equity (deficit) 1,516,008 (13,653,657) ------------- -------------- Total $ 56,122,538 $ 90,143,392 ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Years ended February 29, 2000, February 28, 1999 and February 28, 1998 2000 1999 1998 ------------- ------------- ------- Net Revenues $ 5,788,221 $ 53,650,025 $103,939,641 Cost of GOODS AND OVERHEAD 13,424,303 130,437,194 71,774,522 ------------- ------------- ------------- GROSS PROFIT (LOSS) (7,636,082) (76,787,169) 32,165,119 -------------- -------------- ------------- EXPENSES: Research and development 148,443 1,996,198 475,992 Impairment of long-lived assets -- 5,838,466 -- Selling, general and administrative expenses 10,725,397 64,131,074 35,266,048 ------------- ------------- ------------- Total expenses 10,873,840 71,965,738 35,742,040 ------------- ------------- ------------- (LOSS) FROM OPERATIONS (18,509,922) (148,752,907) (3,576,921) OTHER (INCOME) AND EXPENSE 5,893,449 30,562,046 349,962 (LOSS) BEFORE INCOME TAXES AND OTHER ITEMS (24,403,371) (179,314,953) (3,926,883) Provision (benefit) for taxes -- 566,635 (1,275,555) Minority interests in consolidated subsidiary -- 10,372,895 (946,405) Loss in excess of basis of subsidiary: Aura Systems, Inc. -- 8,080,695 -- Minority interests -- 26,561,481 -- -------------- -------------- ------------- Loss from continuing operations (24,403,371) (134,866,517) (3,597,733) --------------- --------------- --------------- Discontinued Operations: Loss from Discontinued Operations, Net of taxes of $0 for 2000,1999 & 1998 respectively (1,433,859) (14,875,065) (8,038,807) Loss on Disposal, Net of Taxes of 0 for 2000 (2,697,642) -- -- --------------- -------------- -------------- Loss from Discontinued Operations (4,131,501) (14,875,065) (8,038,807) --------------- --------------- --------------- Loss before extraordinary item (28,534,872) (149,741,582) (11,636,540) Extraordinary Item Gain on extinguishment of debt obligations, net of income taxes of $0 19,068,916 -- -- -------------- -------------- -------------- Net loss (9,465,956) (149,741,582) (11,636,540) Other comprehensive income (loss), net of taxes: -- (406,574) -- -------------- --------------- -------------- Comprehensive loss $ (9,465,956) $ (150,148,156) $ (11,636,540) ============== =============== ============== NET (LOSS) PER COMMON SHARE $ (0.08) $ (1.74) $ (.15) ============== =============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 124,294,051 5,831,688 79,045,290 =========== ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended February 29, 2000, February 28, 1999 and February 28, 1998 Accumulated Other Common Stock Additional Common Comprehensive Paid-in Stock not Accumulated (CTA) Income Shares Amount Capital Issued Deficit (Loss) Total ------ ------ ------- ------ ------- - ------ ----- 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) Notes payable converted 68,534,445 342,672 10,036,430 -- -- -- 10,379,102 Exercise of warrants 120,000 600 44,200 -- -- -- 44,800 Stock issued to satisfy 2,907,275 14,536 770,429 -- -- -- 784,965 liabilities Private placements 17,661,630 88,308 4,400,692 -- -- -- 4,489,000 Expenses of issuances -- -- (195,020) -- -- -- (195,020) Common stock not issued 9,132,774 9,132,774 Net (loss) -- -- -- -- (9,465,956) -- (9,465,956) -------------- -------- ------------ --------- --------------- -------- ---------- Balances at February 29, 2000 196,975,392 $984,875 $233,211,217 $9,132,774 $(241,446,926) $(365,932) $1,516,008 ============== ======== ============ ========== ============== ========== =========
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended February 29, 2000, February 28, 1999 and February 28, 1998 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net loss $ (9,465,956) $(149,741,582) $(11,636,540) ------------- -------------- ---------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 6,853,924 12,985,278 8,362,110 Provision for environmental cleanup 48,812 44,516 40,597 (Gain) Loss on disposition of assets 1,122,119 6,066,168 (555,326) Equity in losses of unconsolidated joint ventures -- 6,268,384 1,937,747 (Gain)loss on sale of subsidiary and other stock investments 1,669,161 (262,804) (12,144,740) Impairment of long-lived assets -- 9,403,687 -- Gain on extinguishment of Debt (19,068,916) -- -- Foreign currency translation adjustment -- (406,574) -- Assets-(Increase) Decrease: Receivables 462,541 46,037,727 (674,443) Inventories 4,019,810 40,236,817 (24,866,579) Prepayments -- 9,891,144 (5,631,521) Other current assets 1,515,787 3,801,107 (5,534,281) Deferred income taxes -- 838,000 (940,000) Liabilities-Increase (Decrease): Accounts payable (1,371,174) (21,479,522) 20,279,113 Accrued expenses (1,577,248) 4,614,005 2,086,583 Litigation and other liabilities 222,223 7,389,649 (345,372) -------------- ------------ ------------ Total adjustments (6,102,961) 125,427,582 (17,986,112) -------------- ----------- ---------- Net cash used by operating activities (15,568,917) (24,314,000) (29,622,652) --------------- ------------ ---------- Cash flows from investing activities: Payments from Notes Receivable 5,674,828 -- -- Proceeds from sale of assets 327,109 2,721,000 920,000 Purchase of property and equipment (16,103) (2,143,237) (1,910,214) Manufacture of special tools and equipment -- (1,910,611) (16,096,180) Investment in joint ventures -- (164,466) 1,202,138 Long-term investments -- (4,940,000) (1,117,465) Long-term receivables -- 3,436,809 3,347,144 Patents and trademarks -- (467,167) (1,903,718) Goodwill and other assets -- 1,425,794 (2,398,400) Proceeds from subsidiary stock -- 1,611,873 5,472,656 -------------- ----------- ----------- Net cash provided (used) by investing activities 5,985,834 (430,005) (12,484,039) -------------- ------------ ----------=
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows 2000 1999 1998 ---- ---- ---- Cash flows from financing activities: Net proceeds from borrowings $251,101 $17,922,584 $26,287,632 Repayment of notes payable (1,218,571) (3,396,083) (10,874,683) Proceeds from exercise of options -- 103,000 -- Net proceeds from issuance of common stock 7,393,980 1,675,873 636,350 Net proceeds from exercise of warrants 24,800 7,884,325 -- Proceeds from issuance of warrants -- -- 900,000 Net proceeds from issuance of convertible notes -- 11,720,000 13,959,649 Repayment of convertible notes (430,000) (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 6,021,310 22,486,804 41,073,748 ------------ ------------ ---------- Net decrease in cash and equivalents (3,561,773) (2,257,201) (1,032,943) Cash and equivalents at beginning of year 3,822,210 6,079,411 7,112,354 ------------ ------------ ----------- Cash and equivalents at end of year $ 260,437 $ 3,822,210 $ 6,079,411 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 922,708 $ 3,374,992 $ 6,280,859 ============ ============ =========== Income Taxes -- $ 2,244,762 $ 186,310 $ ============ ============ ===========
Supplemental disclosures of non-cash investing and financing activities: 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. During the year ended February 29, 2000, $11,009,102 of convertible notes were converted into 71,054,445 shares of common stock. Additionally, liabilities of $20,000 were satisfied by the exercise of 40,000 warrants with an exercise price of $.50 per share, and 1,020,890 shares of stock were issued as fees in connection with the private placement. The Company issued 2,907,275 shares of common stock in settlement of accrued and unpaid management compensation of $784,965. See accompanying notes to consolidated financial statements Subsequent to year end, the Company issued the following shares of common stock which were recorded as a component of stockholder's equity (common stock not issued) at February 29, 2000. The common stock could not be issued prior to year end due to the limitation on the number of shares authorized (see note 13). The Company issued 2,520,000 shares of common stock for the conversion of notes payable and accrued interest of $686,524; 541,667 shares of common stock in settlement of accrued and unpaid director's fees of $146,250; 12,500,000 shares of common stock, in the amount of $3,100,000 for the Company's private placement, and 14,687,972 shares of common stock with a value of $5,200,000 to satisfy the liability for a class action settlement. In addition, 2,400,000 shares of common stock were issued as a finder's fee for the Company's private placements and 1,775,824 shares of common stock for repricing a prior private placement of the Company. The finder's fee and repricing had no effect on total stockholders' equity. See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 29, 2000, February 28, 1999 and February 28, 1998 (1) Business and Summary of Significant Accounting Policies Business Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, was founded to engage in the development, commercialization and sales of products, systems and components using its patented and proprietary electromagnetic and electro-optical technology. The Company's proprietary and patented technology has been developed for use in systems and products for commercial, industrial, consumer, and government use. 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 vehicle 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 is being distributed and sold through dealers, distributors, and OEMs. The Company intends to continue to focus its business on the AuraGen line of products. In addition, the Company is entitled to receive royalties from Daewoo Electronics Co., Ltd. ("Daewoo") for its electro-optics technology ("AMA") licensed to Daewoo in 1992. 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. 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. NewCom ceased operations in early Fiscal 2000. 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. In Fiscal 2000, the Company sold MYS to MYS management. AuraSound manufactured and sold professional and consumer sound system components and products. In July 1999, the Company entered into an agreement for the sale of the assets of AuraSound. 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 such realization of assets and liquidation of liabilities is subject to significant uncertainties. Management is currently seeking or obtaining additional sources of funds and the Company has restructured a significant portion of its debt obligations. The Company's ability to continue as a going concern is dependent upon the successful achievement of profitable operations and the ability to generate sufficient cash from operations and financing sources to meet the restructured obligations. The Company is now focusing 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 For the year ended February 29, 2000, the consolidated financial statements include accounts of the Company and its wholly owned subsidiaries Aura Ceramics, Inc. and Electrotec Productions, Inc. (and its wholly owned subsidiary Electrotec Europe). During the year ended February 29, 2000, the Company divested its AuraSound segment (see note 22). The AuraSound segment included the Company's wholly owned subsidiaries AuraSound, Inc. and MYS and its subsidiaries Audio-MYS, MYS America and MYS U.S.A. Subsequent to year-end the Company sold its interest in Aura Ceramics, Inc. to local management. For the year ended February 28, 1999, 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 year ended February 28, 1998, 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 to 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 losses of subsidiary are in excess of minority interests investments. The minority 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 and 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. For Fiscal 1999 the Company's other comprehensive loss consists of foreign currency translations. The adoption of this statement did not have any impact on the Company's results of operations, financial position, or cash flows. Cash Equivalents The Company considers all highly liquid assets, having an original maturity of less than three months when purchased, 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 In Fiscal 1999, goodwill represented the excess purchase price over the fair market value of the assets acquired of certain acquisitions. Goodwill was being amortized over 40 years on a straight-line basis. As a result of the Company's AuraSound sale, there was no goodwill as of February 29, 2000. Inventories Inventories are stated at the lower of cost (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. Such common stock equivalents amount to 11,709,000 common shares for convertible debt, warrants and options. Patents and Trademarks The Company capitalizes the costs of obtaining or acquiring patents and trademarks. Amortization of patent and trademark costs is provided for by the straight line method over the shorter of the legal or estimated economic life. If a patent or trademark is rejected, abandoned, or otherwise invalidated the un-amortized cost is expensed in that period. 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 Fiscal 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, in Fiscal 1999 the Company recognized a $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 2000, 1999 and 1998 approximated nil, $9.4 million and $5.8 million, respectively. 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 Fiscal 2000 and 1999, the Company capitalized costs of nil and $1,910,611, respectively, on special tools and equipment, which have been designed for the manufacturing and development of automotive products. The capitalized amounts, included in machinery and equipment, include allocated costs of direct labor and overhead. During Fiscal 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 $6.5 million, $11.9 million and $5.4 million for Fiscal 2000, 1999 and 1998, respectively. (2) Receivables Receivables consist of the following:
2000 1999 ---- ---- Commercial receivables: Amounts billed $10,100,962 $16,548,666 Advances due from related parties 31,455 102,773 Less allowance for uncollectible receivables and (7,673,217) (8,271,025) ----------- ----------- sales returns $2,459,200 $8,380,414 ========= =========
Bad debt expense was approximately $0.5 million, $13.3 million and $3.6 million in Fiscal 2000, 1999 and 1998 respectively. (3) Notes Receivable Notes receivable consist of the following: 2000 1999 ---- ---- MYS $ 570,092 $ -- Algo 1,736,975 -- Telemac 2,500,000 2,750,000 --------- --------- 4,807,067 2,750,000 Less current portion 3,557,067 250,000 --------- --------- $1,250,000 $2,500,000 ========= ========= During Fiscal 1999, the Company sold a portion of its shares in Telemac Cellular Corp. (Telemac) back to Telemac. The Company then entered into a cancellation of shares agreement whereby it tendered the remaining shares to Telemac in exchange for a note receivable from Telemac resulting in a gain recognized of approximately $850,000. The note matures in Fiscal 2002. In March 1999, the Company sold MYS Corp. and subsidiaries to the management of MYS for a sales price of $4.2 million. In December 1999, the Company finalized the sale of the assets of the AuraSound speaker division, total consideration received was approximately $2.4 million. The purchaser of AuraSound's assets is the same party that acquired the majority of the Company's restructured debt as described at Note 24. (4) Long Term Investments Long-term investments consist of the following:
2000 1999 ---- ---- Aquajet Corporation $ 923,835 $ 923,835 Alaris Industries, Inc. 1,200,000 1,200,000 Other 0 800,000 ---------- ----------- $ 2,123,835 $2,923,835 ========== ==========
(5) 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. In Fiscal 2000 the Company's remaining investment in property of the joint venture was disposed of, and certain claims and liabilities were satisfied. A loss on disposal of assets, in the amount of $800,000, was recorded in Fiscal 2000. (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. Daewoo was taken over by its creditors during Fiscal 1999. No assurances can be given as to the future plans of the "AMA" technology at Daewoo. (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 its financial crisis the Company ceased 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 in Fiscal 1999. (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. In Fiscal 1999, due to 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 ventures. (6) Related Party Transactions Notes and advances due from related parties, aggregated $31,455 and $102,773 at February 29, 2000 and February 28, 1999, respectively, included in current receivables. (7) Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of the following:
2000 1999 ---- ---- Raw materials $4,205,828 $11,318,263 Finished goods 7,310,335 15,034,795 Reserves for potential product obsolesence (326,936) (7,876,000) --------------- --------------- $11,189,227 $18,477,058 ============== ==============
At February 29, 2000, inventories consist primarily of components and completed units for the Company's AuraGen product. (8) Property and Equipment Property and Equipment, at cost is comprised as follows:
2000 1999 ---- ---- Land $ 3,187,997 $ 3,877,074 Buildings 8,708,796 9,396,392 Machinery and equipment 27,755,903 32,354,243 Furniture, fixtures and leasehold improvements 2,566,721 2,348,990 ------------ ------------------ $42,219,417 $47,976,699 =========== ===========
(9) Notes Payable and Other Liabilities Notes Payable and Other Liabilities consist of the following:
2000 1999 ---- --- ---- Litigation payable $ 5,722,221 $17,302,047 Lines of Credit 2,584,000 3,000,000 Notes payable-equipment (a) 31,353 194,296 Notes payable-buildings (b) 5,535,693 8,549,854 Unsecured notes payable (c) 6,807,676 5,190,747 Trade debt (d) 10,961,151 -- Secured notes payable (e) 15,309,622 -- ---------- -------------- 46,951,716 34,236,944 Less: current portion 9,899,531 8,787,113 -------------- -------------- Long term portion 37,052,185 25,449,831 Reserve for environmental cleanup 554,510 505,698 ------------- ------------- $ 37,606,695 $25,955,529 ============= ==============
(a) Notes payable-equipment at February 29, 2000 consists of a note maturing in February 2005. (b) Notes payable-buildings consists of a 1st Trust Deed on a building in California, due in Fiscal 2009, and in Fiscal 1999 includes a note due October 2000 collateralized by a building in Malaysia. (c) Unsecured notes payable consists of four notes at February 29, 2000 and three notes at February 28, 1999. (d) Trade debt was restructured with payment terms over a three year period with interest at 8% per annum commencing on January 2000. (e) Secured notes payable consists of three notes. One of the secured notes includes warrants to purchase 1,000,000 shares of the Company's common stock exercisable at $0.375 per share. On another of the secured notes, in the event of default the holder is entitled to convert the unpaid principal and interest into common stock of the Company at $0.60 per share; however, the Company is entitled to a discount if the note is prepaid, which discount is initially 20% of the amount prepaid, and the discount declines proportionally over the three year term of the note. Annual maturities of long term notes payable and litigation payable for the next fiscal years are as follows: Fiscal Year Amount ----------- ------ 2001 $9,899,531 2002 6,578,296 2003 18,882,754 2004 619,521 2005 629,028 thereafter 10,342,586 ---------- $46,951,716 (10) 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 obligation of $2,122,900, related to these notes was redeemed by the Company. In Fiscal 1998, the Company issued $34.5 million of unsecured notes payable to investors. During fiscal 1998 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 Fiscal 2000 the Company redeemed $1.6 million of convertible notes issued in Fiscal 1998. Additionally, in Fiscal 1999, $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. In Fiscal 2000, the Company restructured much of its convertible notes payable through debt forgiveness and equity conversion (see note 24). (11) Accrued Expenses Accrued expenses consist of the following: 2000 1999 ---- ---- Accrued payroll and related expenses $ 582,850 $1,076,185 Bond interest payable 261,328 4,535,789 Other 290,120 2,444,809 ---------- ------------- $ 1,134,298 $8,056,783 ========== ============== (12) Income Taxes At February 29, 2000, the Company had net operating loss carry-forwards for Federal and state income tax purposes of approximately $242 million and $108 million respectively, which expire through 2020. 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 $97 million for Fiscal 2000 and $93 million for Fiscal 1999. The Company has also recorded a valuation account to fully offset the deferred benefit due to the uncertainty of the realization of this benefit. The Company's formerly owned Japanese subsidiary, MYS Corporation, paid income taxes to the Japanese government at an effective rate of approximately fifty eight percent. At February 28, 1999, MYS Corporation had a current income tax receivable of approximately $153,000. (13) Common Stock, Stock Options and Warrants At February 29, 2000, the Company had 200,000,000 shares of $.005 par value common stock authorized for issuance. The number of authorized shares was increased to 500,000,000 subsequent to February 29, 2000 (see Note 23). At February 29, 2000 there were warrants outstanding to purchase 1,213,000 shares of the Company's common stock exercisable at $0.375 a share. 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 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 Grants -- -- Cancellations -- -- Exercises -- -- Expired (60,000) 3.00-4.75 -------- ----------- Options outstanding at February 29, 2000 500,000 $2.06-$2.30 ======= ===========
The following table summarizes information about director stock options at February 29, 2000:
Number Average Weighted Number Range of Outstanding at Remaining Life Average Exercise Exercisable As - Exercise Price 2/29/00 in Years Price of 2/29/00 $2.30 50,000 7.13 $2.30 50,000 $2.06 450,000 7.36 $2.06 400,000
(14) Employee Stock Plans As of February 29, 2000, the Company has one employee benefit plan: The Employee Stock Ownership Plan (ESOP). In addition, the options granted under the 1989 Stock Option Plan are valid and subject to exercise. 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 2000, 1999 and 1998 respectively. In March 2000, the Company's Board of Directors adopted the 2000 Stock Option Plan, a nonqualified plan which was subsequently approved by the shareholders. The Stock Option Plan authorizes the grant of options to purchase up to 10% of the Company's outstanding common shares. Shares currently under option generally vest ratably over a 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 2000, 1999 and 1998 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 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 Grants -- -- Cancellations (454,500) 2.06-7.31 Exercises -- -- Expired (131,800) 3.06-4.12 ------------ ----------- Options outstanding at February 29, 2000 5,939,000 $1.44-7.31 =========== ---==========
The following table summarizes information about employee stock options at February 29, 2000:
Number Average Weighted Number Range of Outstanding at Remaining Life Average Exercise Exercisable As - Exercise Price 2/29/00 in Years Price of 2/29/00 $1.44 431,000 0.92 $1.44 431,000 $7.25 6,000 1.75 $7.25 6,000 $3.00-$4.00 215,000 2.62 $3.47 215,000 $7.31 6,000 3.60 $7.31 6,000 $1.79-$2.15 2,481,000 7.42 $2.04 2,481,000 $3.31 2,800,000 8.05 $3.31 560,000
(15) Leases At February 29, 2000, the Company has no long term operating leases. Rental expense charged to operations approximated $.9 million, $1.8 million and $1.3 million in Fiscal 2000, 1999 and 1998, respectively. (16) Significant Customers The Company sold ceramics related products to a single significant customer during Fiscal 2000 for a total of approximately $2.1 million or 29.7% of net revenues. After Fiscal 2000 this customer will not be a significant customer as the Company has sold the Ceramics division. 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. The Company sold sound related products and computer related products to five significant customers during Fiscal 1998. Sales of speakers to a major electronics retailer accounted for approximately $11.8 million or 7.3% of gross revenues. Sales of communications and multimedia products to major mass merchandisers Best Buy, Circuit City, and Staples accounted for $60.1 million or 37.3% of gross revenues. Sales of computer monitors to two customers accounted for approximately $10 million or 6.2% of gross revenues. (17) 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. 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 finally approved in or about April, 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. The deferral resulted from the limitation on the number of shares authorized (see note 23). The final distribution of stock and warrants to class members occured in June 2000. NewCom Related Litigation 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 set for May, 2000 was suspended by the panel without yet scheduling a new hearing date. 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 parties have agreed to submit this matter to mediation on June 28, 2000. 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. (18) 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 29, 2000. 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. (19) Other (Income) and Expenses Other (income) and expenses consist of:
2000 1999 1998 ---- ---- ---- Gain on subsidiary stock and other assets $ -- $ (811,657) $ (12,632,265) Legal settlements 2,777,762 7,717,518 1,700,000 Equity in losses of unconsolidated joint ventures -- 6,268,384 1,937,747 Loss on disposal of assets (259,274) 1,026,972 -- Loss on disposal of investment -- 4,782,839 -- Termination of license arrangement -- -- 3,114,030 Other income (1,101,279) (101,711) (220,291) Interest expense 4,476,690 11,679,701 6,450,741 --------- ---------- ------------- $ 5,893,449 $ 30,562,046 $ 349,962 ========= ============ ============
(20) Fourth Quarter Adjustments Certain fourth quarter adjustments were made in Fiscal 2000 that are significant to the quarter and to comparisons between quarters. During the fourth quarter of Fiscal 2000, in conjunction with the Company's restructuring, $13,218,750 in debt and $5,850,168 in accrued interest was forgiven by the Company's major creditors. This forgiveness of debt is recorded as an extraordinary item in the fourth quarter of Fiscal 2000 (see note 24). (21) 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 related products including 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, revenues generated from the sale of computer monitors and activity from Electrotec. 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 in early Fiscal 2000. The sound segment consists of the manufacture and sale of professional and consumer sound system components and products, including speakers, amplifiers, and Bass Shakers. AuraSound reflects the aggregate segment operating units based on economic characteristics, products and services, the production process class of customer and distribution process. AuraSound was sold during Fiscal 2000. Aura NewCom AuraSound Consolidated (in thousands) Net Revenues* 2000 $ 5,788 $ -- $ -- $ 5,788 1999 $ 6,830 $ 46,820 $ -- $ 53,650 1998 $ 10,252 $ 93,687 $ -- $ 103,939 Income (loss) from Operations 2000 $ (18,510) $ -- $ -- $ (18,510) 1999 $ (54,396) $ (94,357) $ -- $ (148,753) 1998 $ (15,448) $ 11,872 $ -- $ (3,516) Identifiable Assets 2000 $ 56,036 $ -- $ -- $ 56,036 1999 $ 63,754 $ -- $ 26,389 $ 90,143 1998 $ 96,735 $ 96,127 $ 34,441 $ 227,303 Depreciation and Amortization 2000 $ 6,854 $ -- -- $ 6,854 1999 $ 7,375 $ 1,511 $ 4,099 $ 12,985 1998 $ 3,621 $ 1,274 $ 3,467 $ 8,362 Capital Expenditures 2000 $ 16 $ -- $ -- $ 16 1999 $ 2,450 $ 161 $ 1,443 $ 4,054 1998 $ 15,322 $ 1,455 $ 1,229 $ 18,006 Number of operating locations at year-end (unaudited) 2000 2 -- -- 2 1999 2 2 5 9 1998 2 2 5 9
* 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 Net Revenue from customer geographical segments are as follows (in thousands):
2000 1999 1998 ---- ---- ---- U.S., Canada, Latin America $6,845 96.75% $58,871 72.22% $120,517 88.15% Europe 63 .89 772 0.95 451 0.33 Asia 168 2.36 21,875 26.83 15,747 11.52 --- ------- ------ ------- ------- ------ $7,076 100.00% $81,518 100.00% $136,715 100.00% ====== ======= ======= ====== ========= ======
All of the Company's operating long-lived assets are located in the United States (22) Discontinued Operations In June 1999 and March 1999, the Company divested its interest in AuraSound, Inc. and the MYS group of entities, respectively. Pursuant to Accounting Principles Board Option ("APB") No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of the Company have been reclassified to reflect the disposition of the AuraSound segment as a discontinued operation. Net operating revenues for discontinued operations for Fiscal 2000, 1999 and 1998 were approximately $1,037,000, $27,868,000 and $32,776,000 respectively. (23) Subsequent Events Note Conversion On March 6, 2000, the Company entered into a settlement agreement and release of claims for a $1,000,000 convertible note in exchange for 3,000,000 shares of the Company's common stock. Sale of Assets of Aura Ceramics Effective March 1, 2000 the Company entered an agreement for the sale of the assets of Aura Ceramics. The agreement calls for a sales price of $3.5 million with a down payment of $1 million, which was paid on May 2000. The balance, including interest at 8% per annum is due in monthly installments of $31,000, with a balloon payment of the remaining principal and interest due at the end of seven years. Completion of Common Stock Private Placement In May 2000, the Company completed a private placement of approximately 15.5 million shares of its common stock at $0.32 per share resulting in gross proceeds of approximately $5.0 million. Authorized Stock In March 2000, the Company's shareholders approved an amendment to the articles of incorporation to increase the number of common shares authorized to 500,000,000, and to authorize the issuance of up to 10,000,000 shares of preferred stock. 2000 Stock Option Plan At the March 6, 2000 Annual Meeting, the Company's Board of Directors adopted, and shareholders approved, the 2000 Stock Option Plan. (24) Extinguishment of Debt At the start of Fiscal 2000, the Company had $38,481,782 in convertible notes payable, of which most were in default. During the current year the Company restructured much of its convertible notes payable obligation through debt forgiveness and equity conversion. With the debt restructure, $11,009,102 of convertible notes was converted into 71,054,445 shares of the Company's common stock, of which 2,520,000 shares are not reflected as outstanding as of February 29, 2000. The Company also redeemed $430,000 of convertible notes, and $12,535,898 in convertible notes and $5,850,168 in accrued interest were forgiven. A majority of the restructure was accomplished by a single unrelated party acquiring $21,345,000 of the convertible notes payable and subsequently converting $9,224,102 into 65,034,445 shares of the Company's common stock and debt forgiveness of $12,120,898. In addition, $682,852 in accounts payable and accrued expenses was also forgiven. Total debt forgiveness of $19,068,918 is reflected as an extraordinary item in the accompanying consolidated financial statements.
SCHEDULE II AURA SYSTEMS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended February 29, 2000, February 28, 1999 and February 28, 1998 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 29, 2000 Allowance for: Uncollectible Accounts $8,149,551 $ 456,233 $ -- $ 932,567 $7,673,217 Reserve for returns 121,474 359,488 -- 480,962 -- Reserve for potential product obsolescence 7,876,000 82,913 -- 7,631,977 326,936 --------- -------- ------------ --------- ---------- $16,147,025 $ 898,634 $ -- $9,045,506 $8,000,153 ========== ======= =============== ========== ========= 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 ========= ========== ========== ========== ==========
Amounts charged to other accounts include amounts charged to price protection and rebates in Fiscal 1999. EX-10.24 2 0002.txt RELEASE FROM INFINITY INVESTORS LIMITED RELEASE This Release is being executed and delivered in accordance with Section 3.15 of the Exchange Agreement dated February 14, 2000 ("Agreement") by and among INFINITY INVESTORS LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity"), GLACIER CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Glacier"), GLOBAL GROWTH LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Global"), SUMMIT CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Summit" and, together with Infinity, Glacier and Global, each a "Fund", and collectively, the "Funds" or the "Releasors") and AURA SYSTEMS, INC., a Delaware corporation (the "Company" or "Releasee"). Capitalized terms used in this Release without definition have the respective meanings given to them in the Agreement. WITNESSETH: WHEREAS, Releasors acknowledge that the execution and delivery of this Release is a condition to the Company's obligation to make the Exchange on the Closing Date pursuant to the Agreement and that the Company is relying on this Release in consummating such Exchange. NOW, THEREFORE, in consideration of the Purchase Price and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Releasors agree as follows: Section 1. Recitals. The foregoing recital is true and correct. Section 2. Release. Effective upon the execution and delivery of this Release, each of the Releasors does hereby forever discharge and fully release the Releasee from any and all actions, causes of action, claims, contracts, obligations, demands, damages, costs, expenses, attorneys' fees, compensation, debts and liabilities of any nature whatsoever, whether arising at law or in equity, known or unknown, arising out of or relating to any matters, transactions or events which existed or have occurred prior to the date of this Release; provided, however, that such Release shall not (a) preclude the Funds from asserting any and all matters in connection with the appointment of a bankruptcy trustee, examiner, receiver or responsible person for the Company in any bankruptcy, insolvency or other proceeding involving the Company, or (b) include any and all claims or causes of action of the Funds of whatever character or nature, at law or in equity, arising from, related to, or in connection with any payments, conveyances or transfers of assets or property by the Company to any Person, including, without limitation, to any of its officers, directors, subsidiaries, Affiliates or Insiders. Section 3. Representations and Warranties. Each of the Releasors represent and warrants to the Releasee as of the date hereof that: 3.1. Authority and Enforceability. He has full power and authority to execute and deliver this Release, on behalf of the Funds and to obligate the Funds as provided herein. He has duly authorized, executed and delivered this Release voluntarily, on behalf of the Funds and this Release constitutes the legal, valid and binding agreement of the Funds, enforceable against the Funds in accordance with its terms, except as such enforcement may be limited by general principles of equity or by bankruptcy, insolvency, or other similar laws affecting creditors' rights generally. 3.2. No Assignment. He has not assigned or transferred to any other person or entity any rights or claims which if not so assigned or transferred would be relinquished by this Release. 3.3. Review of Documentation and Release; Consultation with Counsel. Releasors have provided a copy of the Release to its attorneys and have had an adequate opportunity to consult with them and to take whatever actions it has deemed necessary in order to adequately evaluate the terms and provisions hereof and to determine to execute and deliver this Release. 3.4. No Reliance or Inducements. Except for the consideration reflected in the recitals hereto, in executing and delivering this Release, the Funds have not relied upon any statements, representations, conduct, or information in any form, made or given by the Releasee or its representatives or professional advisors. Section 4. Miscellaneous. 4.1. Governing Law. The interpretation and construction of this Release, and all matters relating hereto, shall be governed by the laws of the State of New York, without regard to principles of conflicts of law. 4.2. Severability. The rights, benefits and obligations of the Releasors pursuant to this Release shall be separate and apart and irrespective of any other rights, benefits, obligations or conditions in any other agreement, document or instrument, and if any other agreement, document or instrument, or any provision thereof, shall be held to be invalid or unenforceable, this Release and all provisions herein shall remain in full force and effect. If any provision of this Release shall be held to be unenforceable, then the invalidity of such specific provision shall not be held to invalidate any other provision herein and such other provision shall remain in force and effect. 4.3. No Waiver. The waiver by any party of a breach or violation of any provision of this Release shall not operate as, or be construed to be, a waiver of any subsequent breach of the same or other provision hereof. No single or partial exercise of any right, power or privilege hereunder precludes any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 4.4. Amendments. This Release may be amended only in writing signed by the Releasors and consented to by the Releasee. 4.5. Construction. This Release shall be interpreted without regard to any presumption or rule requiring construction against the Person causing this Release to be drafted. 4.6. Entire Agreement. This Release sets forth the entire understanding of the Releasors and the Releasee with respect to the subject matter hereof. This Release supersedes all prior oral and written agreements and understandings among the Releasors and the Releasee with respect to such subject matter. [SIGNATURE PAGE] [SIGNATURE PAGE] IN WITNESS WHEREOF, the undersigned have executed and delivered this Release by their duly authorized agent as of the date first indicated above. INFINITY INVESTORS LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title: Senior Vice President GLACIER CAPITAL LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title: Senior Vice President GLOBAL GROWTH LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title: Senior Vice President SUMMIT CAPITAL LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title: Senior Vice President EX-10.25 3 0003.txt RELEASE FROM AURA SYSTEMS, INC. TO INFINITY RELEASE This Release is being executed and delivered in accordance with Section 3.15 of the Exchange Agreement dated February 14, 2000 ("Agreement") by and among AURA SYSTEMS, INC., a Delaware corporation (the "Company" or "Releasor"), and INFINITY INVESTORS LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity"), GLACIER CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Glacier"), GLOBAL GROWTH LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Global"), SUMMIT CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Summit" and, together with Infinity, Glacier and Global, each a "Fund", and collectively, the "Funds" or the "Releasees"). Capitalized terms used in this Release without definition have the respective meanings given to them in the Agreement. WITNESSETH: WHEREAS, Releasor acknowledges that the execution and delivery of this Release is a condition to each Fund's obligation to make the Exchange on the Closing Date pursuant to the Agreement and that each of the Funds is relying on this Release in consummating such Exchange. NOW, THEREFORE, in consideration of the Secured Notes and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Releasor agrees as follows: Section 1. Recitals. The foregoing recital is true and correct. Section 2. Release. Effective upon the execution and delivery of this Release, the Releasor does hereby forever discharge and fully release each of the Releasees, and its or their present or former agents, shareholders, officers, directors, principals, advisors, employees, representatives, attorneys, agents, heirs, predecessors, successors and assigns, from any and all actions, causes of action, claims, contracts, obligations, demands, damages, costs, expenses, attorneys' fees, compensation, debts and liabilities of any nature whatsoever, whether arising at law or in equity, known or unknown, arising out of or relating to any matters, transactions or events which existed or have occurred prior to the date of this Release. Section 3. Representations and Warranties. The Releasor represents and warrants to each of the Releasees as of the date hereof that: 3.1. Authority and Enforceability. He has full power and authority to execute and deliver this Release, on behalf of the Company and to obligate the Company as provided herein. He has duly authorized, executed and delivered this Release voluntarily, on behalf of the Company and this Release constitutes the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as such enforcement may be limited by general principles of equity or by bankruptcy, insolvency, or other similar laws affecting creditors' rights generally. 3.2. No Assignment. The Company has not assigned or transferred to any other person or entity any rights or claims which if not so assigned or transferred would be relinquished by this Release. 3.3. Review of Documentation and Release; Consultation with Counsel. Releasor has provided a copy of the Release to its attorneys and has had an adequate opportunity to consult with them and to take whatever actions it has deemed necessary in order to adequately evaluate the terms and provisions hereof and to determine to execute and deliver this Release. 3.4. No Reliance or Inducements. Except for the consideration reflected in the recitals hereto, in executing and delivering this Release, the Company has not relied upon any statements, representations, conduct, or information in any form, made or given by any of the Releasees or their representatives or professional advisors. Section 4. Miscellaneous. 4.1. Governing Law. The interpretation and construction of this Release, and all matters relating hereto, shall be governed by the laws of the State of New York, without regard to principles of conflicts of law. 4.2. Severability. The rights, benefits and obligations of the Releasor pursuant to this Release shall be separate and apart and irrespective of any other rights, benefits, obligations or conditions in any other agreement, document or instrument, and if any other agreement, document or instrument, or any provision thereof, shall be held to be invalid or unenforceable, this Release and all provisions herein shall remain in full force and effect. If any provision of this Release shall be held to be unenforceable, then the invalidity of such specific provision shall not be held to invalidate any other provision herein and such other provision shall remain in force and effect. 4.3. No Waiver. The waiver by any party of a breach or violation of any provision of this Release shall not operate as, or be construed to be, a waiver of any subsequent breach of the same or other provision hereof. No single or partial exercise of any right, power or privilege hereunder precludes any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 4.4. Amendments. This Release may be amended only in writing signed by the Releasor and consented to by the Releasees. 4.5. Construction. This Release shall be interpreted without regard to any presumption or rule requiring construction against the Person causing this Release to be drafted. 4.6. Entire Agreement. This Release sets forth the entire understanding of the Releasor and the Releasees with respect to the subject matter hereof. This Release supersedes all prior oral and written agreements and understandings among the Releasor and the Releasees with respect to such subject matter. IN WITNESS WHEREOF, the undersigned has executed and delivered this Release as of the 14th day of February, 2000. AURA SYSTEMS, INC. By: Name: Title: EX-10.26 4 0004.txt EXCHANGE AGREEMENT EXCHANGE AGREEMENT Among AURA SYSTEMS, INC., INFINITY INVESTORS LIMITED, GLACIER CAPITAL LIMITED, SUMMIT CAPITAL LIMITED, GLOBAL GROWTH LIMITED, and HW PARTNERS, LP as Agent for the Funds Dated as of February 22, 2000 EXCHANGE AGREEMENT THIS EXCHANGE AGREEMENT, dated as of February 22, 2000 (this "Agreement"), by and among AURA SYSTEMS, INC., a Delaware corporation (the "Company"), INFINITY INVESTORS LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity"), GLACIER CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Glacier"), SUMMIT CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Summit"), GLOBAL GROWTH LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Global" and, together with Infinity, Glacier and Summit, each a "Fund", and collectively, the "Funds"), and HW PARTNERS, LP, a Texas limited partnership, not in its individual capacity but solely as agent for the Funds hereunder (the "Agent"). W I T N E S S E T H : WHEREAS, the Company acknowledges and agrees that Infinity is the holder of the Company's Variable Interest Rate Convertible Notes due September 30, 1998, in the aggregate amount of at least $15,243,581.46, including all accrued interest thereon (collectively, the "Infinity Notes"), which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, the Company acknowledges and agrees that Glacier is the holder of the Company's Variable Interest Rate Convertible Notes due September 30, 1998, in the aggregate amount of at least $1,227,868.92, including all accrued interest thereon (collectively, the "Glacier Notes"), which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, the Company acknowledges and agrees that Summit is the holder of the Company's Variable Interest Rate Convertible Notes due September 30, 1998, in the aggregate amount of at least $1,227,868.92, including all accrued interest thereon (collectively, the "Summit Notes"), which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, the Company acknowledges and agrees that Global is the holder of the Company's Variable Interest Rate Convertible Notes due September 30, 1998, in the aggregate amount of at least $601,302.92, including all accrued interest thereon (collectively, the "Global Notes" and, together with the Infinity Notes, the Glacier Notes and the Summit Notes, the "Original Notes"), which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, prior to the Exchange (as defined below), the Funds will transfer, convey and assign (the "Assignment") to a third-party purchaser acceptable to the Funds (the "Purchaser") $4,000,000 in principal amount of the Original Notes (the "Assigned Notes") in exchange for $3,000,000 in cash (the "Cash Payment") and 1,111,111 unrestricted shares of the Company's Common Stock (the "Acquired Shares" and, together with the Cash Payment, the "Purchase Price"); WHEREAS, in connection with a proposed restructuring of its financial affairs (the "Restructuring"), the Company has requested that the Funds agree to accept Secured Notes of even date herewith (defined below) in an aggregate principal amount of $12,500,000 in exchange for the Original Notes held by the Funds after giving effect to the Assignment; and WHEREAS, pursuant to the Restructuring, the Funds have agreed to accept Secured Notes in exchange for the Original Notes held by the Funds after giving effect to the Assignment, subject to the terms and satisfaction of the conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: SECTION 1. Definitions and Principles of Construction. 1.1. Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined, except as otherwise provided): "Affiliate" shall mean, with respect to any Person, (i) any other Person that, directly or indirectly, is controlled by, or is under common control with, or controls such Person, (ii) any other Person in which, directly or indirectly, such Person holds, of record or beneficially, five percent or more of the equity or voting securities, (iii) any other Person that holds, of record or beneficially, five percent or more of the equity or voting securities of such Person, or (iv) any director, officer, partner or individual holding a similar position in respect of such Person. "Agent" shall have the meaning given to such term in the first paragraph of this Agreement. "Agreement" shall mean this Exchange Agreement, as modified, supplemented, amended, restated (including any amendment and restatement hereof), extended, reviewed or replaced from time to time. "Applicable Discount" shall mean, with respect to any applicable prepayment of principal under the Secured Notes in accordance with the terms thereof, a percentage which on the Closing Date shall be equal to twenty percent (20%) and thereafter shall decrease on a daily, straight line basis to zero percent (0%) on the Maturity Date. "Assigned Notes" shall have the meaning given to such term in the fifth whereas clause of this Agreement. "Assignment" shall have the meaning given to such term in the fifth whereas clause of this Agreement. "Aura Ceramics" shall mean Aura Ceramics, Inc., a Delaware corporation. "Aura Realty" shall mean Aura Realty, Inc., a Delaware corporation. "AuraGen" shall mean that certain power generator developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries under the trademark AuraGen, any successor thereto or any similar, derivative or related product line which may be developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries. "AuraSound" shall mean AuraSound, Inc., a Delaware corporation. "Authority" shall mean any governmental, regulatory or administrative body, agency, commission, board, arbitrator or authority, any court or judicial authority, or any public, private or industry regulatory authority, whether international, national, federal, state or local. "Bankruptcy Code" shall mean title 11 of the United States Code (11 U.S.C. ss. 101 et seq.), as amended from time to time. Section references to the Bankruptcy Code are to the Bankruptcy Code as in effect on the date of this Agreement and any subsequent provisions of the Bankruptcy Code, amendatory thereof, supplemental thereto or substituted therefor. "Board of Directors" shall mean the Board of Directors of the Company. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other government actions to close. "Claim" shall mean any action, claim, lawsuit, demand, suit, inquiry, hearing, investigation, notice of a violation, litigation, proceeding, arbitration, appeals or other dispute, whether civil, criminal, administrative or otherwise. "Closing" shall have the meaning given to such term in Section 2.2(a) hereof. "Closing Date" shall have the meaning given to such term in Section 2.2(a) hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property subject to the Security Documents. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean shares now or hereafter authorized of the class of common stock of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as common stock. "Company" shall have the meaning given to such term in the first paragraph of this Agreement. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person arising under, pursuant to or derived from any derivatives transactions or guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (subject to any limitation therein) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Contract" shall mean any agreement, contract, commitment, instrument or other binding arrangement or understanding, whether written or oral. "Conversion Event" shall have the meaning given to such term in the Secured Notes. "CNA" shall mean American Casualty Company of Reading, Pennsylvania. "CNA Restructuring Agreement" shall mean the agreement by and between the Company and CNA in the form of Exhibit A hereto. "Date Data" shall mean any data of any type that includes date information or which is otherwise derived from, dependent on or related to date information. "Date-Sensitive System" shall mean any software, microcode or hardware system or component, including any electronic or electronically controlled system or component, that processes any Date Data and that is installed, in development or on order by the Company or any of its Subsidiaries for its internal use, or that the Company or any of its Subsidiaries sells, leases, licenses, assigns or otherwise provides, or the provision or operation of which the Company or any of its Subsidiaries provides the benefit, to its customers, vendors, suppliers, affiliates or any other third party. "DFS" shall mean Deutsche Financial Services. "DFS Claims" shall mean the claims of DFS relating to the obligation of the Company with respect to debts owed by NewCom to DFS and guaranteed by the Company. "Disclosure Materials" shall mean, collectively, the exhibits and schedules to this Agreement or the other Exchange Documents furnished by or on behalf of the Company. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" (i) within the meaning of Section 414(b), (c), (m) or (o) of the Code or (ii) as a result of the Company or a Subsidiary of the Company being or having been a general partner of such person. "Exchange" shall have the meaning given to such term in Section 2.2(b) hereof. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended from time to time. "Exchange Documents" shall mean and include (i) this Agreement, (ii) the Secured Notes, (iii) the Security Documents, (iv) the Guaranty, and (v) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "Existing Indebtedness" shall have the meaning given to such term in Section 4.1(l) hereof. "Existing Liens" shall have the meaning given to such term in the Secured Notes. "Existing Secured Indebtedness" means Existing Indebtedness secured by Existing Liens (other than judgment liens). "Financial Statements" shall have the meaning given to such term in Section 4.1(h) hereof. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Funds" shall have the meaning given to such term in the first paragraph of this Agreement. "GAAP" shall mean generally accepted accounting principles in the United States consistently applied during a relevant period. "Glacier" shall have the meaning given to such term in the first paragraph of this Agreement. "Glacier Notes" shall have the meaning given to such term in the second whereas clause of this Agreement. "Global" shall have the meaning given to such term in the first paragraph of this Agreement. "Global Notes" shall have the meaning given to such term in the fourth whereas clause of this Agreement. "Guarantee" shall mean any guarantee or other Contingent Obligation (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (i) any endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (ii) any Contract (x) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (y) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (z) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy an obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. "Guarantor" shall mean each Subsidiary of the Company executing the Guaranty or otherwise made a party thereto in accordance with the terms thereof. "Guaranty" shall mean the Guaranty executed and delivered by the Guarantors in the form of Exhibit B hereto. "Indebtedness" shall mean, as to any Person specified in any provision of this Agreement, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person (x) evidenced by any notes, bonds, debentures or similar instruments made or issued by such Person, (y) for borrowed money or (z) for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person, (iii) all liabilities secured by any Lien upon any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized in accordance with GAAP under leases under which such Person is the lessee and (v) all Contingent Obligations and Guarantees of such Person. "Independent Director" shall mean a director of the Company who has no relationship to the Company that may interfere with the exercise of such individual's independence from the Company or its management. For purposes hereof, "relationship" shall include, without limitation, (i) being employed by the Company or any of its Affiliates at any time during the year in which such individual was elected to the Board of Directors of the Company or at any time during any of the three calendar years preceding the year of such election, (ii) accepting any compensation from the Company or any of its Affiliates other than compensation for board service or benefits under a tax-qualified retirement plan, (iii) being a member of the immediate family of an individual who at any time during the year in which such director was elected to the Board of Directors of the Company is, or has been at any time during any of the three calendar years preceding the year of such election, employed by the Company or any of its Affiliates as an executive officer, (iv) being a partner in, or a controlling shareholder or an executive officer of, any for-profit organization to which the Company or any of its Affiliates made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities) that exceed five percent (5%) of such organization's consolidated gross revenues for that year, or $200,000, whichever is more, at any time during any of the three calendar years preceding the year of election of the director to the Company's Board of Directors, and (v) being employed as an executive of another company where any of the Company's executives serve on such other company's compensation committee. "Infinity" shall have the meaning given to such term in the first paragraph of this Agreement. "Infinity Notes" shall have the meaning given to such term in the first whereas clause of this Agreement. "Insider" shall have the meaning given to such term in Section 101(31) of the Bankruptcy Code. "Isosceles" shall mean Isosceles Fund Ltd. "JNC" shall mean JNC Opportunity Fund Ltd., a Cayman Islands limited duration company. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Margin Stock" shall mean "margin stock" as such term is defined under Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Material Adverse Effect" shall mean, with respect to the Company and its Subsidiaries taken as a whole, any material adverse effect on the ability of the Company or the Subsidiaries to perform any of their obligations under any Exchange Document. "Maturity Date" shall have the meaning given to such term in Section 2.1(e)(A) hereof. "NEC" shall mean NEC Technologies, Inc., a Delaware Corporation. "New Equity" shall have the meaning set forth in Section 3.14 hereof. "NewCom" shall mean NewCom, Inc., a Delaware corporation. "NewCom Note" shall have the meaning given to such term in Section 4.1(ff) hereof. "Obligations" shall mean all present and future obligations, liabilities and other amounts owing to any Fund pursuant to the terms of this Agreement or any other Exchange Document. "Option" shall mean any subscription, option, warrant, right, security, Contract, commitment, understanding, or stock appreciation, phantom stock option, profit participation or arrangement by which the Company is bound to issue any additional shares of its capital stock or rights pursuant to which any Person has a right to purchase shares of the Company's capital stock. "Order" shall mean any decree, order, judgment, injunction, rule, ruling, Lien, voting right, or consent of or by an Authority. "Original Notes" shall have the meaning given that term in the fourth whereas clause of this Agreement. "OSHA" shall mean the Occupational Safety and Health Administration. "Patents" shall have the meaning given that term in the Security Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permits" shall mean all permits, licenses, registrations, certificates, Orders or approvals from any Authority or other Person (including, without limitation, those relating to the occupancy or use of owned or leased real property) issued to or held by the Company. "Permitted Liens" shall have the meaning given to such term in the Secured Notes. "Person" shall mean an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA which is maintained or contributed to by (or to which there is an obligation to contribute of) the Company or a Subsidiary of the Company or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Company, or a Subsidiary of the Company or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledged Stock" shall have the meaning given to such term in the Stock Pledge Agreement. "Process Agent" shall mean CT Corporation System, presently located at 111 Eighth Avenue, New York, New York 10011. "Proprietary Rights" shall mean all (i) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility, model, certificate of invention and design patents, patent applications, registrations and applications for registrations, (ii) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, (iii) copyrights and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data and documentation, (vi) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (vii) other proprietary rights relating to any of the foregoing and (viii) copies and tangible embodiments thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any prospectus subject to completion, and any such Prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Shares and, in each case, by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchasers" shall have the meaning given to such term in the fifth whereas clause of this Agreement. "Registration Statement" shall mean any registration statement of the Company which covers any of the Shares, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regulation" shall mean any rule, law, code, statute, regulation, ordinance, requirement, announcement or other binding action of or by an Authority. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Restructured NEC Debt" shall have the meaning given to such term in Section 3.13(d) hereof. "Restructured Trade Debt" shall have the meaning given to such term in Section 3.13(c) hereof. "Restructuring" shall have the meaning given to such term in the sixth whereas clause of this Agreement. "Rose Glen" shall mean RGC International Investors, LDC, a limited duration company of the Cayman Islands. "SEC Documents" shall have the meaning set forth in Section 4.1(y) hereof. "Secured Notes" shall mean the Secured Notes of even date herewith issued to the Funds pursuant to this Agreement in exchange for the Original Notes held by the Funds after giving effect to the Assignment, in the form of Exhibit C hereto. "Securities Act" shall mean the United States Securities Act of 1933, as amended from time to time. "Security Agreement" shall mean the Security Agreement to be executed and delivered by the Company in the form of Exhibit D hereto. "Security Documents" shall mean (i) the Security Agreement, (ii) the Stock Pledge Agreement, and (iii) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "Shares" shall mean shares of Common Stock issued to the Funds upon conversion of the Secured Notes or exercise of the Warrants. "Stock Pledge Agreement" shall mean the Stock Pledge Agreement to be executed and delivered by the Company in the form of Exhibit E hereto. "Subsidiaries" has the meaning given to such term in Section 4.1(a) hereof; provided, however, that, for purposes of this Agreement and the other Exchange Documents, the term "Subsidiaries" shall not include NewCom. "Summit" shall have the meaning given to such term in the first paragraph of this Agreement. "Summit Notes" shall have the meaning given to such term in the third whereas clause of this Agreement. "Taxes" shall mean any taxes, including, without limitation, income, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), stamp, leasing, lease, user, excise, duty, franchise, transfer, license, withholding, payroll, employment, foreign, fuel, excess profits, occupational and interest equalization, windfall profits, severance, and other charges (including interest and penalties). "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Warrants" shall mean the Warrants of even date herewith to purchase Common Stock at an exercise price of $0.375 per share in the form of Exhibit F hereto. "Working Capital Indebtedness" shall mean Indebtedness incurred by the Company or its Subsidiaries for working capital purposes, on commercially reasonable terms, in arm's length transactions and approved in each case by no less than two-thirds (2/3) of the Board of Directors of the Company prior to the incurrence thereof. "Year 2000 Compliant" shall mean (i) with respect to Date Data, that such data is in proper format and accurate for all dates in the twentieth and twenty-first centuries, and (ii) with respect to Date-Sensitive Systems, that each such system accurately processes all Date Data, including for the twentieth and twenty-first centuries, without loss or any functionality or performance, including but not limited to calculating, comparing, sequencing, storing and displaying such Date Data (including all leap year considerations), when used as a stand-alone system or in combination with other software or hardware. 1.2. Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP in conformity with those used in the preparation of the financial statements described in Section 4.1(h) hereof. SECTION 2. The Exchange. 2.1. Issuance of Secured Notes and Exchange of Original Notes. (a) Infinity. Subject to the terms and conditions set forth in this Agreement, the Company shall, at the Closing, issue and deliver to the Agent for the account of Infinity (i) one or more Secured Notes, substantially in the form of Exhibit C hereto, in an aggregate principal amount equal to $10,411,928, and (ii) one or more Warrants, substantially in the form of Exhibit F hereto, to purchase 83,296 Shares of Common Stock, against delivery of the Infinity Notes held by Infinity after giving effect to the Assignment. (b) Glacier. Subject to the terms and conditions set forth in this Agreement, the Company shall, at the Closing, issue and deliver to the Agent for the account of Glacier (i) one or more Secured Notes, substantially in the form of Exhibit C hereto, in an aggregate principal amount equal to $838,680 and (ii) one or more Warrants, substantially in the form of Exhibit F hereto, to purchase 6,709 Shares of Common Stock, against delivery of the Glacier Notes held by Glacier after giving effect to the Assignment. (c) Summit. Subject to the terms and conditions set forth in this Agreement, the Company shall, at the Closing, issue and deliver to the Agent for the account of Summit (i) one or more Secured Notes, substantially in the form of Exhibit C hereto, in an aggregate principal amount equal to $838,680 and (ii) one or more Warrants, substantially in the form of Exhibit F hereto, to purchase 6,709 Shares of Common Stock, against delivery of the Summit Notes held by Summit after giving effect to the Assignment. (d) Global. Subject to the terms and conditions set forth in this Agreement, the Company shall, at the Closing, issue and deliver to the Agent for the account of Global (i) one or more Secured Notes, substantially in the form of Exhibit C hereto, in an aggregate principal amount equal to $410,712 and (ii) one or more Warrants, substantially in the form of Exhibit F hereto, to purchase 3,286 Shares of Common Stock, against delivery of the Global Notes held by Global after giving effect to the Assignment. (e) General Terms and Conditions of the Secured Notes. Each Secured Note shall contain, without limitation, the following terms and conditions: (A) Principal under each Secured Note shall mature on November 30, 2002 (the "Maturity Date"); (B) Unpaid principal amount under each Secured Note shall bear interest at the rate of eight percent (8%) per annum (computed on the basis of a 360-day year of 30-day months) and, to the extent permitted by law, any overdue amount thereunder shall bear interest at the rate of sixteen percent (16%) per annum; (C) Each Secured Note shall be convertible, in whole or in part (at the election of the holder thereof), into Common Stock of the Company at a price of $0.60 per Share (or $0.30 per Share upon certain conditions thereof) upon the occurrence of a Conversion Event; and (D) The Company shall have the right to prepay amounts due under each Secured Note at any time, without premium or penalty, in an aggregate principal amount of at least $1,000,000.00, together with interest accrued as of the date of such prepayment; provided, however, that, with respect to any applicable prepayment in accordance with the terms thereof, the principal outstanding amount of such Secured Note shall be reduced by an amount equal to the sum of the principal so prepaid and the Applicable Discount. (f) Funds' Rights Absolute. Nothing in this Agreement or in any other Exchange Document shall interfere with the rights of the Funds to determine and allocate among themselves the Original Notes, the Secured Notes and the Warrants which are the subject of the Exchange referred to in Section 2.2 hereof in such manner as they deem fit. 2.2. Closing. (a) The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of White & Case LLP, 633 West Fifth Street, Suite 1900, Los Angeles, California 90071-2007 on February 24, 2000 (the "Closing Date"), or at such other time and/or place as the Funds and the Company may agree in writing; provided, however, that if the Closing has not occurred by the Closing Date, this Agreement shall automatically terminate and be of no further force and effect unless extended by the parties hereto in writing. (b) At the Closing, (i) the Company shall deliver (A) to the Agent for the account of each Fund, the Secured Notes and the Warrants to be issued and delivered to such Fund as specified in Section 2.1 hereto, and (B) to the persons entitled thereto, all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement; and (ii) each Fund shall deliver to the Company (A) the Original Notes held by it after giving effect to the Assignment, as specified in Section 2.1, and (B) all documents, instruments and writings required to have been delivered at or prior to the Closing by such Fund pursuant to this Agreement (collectively, the "Exchange"). SECTION 3. Conditions Precedent. The obligation of each Fund to make the Exchange on the Closing Date is subject, at the time of the Exchange, to the satisfaction of the following conditions on or prior to the Closing Date (unless waived in writing by the Agent on behalf of the Funds on or prior to the Closing Date): 3.1. Execution of Agreement. The Closing Date shall have occurred, and the Company shall have delivered the Disclosure Materials to the Funds (in form and substance satisfactory to the Agent), and the parties shall have executed the Exchange Documents. 3.2. Issuance and Delivery of Secured Notes and Warrants. The Company shall have issued and delivered to the Agent for the account of each Fund appropriate Secured Notes and Warrants in the amount, with the maturity and as otherwise provided herein. 3.3. Security Documents. (a) The Company shall have duly authorized, executed and delivered the Stock Pledge Agreement, together with satisfactory evidence of all annotations in the stock ledger of each of the issuers of the Pledged Stock referred to therein necessary to grant in favor of the Agent a security interest in, and Lien on, all of the Pledged Stock in accordance with and pursuant to the terms of the Stock Pledge Agreement. (b) The Company shall have duly authorized, executed and delivered the Security Agreement, covering all of the Collateral described therein, and the Agent shall have received: (A) acknowledgment copies of proper financing statements (Form UCC-1) duly filed under the UCC of each jurisdiction as may be necessary or, in the opinion of the Agent, desirable to perfect the security interests purported to be created by the Security Documents; (B) copies of requests for information (Form UCC-11), or equivalent reports, listing the financing statements referred to in clause (A) above and all other effective financing statements that name the Company as debtor and that are filed in the jurisdictions referred to in said clause (A), together with copies of such other financing statements (none of which shall cover the Collateral except to the extent evidencing Permitted Liens); (C) evidence of the completion of all other recordings and filings of, or with respect to, the Security Agreement as may be necessary or, in the opinion of the Agent, desirable to perfect the security interests purported to be created by the Security Documents; and (D) evidence that all other actions necessary or, in the reasonable opinion of the Agent, desirable to perfect and protect the security interests purported to be created by the Security Documents have been taken. (c) Each of the Guarantors shall have duly authorized, executed and delivered the Security Agreement, covering all of the Collateral described therein, and the Agent shall have received: (A) acknowledgment copies of proper financing statements (Form UCC-1) duly filed under the UCC of each jurisdiction as may be necessary or, in the opinion of the Agent, desirable to perfect the security interests purported to be created by the Security Documents; (B) copies of requests for information (Form UCC-11), or equivalent reports, listing the financing statements referred to in clause (A) above and all other effective financing statements that name each Guarantor as debtor and that are filed in the jurisdictions referred to in said clause (A), together with copies of such other financing statements (none of which shall cover the Collateral except to the extent evidencing Permitted Liens); (C) evidence of the completion of all other recordings and filings of, or with respect to, the Security Agreement as may be necessary or, in the opinion of the Agent, desirable to perfect the security interests purported to be created by the Security Documents; and (D) evidence that all other actions necessary or, in the reasonable opinion of the Agent, desirable to perfect and protect the security interests purported to be created by the Security Documents have been taken. 3.4. Issuance of Shares of Aura Realty. Aura Realty shall have issued shares of its capital stock to the Company representing the Company's 100% ownership interest in Aura Realty. 3.5. Guaranty. The Subsidiaries (other than Aura Realty) shall have duly authorized, executed and delivered the Guaranty. 3.6. Proceedings. The Agent shall have received all corporate and legal instruments and agreements required to be delivered in connection with the transactions contemplated by the Exchange Documents in form and substance satisfactory to the Agent in all respects, and the Agent shall have received all information and copies of all documents and papers, including records of corporate and legal proceedings, governmental and third-party approvals, if any, which the Agent reasonably may have requested in connection therewith, and such other documents and papers where appropriate to be certified by proper corporate, governmental or other Authorities. 3.7. No Default; Representations and Warranties. At the time of the Exchange (and after giving effect thereto) (i) there shall exist no Event of Default and (ii) all representations and warranties of the Company and its Subsidiaries contained herein or in any other Exchange Document and all information contained in the Disclosure Materials delivered by, or on behalf of, the Company, shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the Closing Date, except as expressly provided herein. The Company and its Subsidiaries shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it on or prior to the Closing Date. 3.8. Sale of Assigned Notes; Conversion of Assigned Notes. (a) The Funds and the Purchasers shall have entered into the Assignment, and the Funds shall have irrevocably received in the aggregate from the Purchaser, in respect of the Assigned Notes, (i) by wire transfer to the account designated in writing by the Agent, the Cash Payment in immediately available funds, (ii) good and marketable title to the Acquired Shares, which Acquired Shares shall be fully paid, non-assessable, free and clear of all liens and encumbrances, and freely transferable by the Funds immediately upon their receipt thereof, and the certificates of which shall have been duly endorsed by the Purchaser in the manner required by the Funds and shall not bear any restrictive legend with respect to such Acquired Shares or the transfer thereof and (iii) an opinion of Michael Froch, Esquire, general counsel to the Company, substantially in the form of Exhibit G hereto, confirming the foregoing and such other matters as the Funds may require, which opinion shall be in form and substance satisfactory to the Agent. (b) The Purchasers shall have converted the Assigned Notes into Common Stock of the Company (proof of which is set forth in Exhibit M hereto). 3.9. Opinion of Counsel. The Agent shall have received an opinion addressed to the Agent, and dated the Closing Date, from Guzik & Associates, counsel to the Company, substantially in the form of Exhibit H hereto covering such matters as the Agent shall reasonably request in accordance with customary practices in transactions of this nature. 3.10. Consent Letter. The Agent shall have received a letter from the Company, substantially in the form of Exhibit I hereto, indicating its appointment of the Process Agent as its agent to accept service of process in connection with the transactions contemplated by the Exchange Documents, together with the countersignature of the Process Agent indicating its consent to serve in such capacity. 3.11. Compliance with Applicable Law. The Agent and its counsel shall be reasonably satisfied that the Exchange and the consummation of the transactions contemplated hereby shall be in compliance with all applicable law. 3.12. Litigation. No litigation, action, suit, investigation, claim or proceeding shall be pending or threatened with respect to this Agreement or any other Exchange Document or the transactions contemplated hereby or thereby or, except for the DFS Claims, which has, or could reasonably be expected to have, a Material Adverse Effect. 3.13. Indebtedness. (a) The Company shall not have any outstanding liabilities for Indebtedness materially different from those set forth on Schedule 3.13(a) hereto. (b) All unsecured Indebtedness of the Company for borrowed money (including, without limitation, Indebtedness owed to JNC and all holders of the Company's 8% Secured Convertible Non-Recourse Notes Due 2008, as modified, supplemented or amended from time to time in accordance with Section 3.21 of the Secured Notes), all unsecured Indebtedness owed to the Company's management (except as set forth in Schedule 3.13(b) hereto), all Indebtedness evidenced by the Assigned Notes, and all Indebtedness of the Company for borrowed money which is not set forth in Schedule 3.13(a) (including, without limitation, any Indebtedness for borrowed money owed by the Company or any of its Subsidiaries to Algo Technologies, Inc., Maurice Zeitlin or any of their respective Affiliates) in each case outstanding on or before the Closing Date, shall have been converted into Common Stock (proof of which is set forth in Exhibit W hereto). (c) At least ninety percent (90%) of the Company's trade debt as of July 26, 1999 (as set forth in Schedule 3.13(c) hereto) shall have been restructured (each such restructured trade debt, a "Restructured Trade Debt") to provide for payments in full in cash by the Company in respect of each Restructured Trade Debt payable over a period of not less than three (3) years commencing from January 1, 2000. The documentation relating to each Restructured Trade Debt and the terms and conditions thereof shall be as specified in that certain Payment Agreement dated as of January 1, 2000 by and between the Company and Credit Managers Association of California (as agent for the Restructured Trade Debt) and the Ballot and Acceptance of Plan for Repayment of Creditors of Aura Systems, Inc. dated on or about July 26, 1999 in the form attached hereto as Exhibit J. (d) All obligations relating to any Indebtedness owed by NewCom to NEC and guarantied by the Company shall have been restructured (such restructured debt, the "Restructured NEC Debt") pursuant to a valid, binding written agreement executed by NEC. The documentation relating to the Restructured NEC Debt and the terms and conditions thereof shall be reasonably acceptable to the Funds and attached hereto as Exhibit O. 3.14. New Equity. The Company shall have received new equity contributions in cash in an amount of not less than $6,800,000.00 ("New Equity") in exchange for new Common Stock. 3.15. Governmental and Third-Party Approvals. The Agent, the Funds and the Company shall have obtained any and all consents, approvals, Orders, qualifications, licenses, Permits or other authorizations required by all applicable Regulations, Orders and Contracts of the Company or binding on any of its properties or assets with respect to the execution, delivery and performance of this Agreement, the consummation of the transactions contemplated herein (other than the filing and effectiveness of the Registration Statement relating to the resale of the Shares) and the conduct of the business of the Company in the same manner after the Closing Date as before the Closing Date, including, without limitation, the consent of Rose Glen to the granting by the Company of the Liens provided for in the Security Documents (attached hereto as Exhibit P). 3.16. Releases. The Company shall have executed and delivered releases to the Funds in the form of Exhibit K hereto with respect to all matters prior to the Closing Date. The Funds shall have executed and delivered releases to the Company in the form of Exhibit L hereto with respect to all matters prior to the Closing Date; provided, however, that such releases by the Funds shall not (a) preclude the Funds from asserting any and all matters in connection with the appointment of a bankruptcy trustee, examiner, receiver or responsible person for the Company or any of its Subsidiaries in any bankruptcy, insolvency or other proceeding involving the Company or any of its Subsidiaries, or (b) include any and all claims or causes of action of the Funds of whatever character or nature, at law or in equity, arising from, related to, or in connection with any payments, conveyances or transfers of assets or property by the Company to any Person, including, without limitation, to any of its officers, directors, subsidiaries, affiliates or Insiders. 3.17. No Material Adverse Change. Nothing shall have occurred since the Closing Date (and the Funds shall have become aware of no facts or conditions not previously known) which has, or could reasonably be expected to have, a Material Adverse Effect. 3.18. Ranking. The Agent shall be satisfied that the Obligations under and in accordance with the Secured Notes and the other Exchange Documents constitute and will constitute unconditional secured Indebtedness of the Company and the Guarantors and, with respect to the Company, Aura Ceramics and Aura Sound, shall rank and will rank (i) at least pari passu in priority of payment and in all other respects with all other present and future secured Indebtedness of such Persons subject to the priority rights of holders of (A) Existing Secured Indebtedness as of the Closing Date as set forth in Schedule 3.18(i)(A) hereto, (B) validly created and fully perfected senior secured Indebtedness permitted under Sections 4.5(c) and 4.5(d) of the Secured Notes incurred by the Company after the Closing Date, and (C) obligations of the Company, Aura Ceramics, Aura Sound existing on the Execution Date secured by valid and perfected judgment liens against such Persons as set forth in Schedule 3.18(i)(C); provided, however, that the Company may supplement such Schedule 3.18(i)(C) to reflect judgment liens validly created and fully perfected through the Closing Date which the Company had no knowledge of and which were not identified in UCC certificates set forth in such Schedule 3.18(i)(C), and (ii) senior to all other Indebtedness of such Persons. 3.19. Payments. All fees, expenses and other amounts required to be paid on or prior to the Closing Date under this Agreement and the other Exchange Documents shall have been paid. 3.20. AuraGen Patents. The Agent shall have received an opinion dated February 18, 2000, from Blakely Sokoloff, Taylor & Zafman, counsel to the Company, substantially in the form of Exhibit Q hereto with respect to the Company's ownership of the AuraGen Patents. The consummation of the Exchange shall constitute a representation and warranty by the Company to the Agent and each of the Funds that all conditions specified in this Section 3 have been fulfilled in accordance with the terms hereof. All of the Secured Notes, Warrants, certificates, legal opinions and other documents referred to in this Section 3, unless otherwise specified, shall be delivered to the Agent for the account of each of the Funds and, except for the Secured Notes, in sufficient counterparts or copies for each of the Funds and shall, unless otherwise specified, be in form and substance satisfactory to the Agent. SECTION 4. Representations and Warranties. 4.1. Representations and Warranties of the Company. In order to induce the Funds to enter into this Agreement and to make the Exchange provided for herein, the Company makes the following representations, warranties and agreements each as of the Closing Date unless otherwise specified by the terms thereof, all of which shall survive the execution and delivery of this Agreement and the other Exchange Documents and the occurrence of the Exchange, with the occurrence of the Exchange being deemed to constitute a representation and warranty that the matters specified in this Section 4 are true and correct in all material respects on and as of the Closing Date (it being understood and agreed, however, that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date): (a) Corporate Status. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. Aura Ceramics is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. AuraSound is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. The Company has no subsidiaries or equity investment in any other Person other than as set forth in Schedule 4.1(a), Schedule 4.1(h)(a) and Schedule 4.1(y) hereto (collectively, the "Subsidiaries"), and certificates of good standing for each of the Company, Aura Ceramics and AuraSound are set forth in Schedule 4.1(a) hereto. (b) Corporate Power and Authority; Enforcement. Each of the Company, Aura Ceramics and AuraSound has the requisite corporate power and authority to execute, deliver and perform the terms and provisions of each Exchange Document to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of such Exchange Document. Each of the Company, Aura Ceramics and AuraSound has duly executed and delivered each Exchange Document to which it is a party, and each such Exchange Document constitutes the legal, valid and binding obligation of the Company, Aura Ceramics and AuraSound enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application (regardless of whether enforcement is sought in equity or at law). (c) Capitalization. The authorized, issued and outstanding capital stock of the Company and its Subsidiaries is set forth on Schedule 4.1(c) hereto (as may be supplemented in accordance with Section 3.19 of the Secured Notes). No shares of Common Stock are entitled to preemptive or similar rights. Except for the Secured Notes and as otherwise specifically disclosed in Schedule 4.1(c) hereto, there are no outstanding Options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company, Aura Ceramics nor AuraSound is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter or similar organizational documents. (d) Validity of the Original Notes. On the Closing Date, the Original Notes represent valid and binding obligations of the Company to the Funds which are due and payable in the aggregate amount of at least $16,500,000.00, including interest thereon, enforceable pursuant to their terms and which are not subject to setoff, recoupment, or any other defense or counterclaim. (e) Issuance of Secured Notes and Warrants. The Secured Notes and Warrants have been duly and validly authorized for issuance pursuant to this Agreement and, when issued and delivered as provided hereunder in accordance with the terms hereof, shall be valid and binding obligations of the Company enforceable in accordance with their terms free and clear of all Liens. (f) No Violation. Neither the execution, delivery or performance by the Company of the Secured Notes or Warrants or of the Company, Aura Ceramics or AuraSound of any of the other Exchange Documents nor compliance by any of them with the terms and provisions hereof and thereof, nor the consummation of the transactions contemplated hereby or thereby, will (i) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or other restriction of any court or Authority (including Federal and state securities laws and regulations), (ii) conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of, 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, amendment, acceleration or cancellation of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Company, Aura Ceramics or AuraSound pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement, Contract or instrument to which the Company, Aura Ceramics or AuraSound is a party or by which it or any of its property or assets is bound, affected or to which it may be subject (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), or (iii) conflict or be inconsistent with or violate any provision of the certificate of incorporation, bylaws or other charter or similar organizational document (each as amended through the date hereof) of the Company, Aura Ceramics or AuraSound. The businesses of the Company and its Subsidiaries have not been, and are not currently being, conducted in violation of any law, ordinance or regulation of any Authority, except for violations which, individually or in the aggregate, do not have, or could not reasonably be expected to have, a Material Adverse Effect. (g) Consents and Approvals. No consent, waiver, authorization or order of, or any filing or registration with, any court or other federal, state, local or other governmental Authority or other Person (except (A) as have been obtained or made on or prior to the Closing Date and which remain in full force and effect on such date and (B) for the filing and effectiveness of the Registration Statement relating to the resale of the Shares) is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Exchange Document or (ii) the legality, validity, binding effect or enforceability of any such Exchange Document. (h) Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. (A) The audited consolidated year-end balance sheets of the Company for each of the fiscal years ended February 28, 1998 and 1997 and related consolidated statements of income, cash flow and shareholders' equity of the Company and its Subsidiaries for the fiscal years ended on such dates, copies of which are attached hereto as Schedule 4.1(h)(A) (collectively, the "Financial Statements"), fairly present the financial condition of the Company and its Subsidiaries as of such dates and the consolidated results of the operations of the Company and its Subsidiaries for such fiscal years. All of the foregoing financial statements have been prepared (i) in accordance with GAAP (except as stated therein or in the notes thereto) and (ii) from the books and records of the Company, except that the unaudited financial statements have no notes attached thereto and do not have year-end adjustments (none of which would be recurring). All properties used in the Company's business operations as of each Financial Statement date are reflected in the Financial Statements in accordance with and to the extent required by GAAP. (B) On and as of the Closing Date and after giving effect to the Exchange, the Restructuring and to all Indebtedness (including under the Exchange Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith, (i) the sum of the tangible and intangible assets, at a fair valuation, of the Company and Aura Ceramics on a stand-alone basis and of the Company and its Subsidiaries taken as a whole will exceed their debts; (ii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole have not incurred and do not intend to incur, and do not believe that they will incur, debts beyond their ability to pay such debts as such debts mature; and (iii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole will have sufficient capital with which to conduct their businesses. The amount of Contingent Obligations at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. A copy of the pro forma consolidated balance sheet of the Company after giving effect to the Exchange, the Restructuring and to all Indebtedness (including under the Exchange Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith is attached hereto as Schedule 4.1(h)(B) hereto. (C) Except as fully disclosed in the Financial Statements and Schedule 4.1(h)(C), there were as of the Closing Date no Indebtedness, liabilities or obligations with respect to the Company or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent, unliquidated or otherwise) which, either individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. As of the Closing Date, the Company does not know of any basis for the assertion against it or any of its Subsidiaries of any Indebtedness, liability or obligation of any nature whatsoever that is not fully disclosed in the Financial Statements or Schedule 4.1(h)(C) which, either individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. (D) The projections delivered to the Agent on the Closing Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the projections which are based upon or include information known to the Company to be misleading in any material respect or which fail to take into account material information known to the Company regarding the matters reported therein. The Company believes that the projections are reasonable and attainable, it being recognized by the Funds, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the projections may differ from the projected results and that the differences may be material. (i) Ranking. The Obligations under the Secured Notes and the other Exchange Documents constitute and will constitute unconditional secured Indebtedness of the Company and the Guarantors and, with respect to the Company, Aura Ceramics and AuraSound, rank and will rank (i) at least pari passu in priority of payment and in all other respects with all other present and future secured Indebtedness of such Persons subject to the priority rights of holders of (A) Existing Secured Indebtedness as of the Closing Date as set forth in Schedule 3.18(i)(A) hereto, (B) validly created and fully perfected senior secured Indebtedness permitted under Sections 4.5(c) and 4.5(d) of the Secured Notes incurred by the Company after the Closing Date, and (C) obligations of the Company and Aura Ceramics and AuraSound existing on the Execution Date secured by valid and perfected judgment liens against such Persons as set forth in Schedule 3.18(i)(C); provided, however, that the Company may supplement such Schedule 3.18(i)(C) to reflect judgment liens validly created and fully perfected through the Closing Date which the Company had no knowledge of and were not identified in UCC certificates set forth in Schedule 3.18(i)(C), and (ii) senior to all other Indebtedness of such Persons. (j) Litigation; Proceedings. There is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory Authority (federal, state, county, local or foreign) which (A) relates to or challenges the legality, validity or enforceability of any transaction contemplated hereby or any of the Exchange Documents, (B) could, individually or in the aggregate, adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Exchange Documents, or (C) has, or could reasonably be expected to have, a Material Adverse Effect from and after the Closing Date (except for the DFS Claims). (k) No Default or Violation. On and as of the Closing Date (except as otherwise provided herein, in the Exchange Documents or as disclosed in Schedule 4.1(k) hereto), neither the Company nor Aura Ceramics: (i) will be in default under or in violation of any indenture, loan or credit agreement or any other agreement evidencing Indebtedness of the Company or any of its Subsidiaries or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), (ii) will be in violation of any order of any court, arbitrator, governmental body or Authority, or (iii) will be in violation of any statute, rule or regulation of any Authority, except as could not, in any such case, individually or in the aggregate, (A) adversely affect the legality, validity or enforceability of any transaction contemplated hereby or any of the Exchange Documents, or (B) adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Exchange Documents, or (C) has, or could reasonably be expected to have, a Material Adverse Effect. (l) Indebtedness. Schedule 4.1(l) hereto sets forth a true and complete list (subject to variances not to exceed seven and one-half percent (7 1/2%) in the aggregate) of all Indebtedness (excluding Indebtedness under the Secured Notes and the other Exchange Documents) of the Company, Aura Ceramics, and Aura Realty as of the Execution Date and which is to remain outstanding (the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof, accrued interest in respect thereof and the name of any Person which directly or indirectly guaranteed such debt. (m) True and Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund (including, without limitation, all information contained in the Exchange Documents) for purposes of or in connection with this Agreement, any other Exchange Document or any transaction contemplated hereby or thereby is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. There is no fact which the Company has not disclosed to the Agent or the Funds herein and of which the Company, its Subsidiaries, or any of their respective officers, directors or executive employees is aware and which has, or could reasonably be expected to have, a Material Adverse Effect. (n) Use of Proceeds; Margin Regulations. (A) All proceeds of the Original Notes were used by the Company for general corporate purposes. (B) No part of the proceeds of any Original Note were used (i) to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock or to refund indebtedness originally incurred for such purpose or (ii) for any purpose which violated or was inconsistent with the provisions of Regulations G, T, U or X of the Board of Governors of the United States Federal Reserve System. (o) Tax Returns and Payments. Except as disclosed in Schedule 4.1(o) hereto, each of the Company, Aura Ceramics, AuraSound and Aura Realty (A) has filed all income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on its financial statements in accordance with GAAP, and (B) has at all times paid, or has provided adequate reserves (in the good faith judgment of the management of such Person) for the payment of, all income taxes applicable for all prior fiscal years and for the current fiscal year to date. Except as disclosed in Schedule 4.1(o) hereto, there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Company or any of its Subsidiaries, threatened by any Authority regarding any taxes relating to such Person. As of the Execution Date, neither the Company, Aura Ceramics, AuraSound, nor Aura Realty has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of such Person, or is aware of any circumstances that would cause the taxable years or other taxable periods of such Person not to be subject to the normally applicable statute of limitations. (p) Compliance with ERISA. (A) Schedule 4.1(p) hereto sets forth each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been made; neither the Company nor any Subsidiary of the Company nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Company or any Subsidiary of the Company or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Company and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the Closing Date, would not exceed $100,000; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Company, any Subsidiary of the Company, or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Company or any Subsidiary of the Company or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Company and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. (B) Neither the Company nor any of its Subsidiaries has, or has ever had, a Foreign Pension Plan. (q) Compliance with Law and Applicable Government Regulations. Each of the Company and its Subsidiaries is presently in compliance with regard to its operations, practices, real property, plants, structures, machinery, equipment and other property, and all other aspects of its business, with all applicable Regulations and Orders, including, but not limited to, all Regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, Taxes, consumer protection, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety, except for such non-compliances which, individually or in the aggregate, would not have, or could not reasonably be expected to have, a Material Adverse Effect. There are no Claims pending or, to the Company's knowledge threatened, nor has the Company received any written notice regarding any violations of any Regulations or Orders enforced by any Authority including any requirement of OSHA or any pollution and environmental control agency (including air and water) that have, or could reasonably be expected to have, a Material Adverse Effect. (r) Security Documents. The provisions of each of the Security Documents will, on the Closing Date, create in favor of the Agent, for the benefit of the Funds, as security for the Obligations hereunder and under all other Exchange Documents, a valid and enforceable security interest in all of the right, title and interest of the relevant assignor or pledgor thereunder in and to the Collateral described therein superior to all Liens subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 of the Secured Notes (and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k) of the Secured Notes). (s) Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the United States Investment Company Act of 1940, as amended. (t) Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. (u) Labor Relations. Each of the Company and its Subsidiaries is in compliance with all federal, state and local Regulations or Orders affecting employment and employment practices applicable to each such Person, including terms and conditions of employment and wages and hours, except for certain failure to make salary or other compensation payments to management and such non-compliances which, individually or in the aggregate, would not have, or could not reasonably be expected to have, a Material Adverse Effect. The Company and its Subsidiaries have no collective bargaining agreements and there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization. Neither the Company nor any of its Subsidiaries is engaged in any unfair labor practice that has, or could reasonably be expected to have, a Material Adverse Effect. There is (A) no unfair labor practice complaint pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, (B) no strike, labor dispute, slowdown or stoppage is pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries and (C) to the best knowledge of the Company, no union representation question is existing with respect to the employees of the Company or any of its Subsidiaries and, to the best knowledge of the Company, no union organizing activities are taking place, except (with respect to any matter specified in clause (A), (B) or (C) above, either individually or in the aggregate) which does not have, or could not reasonably be expected to have, a Material Adverse Effect. (v) Proprietary Rights, Licenses, Franchises and Formulas. Each of the Company and its Subsidiaries owns all Proprietary Rights, licenses, franchises and formulas, or rights with respect to any of the foregoing, and has obtained assignments of all leases and other rights of whatever nature necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, has, or could reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that the Company or any of its Subsidiaries infringes upon the asserted rights of any other Person under any intellectual property, except for claims which could not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that such intellectual property owned or licensed by the Company or any of its Subsidiaries or which such Person otherwise has the right to use is invalid and unenforceable, except for claims which could not, individually or in the aggregate, have, or reasonably be expected to have, a Material Adverse Effect. The consummation of the transactions contemplated hereby or by any of the other Exchange Documents will not alter or impair any rights of the Company or any of its Subsidiaries to use any intellectual property in a way that would not, individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. The Company is the legal and beneficial owner of all right, title and interest in, to and under the Proprietary Rights with respect to AuraGen, and the Company has not entered into any agreement or understanding with any Person concerning any sale, lease, transfer, option, license, assignment or other disposition of such Proprietary Rights, other than the grant of security interests in connection with Permitted Liens. (w) Certain Fees. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby or by any of the other Exchange Documents. (x) Private Offering. The offer, issuance and sale of the Secured Notes pursuant to this Agreement are exempt from registration under the Securities Act. Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Secured Notes under the Securities Act) which might subject the offering, issuance or sale of the Secured Notes to the registration requirements of the Securities Act. (y) SEC Documents. Attached hereto as Schedule 4.1(y) is a true and complete list of all forms, reports and documents required to be filed by the Company and its Subsidiaries under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the "SEC Documents"), which the Company has failed to file as of the Closing Date. (z) Directors and Management Compensation. Schedule 4.1(z) hereto sets forth a list of all officers, directors and key employees (meaning those earning more than $50,000.00 annually including all bonuses and non-cash consideration) of the Company and its Subsidiaries, together with a description of their respective positions and total compensation and a list of all other outstanding obligations owed by the Company to each of such Persons. On and as of the Closing Date, the Company and its Subsidiaries will not have any liability to any of their employees, officers or directors (except as set forth in Schedule 4.1(z)) other than for the payment of salaries and director fees to be paid in the ordinary course of business. (aa) Absence of Certain Changes. Since November 30, 1998, except as fully disclosed on Schedule 4.1(aa) hereto or otherwise provided in this Agreement, there has not been any (a) material adverse change in the business, operations, properties, assets, condition (financial or otherwise), results, plans, strategies or prospects of the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect; (b) damage, destruction or loss, whether covered by insurance or not, having a Material Adverse Effect with regard to the Company's or any of its Subsidiaries' property and business; (c) declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the Company's or any of its Subsidiaries' capital stock, or any redemption or other acquisition of such stock by the Company or any of its Subsidiaries; (d) increase in the compensation payable to or to become payable by the Company or any of its Subsidiaries to its officers, Insiders or employees (other than in the ordinary course) or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers, Insiders or employees (other than in the ordinary course) or any Affiliate of the Company or any of its Subsidiaries; (e) entry into any material Contract not in the ordinary course of business, including, without limitation, any borrowing or capital expenditure; (f) change by the Company or any of its Subsidiaries in accounting methods or principles; or (g) consensual Lien placed on any property of the Company or any of its Subsidiaries other than Permitted Liens. (bb) Year 2000 Compliance. As of the Closing Date, except as set forth on Schedule 4.1(bb) hereto, all Date Data and Date-Sensitive Systems, if any, of the Company and its Subsidiaries are Year 2000 Compliant. The Company and its Subsidiaries have obtained written representations or assurances from each entity that (x) provides Date Data to the Company or any of its Subsidiaries, or (y) processes in any way Date Data for the Company or any of its Subsidiaries or otherwise provides any material product or service to the Company or any of its Subsidiaries that is dependent on Year 2000 Compliant Date Data or a Year 2000 Compliant Date-Sensitive System, that all of such entity's Date Data and Date-Sensitive Systems that are used for, or on behalf of, the Company or any of its Subsidiaries are Year 2000 Compliant. (cc) Capital Expenditures and Investments. Each Contract of the Company and its Subsidiaries for capital expenditures and investments entered into on or after November 30, 1998 involving $50,000 or more is fully disclosed in Schedule 4.1(cc) hereto. (dd) Dealings with Affiliates. Schedule 4.1(dd) hereto sets forth a complete and accurate list, including the parties, of all oral or written Contracts to which the Company and its Subsidiaries are, will be or have been a party, at any time from November 30, 1998 to and including the Closing Date, and to which any one or more of their Affiliates is also a party. Except as set forth on Schedule 4.1(dd) hereto, since November 30, 1998, the Company and its Subsidiaries have not made any payments, loaned any funds or property or made any credit arrangement with any Affiliate or employee of the Company or any of its Subsidiaries except for the payment of employee salaries and director compensation in the ordinary course of business. (ee) Solicitation Materials. The Company did not solicit any offer to buy or sell the Secured Notes by means of any form of general solicitation or advertising. (ff) Assignment of NewCom Promissory Note. The Company acknowledges, confirms and ratifies the assignment and transfer to the Funds by delivery to the Agent of that certain Promissory Note dated September 19, 1997 payable by NewCom to the order of the Company in the original principal amount of $17,000,000.00 due September 20, 1998 (the "NewCom Note") and further agrees with the Funds that it shall take such further actions, give such notices and deliver such further written instruments as the Funds may reasonably request in order to effectuate such assignment and transfer and to provide benefits thereof. The NewCom Note shall be held by the Agent for the benefit of the Funds. The Company further acknowledges and agrees with the Funds that any amount paid to them under or pursuant to the NewCom Note shall be the property of such Funds and the Company hereby releases any claim, demand or right it may now or hereafter have or acquire with respect to the NewCom Note or any amount paid or payable thereunder. Notwithstanding the above, each of the Funds agrees that, prior to April 30, 2000, it will not (i) commence an involuntary bankruptcy proceeding against NewCom and (ii) at any time assert in any judicial proceeding or otherwise that the Company is NewCom's alter ego or that the Company is obligated to the Funds thereunder. 4.2. Representations and Warranties of the Funds. Each of the Funds, severally and not jointly, hereby represents and warrants to the Company as follows: (a) Ownership of Original Notes. Such Fund is the legal and beneficial owner of the Original Notes to be exchanged hereunder, as specified in Section 2.1. (b) Organization; Authority. Such Fund is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated hereby and otherwise to carry out its obligations hereunder and thereunder. The acquisition of the Secured Notes by such Fund hereunder has been duly authorized by all necessary action on the part of such Fund. This Agreement has been duly executed and delivered by such Fund (by and through its authorized Agent) and constitutes the valid and legally binding obligation of such Fund, enforceable against it in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application (regardless of whether enforcement is sought in equity or at law). (c) Fund Status. At the time such Fund was offered the Secured Notes to be exchanged by it hereunder, it was, and at the date hereof, it is, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) Experience of the Fund. In reliance on the Company's representations and warranties herein, such Fund, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of an investment in the securities to be acquired by it hereunder, and has so evaluated the merits and risks of such investment. (e) Ability of the Fund to Bear Risk of Investment. Such Fund is able to bear the economic risk of an investment in the securities to be acquired by it hereunder and, at the present time, is able to afford a complete loss of such investment. The Company acknowledges and agrees that the Agent and the Funds make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 4.2. SECTION 5. Other Agreements of the Parties. 5.1. Transfer Restrictions. (a) If any Fund should decide to dispose of any of the Secured Notes, such Fund understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, or (ii) pursuant to an available exemption from registration under the Securities Act. (b) The Funds agree to the imprinting, so long as required by the terms of the Securities Act, of the following legend on each Secured Note: NEITHER THIS SECURED NOTE NOR THE GUARANTIES OF THE SUBSIDIARIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. The legend set forth above shall be removed as soon as allowed under the Securities Act or the regulations promulgated thereunder. The Company agrees that it will provide each Fund, upon request, with any required opinion of counsel and a replacement Secured Note, free from such legend at such time as such legend is no longer applicable, at no charge. 5.2. Blue Sky Laws. The Company shall qualify the Shares under the securities or "Blue Sky" laws of such jurisdictions as each Fund may request and shall continue such qualification at all times as long as any Fund owns any Shares. 5.3. Integration. The Company shall not and shall use its best efforts to ensure that no Affiliate shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Secured Notes or the Shares in a manner that would require the registration under the Securities Act of the sale of the Secured Notes or the Shares to the Funds. SECTION 6. Miscellaneous. 6.1. Fees and Expenses. The Company and the Funds shall pay the fees and expenses of their respective advisors, counsel, accountants and other experts, if any, and all other expenses incurred incident to the negotiation, preparation, execution, delivery and performance of this Agreement and the other Exchange Documents. The Company shall pay all stamp and other taxes (other than income) and duties levied in connection with the issuance of the Secured Notes and Shares pursuant hereto or any other Exchange Document. 6.2. Indemnification. (a) Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 of the Security Agreement, the Company agrees to indemnify and hold harmless, to the extent permitted by law, the Agent and each Fund and their respective officers and directors, employees, advisors, attorneys, agents, and representatives against any and all claims, causes of action, losses, liabilities, damages or expenses incurred by any of them as a result of, arising out of, or in any way related to, or by reason of, any breach or default by the Company under any provision of this Agreement or any other Exchange Document, including, but not limited to, any breach by the Company of its representations and warranties set forth in Section 4.1 hereto. (b) Any person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (c) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. 6.3. Entire Agreement; Amendments. This Agreement and the other Exchange Documents, together with the exhibits and schedules hereto and thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 6.4. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 6.4 prior to 4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified below later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: Michael Froch, Esq. Facsimile No.: (310) 643-8719 With copies to: Robinson, Diamant & Brill 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Attn: Lawrence A. Diamant, Esq. Facsimile No.: (310) 277-7584 If to Infinity: Infinity Investors Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 If to Glacier: Glacier Capital Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 If to Global: Global Growth Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 If to Summit: Summit Capital Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 and Mr. Stuart J. Chasanoff c/o HW Partners, LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 If to the Agent: Mr. Stuart J. Chasanoff c/o HW Partners, LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 or such other address as may be designated in writing hereafter, in the same manner, by such person. 6.5. Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Agent, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 6.6. Headings Descriptive. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 6.7. Benefit of Agreement; Assignments; Participations. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its rights or obligations hereunder or under any other Exchange Documents. (b) Any Fund (or any Fund together with one or more other Funds) may sell, assign, transfer or grant participations in all or a portion of its rights and outstanding Obligations hereunder and under the Secured Notes and Warrants to any person, each of which assignees shall become a party to this Agreement as a Fund, provided that new Secured Notes and Warrants will be issued, at the Company's expense, to such new Fund and to the assigning Fund upon the request of such new Fund or assigning Fund, such new Secured Notes and Warrants to be in conformity with the requirements of Section 2.1 hereof (with appropriate modifications) to the extent needed to reflect the revised outstanding Obligations). The assigning Fund will notify the Company of any assignment pursuant to this Section 6.7(b); provided, however, that the failure to give any such notice, or any error in such notice, shall not affect any of the obligations of the Company hereunder or under any other Exchange Document. (c) Nothing in this Agreement shall prevent or prohibit any Fund from pledging its rights hereunder or under any of the Secured Notes or Warrants. 6.8. No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 6.9. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE OTHER EXCHANGE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY SUCH OTHER EXCHANGE DOCUMENT MAY BE BROUGHT IN (i) THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND/OR (ii) THE COURTS OF THE DEFENDANT'S RESPECTIVE CORPORATE DOMICILE, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011 AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS AGREEMENT. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 6.4 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT, ANY FUND OR THE HOLDER OF ANY SECURED NOTE OR ORIGINAL NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY AND/OR ANY GUARANTOR IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER EXCHANGE DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER EXCHANGE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT. 6.10. Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 6.11. Publicity. The Company and the Agent shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases, filings or public statements that are required by law or any regulatory body or governmental authority of competent jurisdiction. 6.12. Confidentiality. (a) Each of the Funds and the Agent agrees to keep confidential any non-public information supplied to it by the Company or any of its Subsidiaries pursuant to this Agreement or any other Exchange Document; provided, however, that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Funds or the Agent so long as such counsel confirms it shall keep the non-public information confidential in accordance with these provisions, (iii) to auditors or accountants or to any other regulatory agency or body with proper authority (including non-governmental regulatory agencies or bodies), (iv) to any other Fund or the Agent, (v) in connection with any litigation to which any one or more of the Funds or the Agent is a party where disclosure of such information is, in the opinion of counsel for any Fund or the Agent, necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving any Fund or the Agent and arising out of, based upon, relating to or involving this Agreement or any other Exchange Document, or any transactions contemplated hereby or thereby or arising hereunder or thereunder, (vi) to any subsidiary, Affiliates, director, officer, employee or representative of any Fund or of the Agent, (vii) to any assignee or participant (or prospective assignee or participant) so long as any such Person confirms in writing that it shall keep the non-public information confidential in accordance with these provisions, or (viii) to any credit rating agency that rates the financial condition of any Fund or the claims paying ability of any Fund, provided that such credit rating agency agrees in writing to keep confidential any non-public information provided by the Company or any of its Subsidiaries; provided further that in no event shall any Fund or the Agent be obligated or required to return any materials furnished by or on behalf of the Company or any of its Subsidiaries. (b) Each of the Funds and the Agent shall inform the Company in writing of the name and address of any of the Persons described in clauses (vii) and (viii) of Section 6.12(a) above to whom any non-public information of the Company or any Subsidiary shall have been provided, together with a description of the information so provided, in each case within five Business Days of the delivery to any such Person of any such non-public information. 6.13. Severability. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 6.14. Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Company and the Funds will be entitled to specific performance of the obligations under this Agreement. The Company and the Funds agree that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of their respective obligations described in the foregoing sentence and hereby agree to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] [SIGNATURE PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Exchange Agreement to be executed by their duly authorized officer or agent as of the date first indicated above. AURA SYSTEMS, INC. By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title:Senior Vice President HW PARTNERS, LP By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President INFINITY INVESTORS LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title Senior Vice President GLACIER CAPITAL LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President GLOBAL GROWTH LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President SUMMIT CAPITAL LIMITED HW Partners, LP Its Agent By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title Senior Vice President losangeles 37189 v5 [Sp105!.docSp105!.doc]Sp105!.docSp105!.doc [INSERT EXHIBITS AND SCHEDULES] losangeles 37189 v5 [Sp105!.docSp105!.doc]Sp105!.docSp105!.doc (ii) losangeles 37189 v5 [Sp105!.docSp105!.doc]Sp105!.docSp105!.doc (i) TABLE OF CONTENTS SECTION 1. Definitions and Principles of Construction...................2 1.1. Defined Terms................................................2 1.2. Principles of Construction..................................11 SECTION 2. The Exchange................................................11 2.1. Issuance of Secured Notes and Exchange of Original Notes....11 2.2. Closing.....................................................13 SECTION 3. Conditions Precedent........................................13 3.1. Execution of Agreement......................................13 3.2. Issuance and Delivery of Secured Notes......................13 3.3. Security Documents..........................................13 3.4. Issuance of Shares of Aura Realty...........................15 3.5. Guaranty....................................................15 3.6. Proceedings.................................................15 3.7. No Default; Representations and Warranties..................15 3.8. Sale of Assigned Notes; Conversion of Assigned Notes........15 3.9. Opinion of Counsel..........................................16 3.10. Consent Letter..............................................16 3.11. Compliance with Applicable Law..............................16 3.12. Litigation..................................................16 3.13. Indebtedness................................................16 3.14. New Equity..................................................17 3.15. Governmental and Third-Party Approvals......................17 3.16. Releases....................................................17 3.17. No Material Adverse Change..................................17 3.18. Ranking.....................................................17 3.19. Payments....................................................18 3.20. AuraGen Patents.............................................18 SECTION 4. Representations and Warranties..............................18 4.1. Representations and Warranties of the Company...............18 4.2. Representations and Warranties of the Funds.................28 SECTION 5. Other Agreements of the Parties.............................29 5.1. Transfer Restrictions.......................................29 5.2. Blue Sky Laws...............................................30 5.3. Integration.................................................30 SECTION 6. Miscellaneous...............................................30 6.1. Fees and Expenses...........................................30 6.2. Indemnification.............................................30 6.3. Entire Agreement; Amendments................................31 6.4. Notices.....................................................31 6.5. Amendments; Waivers.........................................33 6.6. Headings Descriptive........................................33 6.7. Benefit of Agreement; Assignments; Participations...........33 6.8. No Third-Party Beneficiaries................................34 6.9. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL..................................................34 6.10. Counterparts................................................35 6.11. Publicity...................................................35 6.12. Confidentiality.............................................35 6.13. Severability................................................36 6.14. Remedies....................................................36 EX-10.27 5 0005.txt GUARANTY DATED AS OF FEBRUARY 22, 2000 GUARANTY GUARANTY, dated as of February 22, 2000 (the "Guaranty"), made by each of AURA CERAMICS, INC., a Delaware corporation ("Aura Ceramics"), AURASOUND, INC., a Delaware corporation ("AuraSound"), AURA MEDICAL SYSTEMS, INC., a Delaware corporation ("Aura Medical"), ELECTROTEC PRODUCTIONS, INC., a California corporation ("Electrotec Productions"), DS OSCILLATOR, INC., a California corporation ("DS Oscillator"), PHILIPS SOUND LABS, INC., a Nevada corporation ("Philips Sound") and ELECTROTEC AUDIO LEASE LIMITED, a corporation organized and existing under the laws of England ("Electrotec Audio" and together with the Company, Aura Ceramics, AuraSound, Aura Medical, Electrotec Productions, DS Oscillator, and Philips Sound, each a "Guarantor" and collectively, the "Guarantors"). Unless the context otherwise requires, terms used herein and defined in the Secured Notes (as defined below) shall be used herein as so defined. W I T N E S S E T H : WHEREAS, each Guarantor is a wholly owned subsidiary of Aura Systems, Inc., a Delaware corporation (the "Company"). WHEREAS, each of Infinity Investors Limited, Glacier Capital Limited, Global Growth Limited and Summit Capital Limited (collectively, the "Funds"), is the holder of certain Variable Interest Rate Convertible Notes due September 30, 1998 (the "Original Notes") of the Company, which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, on the date hereof the Company will issue and deliver Secured Notes of even date herewith in an aggregate amount of $12,500,000.00 (as modified, supplemented or amended from time to time, the "Secured Notes") to the Funds in exchange for Original Notes held by the Funds after giving effect to the Assignment (the "Exchange"); WHEREAS, it is a condition to the Exchange that each Guarantor shall have executed and delivered this Guaranty; and WHEREAS, each Guarantor obtained benefits as a result of the proceeds of the Original Notes and, thus, of the Obligations evidenced by each Secured Note and, accordingly, desires to execute and deliver this Guaranty in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Funds and hereby covenants and agrees with the Agent and each Fund as follows: 1. Each Guarantor irrevocably and unconditionally guarantees the full and prompt payment when due (whether by acceleration or otherwise) of the principal of and interest on any of the Secured Notes and all other Obligations (including, without limitation, indemnities, fees and interest thereon) of the Company and each Guarantor now existing or hereafter incurred under, arising out of or in connection with the Secured Notes or any other Transaction Document and the due performance and compliance with the terms of the Transaction Documents by the Company and each Guarantor (all such principal, interest, and other Obligations, collectively, the "Guaranteed Obligations"). All payments by the Guarantors under this Guaranty shall be made on the same basis as payments by the Company under the Secured Notes. 2. Each Guarantor hereby waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liability, suit or taking of other action by the Agent or any Fund against, and any other notice to, any party liable thereon (including such Guarantor). 3. The Agent and any Fund may at any time and from time to time without the consent of, or notice to the Guarantors, without incurring responsibility to the Guarantors and without impairing or releasing the obligations of the Guarantors hereunder, upon or without any terms or conditions and in whole or in part: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and the Guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Company or others or otherwise act or refrain from acting; (d) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Company to creditors of the Company other than the Funds and the Guarantors; (e) apply any sums by whomsoever paid or howsoever realized to any Obligations of the Company to the Agent or the Funds regardless of what Obligations of the Company remain unpaid; and/or (f) consent to or waive any breach of, or any act, omission or default under, any of the Transaction Documents, or otherwise amend, modify or supplement any of the Transaction Documents or any of such other instruments or agreements. 4. Obligations of each Guarantor under this Guaranty shall be secured by that certain Security Agreement, dated as of the date hereof, among each of the Company, each Guarantor and HW Partners, LP, as agent for the Funds (as modified, supplemented or amended from time to time, the "Security Agreement"). 5. Obligations of each Guarantor under this Guaranty are absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any action or inaction by the Agent or any Fund as contemplated in Section 3 of this Guaranty; or (b) any invalidity, irregularity or unenforceability of all or part of the Guaranteed Obligations or of any security therefor (including, without limitation, the Security Agreement). This Guaranty is a primary obligation of each Guarantor. The entirety of this Section 5 notwithstanding, prior to the occurrence of an Event of Default (which has not been cured in accordance with the terms of the Secured Notes), the obligations of a Guarantor under this Guaranty shall be released concurrently with the closing of the sale of all of the capital stock of such Guarantor in accordance with Section 4.3(d) of the Secured Notes, and the Agent and the Funds shall execute all documents reasonably required by such purchaser to so evidence. 6. If and to the extent that any Guarantor makes any payment to the Agent, any Fund, the holder of any Secured Note or to any other Person in satisfaction of such Guarantor's Guaranteed Obligations under this Guaranty or any other Transaction Document, any claim which such Guarantor may have against the Company by reason thereof, including, without limitation, by way of contribution, reimbursement or subrogation, is hereby waived, and such Guarantor shall have no recourse against the Company or its assets with respect to any such claims. 7. In order to induce the Funds to exchange the Original Notes for the Secured Notes, each Guarantor (except where otherwise indicated below) makes the following representations, warranties and agreements: (a) Each of Aura Ceramics and AuraSound (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged, (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualification, except for failures to be so qualified or in good standing, as the case may be, which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and (iv) has no subsidiaries. (b) The Guarantor has the corporate power to execute, deliver and perform the terms and provisions of this Guaranty and has taken all necessary corporate action to authorize the execution, delivery and performance by it of this Guaranty. Each Guarantor has duly executed and delivered this Guaranty, and this Guaranty constitutes its legal, valid and binding obligation enforceable in accordance with its terms. (c) Neither the execution, delivery or performance by each Guarantor of this Guaranty, nor compliance by it with the terms and provisions hereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of such Guarantor pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which such Guarantor is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation or by-laws of such Guarantor. (d) With respect to Aura Ceramics and AuraSound, no order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Execution Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of this Guaranty or (ii) the legality, validity, binding effect or enforceability of this Guaranty. (e) There are no actions, suits or proceedings pending or, to the best knowledge of each Guarantor, threatened (i) with respect to any Transaction Document or (ii) that are reasonably likely to materially and adversely affect the business, operations, property, assets, condition (financial or otherwise) or prospects of such Guarantor. (f) All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of each Guarantor in writing to the Agent or any Fund (including, without limitation, all information contained herein) for purposes of or in connection with this Guaranty or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of such Guarantor in writing to the Agent or any Fund will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. (g) Each of Aura Ceramics and AuraSound is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as would not, in the aggregate, have a material adverse effect on the business, operations, property, assets, condition (financial or otherwise) or prospects of such Guarantor. (h) The Security Agreement creates, as security for the Guaranteed Obligations hereunder and under all other Transaction Documents, a valid and enforceable security interest in all of the right, title and interest of the relevant Guarantor as set forth thereunder in and to the Collateral described therein in favor of the Agent, for the benefit of the Funds and, as to Aura Ceramics and Aura Sound, of first priority on all of the Collateral superior to all Liens (subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 of the Secured Notes and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k) of the Secured Notes); (i) Each Guarantor is not an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended. (j) Each Guarantor is not a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. 8. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of the Agent or any Fund in exercising any right, power or privilege hereunder and no course of dealing between the Company, the Guarantors, the Agent, any Fund or the holder of any Secured Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights, powers and remedies herein expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Agent, any Fund or the holder of any Secured Note would otherwise have. No notice to or demand on the Guarantors in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent, any Fund or the holder of any Secured Note to any other or further action in any circumstances without notice or demand. 9. This Guaranty shall be binding upon each Guarantor and its respective successors and assigns and shall inure to the benefit of the Agent and the Funds and their respective successors and assigns. 10. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated except with the prior written approval of the Agent. 11. The Guarantor acknowledges that an executed (or conformed) copy of each of the Secured Notes has been made available to its principal executive officers and such officers are familiar with the contents thereof. 12. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default (which has not been cured in accordance with the terms of the Secured Notes), the Agent and each Fund is hereby authorized at any time or from time to time, without presentment, demand, protest, or other notice of any kind to the Guarantors or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by the Agent or such Fund to or for the credit or the account of the Guarantors against and on account of the Guaranteed Obligations of the Guarantors to the Agent or such Fund under this Guaranty, irrespective of whether or not the Agent or such Fund shall have made any demand hereunder and although said Guaranteed Obligations, or any of them, shall be contingent or unmatured. 13. All notices and other communications hereunder shall be made at the addresses, in the manner and with the effect provided in Section 10.1 of the Security Agreement. 14. If a claim is ever made upon the Agent, any Fund or the holder of any Secured Note for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (a) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (b) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Company), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon it, notwithstanding any revocation hereof or the cancellation of any Secured Note or other instrument evidencing any liability of the Company, and each Guarantor shall be and remain liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 15. Any acknowledgment or new promise, whether by payment of principal or interest or otherwise and whether by the Company or others (including the Guarantors), with respect to any of the Guaranteed Obligations shall, if the statute of limitations in favor of the Guarantors against the Agent, any Fund or the holder of any Note shall have commenced to run, toll the running of such statute of limitations, and if the period of such statute of limitations shall have expired, prevent the operation of such statute of limitations. 16. This Guaranty and the rights and obligations of the Agent, each of the Funds, the holders of any Secured Note and the Guarantors hereunder shall be construed in accordance with and governed by the law of the State of New York. Any legal action or proceeding with respect to this Guaranty may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby irrevocably designates, appoints and empowers Robinson, Diamant & Brill, 1888 Century Park East, Suite 1500, Los Angeles, California 90067, Attn. Lawrence A. Diamant, Esq. as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding under this Guaranty or the Security Agreement. If for any reason such designee, appointee and agent shall cease to be available to act as such, each Guarantor agrees to designate a new designee, appointee and agent on the terms and for the purposes of this provision satisfactory to the Agent. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its address set forth opposite its signature below, such service to become effective thirty (30) days after such mailing. Nothing herein shall affect the right of the Agent, any Fund or the holder of any Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against each Guarantor in any other jurisdiction. Each Guarantor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 17. The obligation of each Guarantor to make payment in cash of any Guaranteed Obligations due hereunder shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment, which is expressed in or converted into any currency other than cash, except to the extent such tender or recovery shall result in the actual receipt by the Agent at its office on behalf of the Funds or holders of the Secured Notes of the full amount of cash expressed to be payable in respect of any such Guaranteed Obligations. The obligation of each Guarantor to make payment in cash as aforesaid shall be enforceable as an alternative or additional cause of action for the purpose of recovery in cash of the amount, if any, by which such actual receipt shall fall short of the full amount of cash expressed to be payable in respect of any such Guaranteed Obligations, and shall not be affected by judgment being obtained for any other sums due under this Guaranty. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] [SIGNATURE PAGE] IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered by their duly authorized officer as of the date first indicated above. AURA CERAMICS, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary AURASOUND, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary AURA MEDICAL SYSTEMS, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary ELECTROTEC PRODUCTIONS, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary DS OSCILLATOR, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary PHILIPS SOUND LABS, INC., as Guarantor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary ELECTROTEC AUDIO LEASE LIMITED, as Guarantor By: Name: Title: ACKNOWLEDGED AND ACCEPTED HW PARTNERS, LP, as Agent for the Funds BY: By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President EX-10.28 6 0006.txt STOCK PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT, dated as of February 22, 2000 (this "Agreement"), between AURA SYSTEMS, INC., a Delaware corporation (the "Pledgor"), and HW PARTNERS, LP, as agent (the "Pledgee" or the "Agent") for the benefit of the Funds (as defined below) under the Secured Notes (as defined below). Unless the context otherwise requires, terms used herein and defined in the Secured Notes (as defined below) shall be used herein as so defined. W I T N E S S E T H : WHEREAS, each of Infinity Investors Limited, Glacier Capital Limited, Global Growth Limited and Summit Capital Limited (collectively, the "Funds") is the holder of certain of the Pledgor's Variable Interest Rate Convertible Notes due September 30, 1998 (the "Original Notes") which are secured by certain assets of the Pledgor as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, on the date hereof the Pledgor will issue and deliver Secured Notes of even date herewith in an aggregate amount of $12,500,000.00 (as modified, supplemented or amended from time to time, the "Secured Notes") to the Funds in exchange for Original Notes held by the Funds after giving effect to the Assignment (the "Exchange"); WHEREAS, the Pledgor owns all of the issued and outstanding capital stock of the following subsidiaries (collectively, the "Subsidiaries"): Aura Ceramics, Inc., a Delaware corporation, AuraSound, Inc., a Delaware corporation, Aura Medical Systems, Inc., a Delaware corporation, Aura Tech, Inc., a Delaware corporation, Electrotec Productions, Inc., a California corporation, DS Oscillator, Inc., a California corporation, Philips Sound Labs, Inc., a Nevada corporation and Electrotec Audio Lease Limited, a corporation organized and existing under the laws of England; WHEREAS, it is a condition to the Exchange that the Pledgor shall have executed and delivered to the Pledgee this Agreement; and WHEREAS, the Pledgor desires to execute and deliver this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby makes the following representations and warranties to the Agent and the Funds and hereby covenants and agrees with the Agent and each of the Funds as follows: 1. SECURITY FOR the SECURED OBLIGATIONS. This Agreement is for the benefit of the Agent and the Funds to secure the payment and performance of the following obligations and liabilities, whether now existing or hereafter arising (the "Secured Obligations"): (i) the full and prompt payment when due of all principal and interest under the Secured Notes, the payment of all other Obligations and liabilities (including, without limitation, expenses, fees, indemnities and interest thereon) of the Pledgor under, arising out of or in connection with the Secured Notes or any other Transaction Document and the due performance and compliance by the Pledgor with the terms thereof; (ii) any and all sums advanced by the Agent or the Funds in order to preserve the Collateral or preserve the security interest in the Collateral granted herein; (iii) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities referred to in clause (i) above, after an Event of Default has occurred (which has not been cured in accordance with the terms of the Secured Notes), the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral, or of any exercise by the Agent of its rights hereunder with respect thereto, together with reasonable attorneys' fees and court costs; and (iv) all amounts paid by any Indemnitee (as defined in Section 8 hereof) as to which such Indemnitee has the right to indemnification or reimbursement from the Pledgor under this Agreement. 2. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "Stock" shall mean all the issued and outstanding shares of capital stock of the Subsidiaries or any other subsidiary of the Pledgor (excluding New Com, Inc., Aura Realty, Inc. and MYS Corporation), now or hereafter owned by the Pledgor. All Stock pledged hereunder is hereinafter called the "Pledged Stock," and the Pledged Stock, together with all proceeds thereof, including any securities and moneys received and at the time held by the Pledgor hereunder, is hereinafter called the "Collateral." 3. PLEDGE OF STOCK, ETC. 3.1 Pledge. To secure the Secured Obligations and for the purposes set forth in Section 1, the Pledgor (i) hereby grants to the Agent a security interest in the Collateral, (ii) hereby pledges as security to the Agent all Stock now or hereafter owned by the Pledgor, and (iii) hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the Agent (as security) all of the Pledgor's right, title and interest in and to such Stock (and in and to the certificates or instruments evidencing such Stock). 3.2 Subsequently Acquired Stock. If the Pledgor shall acquire (by purchase, stock dividend, conversion or otherwise) any additional Stock at any time or from time to time after the date hereof, the Pledgor agrees that such additional Stock shall be subject to the security interest and pledge created hereby, without the need for the execution of any further documents or instruments, and agrees to immediately deposit such Stock as security with the Agent and deliver to the Agent certificates therefor accompanied by stock powers duly executed in blank by the Pledgor or such other instruments of transfer as are acceptable to the Agent, and, upon request of the Agent, will promptly thereafter deliver to the Agent a certificate executed by the Pledgor describing such Stock and certifying that the same has been duly pledged with the Agent hereunder. 3.3 Uncertificated Stock. Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2 above, if any Stock (whether now owned or hereafter acquired) consists of an uncertificated security, the Pledgor shall promptly notify the Agent thereof and shall promptly take all actions required to perfect the security interests of the Agent under applicable law (including, in any event, under all applicable provisions of the UCC of all relevant jurisdictions). The Pledgor further agrees to take such actions as the Agent deems necessary or desirable to effect the foregoing and to permit the Agent to exercise any of its rights and remedies hereunder, and agrees to provide an opinion of counsel in form and substance satisfactory to the Agent with respect to any such pledge of uncertificated Stock promptly upon request of the Agent. 3.4 Voting, Etc., While No Event of Default. Unless and until an Event of Default has occurred (which has not been cured in accordance with the terms of the Secured Notes), the Pledgor shall be entitled to vote any and all Pledged Stock and to give consents, waivers or ratifications in respect thereof, provided that no vote shall be cast or any consent, waiver or ratification given or any action taken which would violate or be inconsistent with any of the terms of this Agreement, or any other Transaction Document, or any other instrument or agreement referred to herein or therein, or which could reasonably be expected to have a Material Adverse Effect. All such rights of the Pledgor to vote and to give consents, waivers and ratifications shall cease upon the occurrence of an Event of Default (which has not been cured in accordance with the Secured Notes), and Section 5 hereof shall become applicable. 4. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until the occurrence of an Event of Default (which has not been cured in accordance with the Secured Notes), all cash dividends payable in respect of the Pledged Stock shall be paid to the Pledgor, provided that all dividends payable in respect of the Pledged Stock (except cash dividends paid to the Pledgor in accordance with Section 4.4(b) of the Secured Notes as a result of the liquidation or disposition of Non-Core Assets) which are determined by the Agent, in its absolute discretion, to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital shall be paid to the Agent and retained by it as part of the Collateral. Subject to Section 4.3(e) of the Secured Notes, the Agent shall also be entitled to receive directly, and to retain as part of the Collateral: (a) all other or additional stock or securities or property (other than cash) paid or distributed by way of dividend in respect of the Pledged Stock; (b) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Pledged Stock by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (c) all other or additional stock or other securities or property which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization. 5. REMEDIES IN CASE OF EVENT OF DEFAULT. Upon the occurrence of an Event of Default (which has not been cured in accordance with the Secured Notes), the Agent shall be entitled to exercise all the rights, powers and remedies vested in it (whether vested in it by this Agreement or any other Transaction Document or by law) for the protection and enforcement of its rights in respect of the Collateral, and the Agent shall be entitled, without limitation, to exercise the following rights, which the Pledgor hereby agrees to be commercially reasonable: (a) to receive (as additional Collateral hereunder) all amounts payable in respect of the Collateral otherwise payable under Section 4 to the Pledgor; and (b) at any time or from time to time in a commercially reasonable manner to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Agent in its absolute discretion may determine, provided that at least ten (10) days' notice of the time and place of any such sale shall be given to the Pledgor. The Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshaling the Collateral and any other security for the Secured Obligations or otherwise. At any such sale, unless prohibited by applicable law, the Agent or any Fund on its behalf may bid for and purchase all or any part of the Collateral so sold free from any such right or equity of redemption. The Agent and the Funds shall not be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto. Notwithstanding anything to the contrary contained herein, upon the occurrence of an Event of Default (which has not been cured in accordance with the Secured Notes), the Agent shall have the right to vote any and all Pledged Stock and to give consents, waivers or ratifications in respect thereof in the Agent's sole discretion. 6. APPLICATION OF PROCEEDS. All moneys collected by the Agent upon any sale or other disposition of the Collateral, together with all other moneys received by the Agent hereunder, shall be applied to the payment of all costs and expenses incurred by the Agent in connection with such sale, the delivery of the Collateral or the collection of any such moneys (including, without limitation, attorneys' fees and expenses), and the balance of such moneys shall be held by the Agent and applied by it to satisfy the Secured Obligations. 7. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the Agent hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Agent or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Agent or such officer or be answerable in any way for the misapplication or nonapplication thereof. 8. INDEMNITY. 8.1 Indemnification. Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 of the Security Agreement, the Pledgor agrees to indemnify, reimburse and hold the Agent and each of the Funds and its respective officers, directors, employees, representatives and agents (hereinafter in this Section 8.1 referred to individually as "Indemnitee" and collectively as "Indemnitees") harmless from any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, costs, expenses or disbursements (including reasonable attorneys' fees and expenses) (for the purposes of this Section 8.1, the foregoing are collectively called "Expenses") of whatsoever kind or nature which may be imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement, any other Transaction Document or the documents executed in connection herewith or therewith or in any other way connected with the administration of the transactions contemplated hereby or thereby or the enforcement of any of the terms of or the preservation of any rights under any thereof, or in any way relating to or arising out of the ownership, purchase, delivery, control, acceptance, financing, possession, condition, sale, return or other disposition or use of the Collateral, the violation of the laws of any country, state or other governmental body or unit, any tort or any contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section 8.1 for Expenses to the extent caused by the gross negligence or willful misconduct of such Indemnitee. The Pledgor agrees that upon written notice by any Indemnitee of any assertion that could give rise to an Expense, the Pledgor shall assume full responsibility for the defense thereof. Each Indemnitee agrees to use its best efforts to promptly notify the Pledgor of any such assertion of which such Indemnitee has knowledge. 8.2 Preservation of Collateral. Subject to Section 8.1 hereof, the Pledgor agrees to pay, or reimburse the Agent for (if the Agent shall have incurred fees, costs or expenses because the Pledgor shall have failed to comply with its obligations under this Agreement or any other Transaction Document), any and all fees, costs and expenses of whatever kind or nature incurred in connection with the preservation or protection of the Agent's Liens on, and security interest in, the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. 8.3 Pledgor's Misrepresentation. Subject to Sections 8.1 and 8.2 hereof, the Pledgor agrees to pay, indemnify and hold each Indemnitee harmless from and against any expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any misrepresentation by the Pledgor in this Agreement or any other Transaction Document or in any statement or writing contemplated by or made or delivered pursuant to or in connection with this Agreement or any other Transaction Document. 8.4 Contribution. If and to the extent that the obligations of the Pledgor under this Section 8 are unenforceable for any reason, the Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 8.5 Survival. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations, as the case may be, secured by the Collateral. The indemnity obligations of the Pledgor contained in this Section 8 shall continue in full force and effect notwithstanding the full payment of the Secured Notes and all of the other Secured Obligations and notwithstanding the discharge thereof. 9. FURTHER ASSURANCES; POWER OF ATTORNEY. 9.1 Further Acts. The Pledgor agrees that it will join with the Agent in executing and, at its own expense, file and refile under the UCC of all relevant jurisdictions such financing statements, continuation statements and other documents in such offices as the Agent may deem necessary or desirable and wherever required or permitted by law in order to perfect and preserve the Agent's security interests in the Collateral and hereby (i) authorizes the Agent to file financing statements and amendments thereto relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law, (ii) irrevocably designates the Agent as its attorney-in-fact (which designation shall be and shall be deemed to be coupled with an interest) to execute and file on its behalf any and all financing statements, continuation statements and other documents related thereto, and (iii) agrees to do such further acts and things and to execute and deliver to the Agent such additional conveyances, assignments, agreements and instruments as the Agent may reasonably require or deem advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Agent its rights, powers and remedies hereunder. 9.2 Power of Attorney. The Pledgor hereby appoints the Agent as its attorney-in-fact (which appointment shall be and shall be deemed to be coupled with an interest), with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, from time to time after the occurrence of an Event of Default (which has not been cured in accordance with the terms of the Secured Notes), to take any action and to execute any instrument which the Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement including, without limitation, to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with the Collateral, to file any claims or take any action or institute any proceedings that the Agent may deem to be necessary or desirable for the collection thereof or to enforce compliance with the terms and conditions of this Agreement, and to make and execute all conveyances, assignments and transfers of the Collateral sold pursuant to this Agreement, and the Pledgor hereby ratifies and confirms all that the Agent, as said attorney-in-fact, shall do by virtue hereof. Nevertheless, the Pledgor shall, if so requested by the Agent, ratify and confirm any sale or sales by executing and delivering to the Agent, or to such purchaser or purchasers, all such instruments as may, in the reasonable judgment of the Agent, be advisable for the purposes of this Section 9. Notwithstanding the foregoing, except as required by applicable law, the Agent shall not be obligated to exercise any right or duty as attorney-in-fact, and shall have no duties to the Pledgor in connection therewith. 10. TRANSFER BY THE PLEDGOR. Except as otherwise provided in Section 4 hereof, the Pledgor will not sell or otherwise dispose of, grant any option with respect to, or create, incur, assume or suffer to exist any Lien on any portion of the Collateral (except the Liens created by this Agreement and other Permitted Liens). 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. The Pledgor represents and warrants that: (i) it is the legal, record and beneficial owner of, and has good and marketable title to, the Stock described in Section 2 hereof, subject to no Lien (except the Liens created by this Agreement and other Permitted Liens); (ii) it has full power, authority and legal right to pledge all such Stock pursuant to this Agreement; (iii) all the shares of such Stock have been duly and validly issued, are fully paid and nonassessable; (iv) this Agreement creates as security for the Secured Obligations a valid and enforceable perfected Lien in favor of the Agent for the benefit of the Funds of first priority on all of the Collateral superior to all Liens (subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 of the Secured Notes and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k) of the Secured Notes); (v) no consent, filing, recording or registration is required to perfect the Lien purported to be created by this Agreement; and (vi) each of the representations and warranties contained in Section 2 of each Secured Note is true and correct. The Pledgor covenants and agrees that it will defend the Agent's right, title and Lien in and to the Collateral against the claims and demands of all Persons; and the Pledgor covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Agent as Collateral hereunder. 12. PLEDGOR'S OBLIGATIONS ABSOLUTE, ETC. The obligations of the Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, any of the Transaction Documents or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such instrument or agreement or this Agreement or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of this Agreement or any other Transaction Document; (iii) any furnishing of any additional security to the Agent or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Agent; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor. 13. PRIVATE SALE, ETC. If at any time when the Agent shall determine to exercise its right to sell all or any part of the Pledged Stock pursuant to Section 5, such Pledged Stock or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as then in effect, and the Agent may, in its sole and absolute discretion, sell such Pledged Stock or part thereof by private sale in such manner and under such circumstances as the Agent may deem necessary or advisable in order that such sale may legally be effected without such registration, provided that at least ten (10) days' notice of the time and place of any such sale shall be given to the Pledgor. Without limiting the generality of the foregoing, in any such event the Agent, in its sole and absolute discretion, (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Stock or part thereof shall have been filed under such Securities Act, (ii) may approach and negotiate with a single possible purchaser to effect such sale and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Stock or any part thereof. 14. TERMINATION; RELEASE. Upon the payment in full of all Secured Obligations or the sale or other disposition of the Pledged Stock by the Pledgor in accordance with Section 4.3(d) of the Secured Notes, this Agreement shall terminate, and the Agent, at the request and expense of the Pledgor, will execute and deliver to the Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Pledgor (without recourse and without any representation or warranty) such of the Pledged Stock as may be in the possession of the Agent and has not theretofore been sold or otherwise applied or released pursuant to this Agreement. 15. NOTICES, ETC. All notices and other communications hereunder shall be made at the addresses, in the manner and with the effect provided in Section 11.4 of the Secured Notes. 16. MISCELLANEOUS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Pledgor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Agent. This Agreement may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. No failure to exercise, and no delay in exercising, on the part of the Agent or any of its agents, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. This Agreement shall be construed in accordance with and governed by the law of the State of New York. The headings of the several sections and subsections in this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. [SIGNATURE PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officer or agent as of the date first indicated above. AURA SYSTEMS, INC., as Pledgor By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title:Senior Vice President [SIGNATURE PAGE] HW PARTNERS, LP, as Pledgee and Agent for the Funds By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President ANNEX A to Pledge Agreement List of Stock
Percentage of Outstanding Type of Number of Shares of Name of Issuing Corporation Shares Shares Capital Stock
EX-10.29 7 0007.txt SECURITY AGREEMENT SECURITY AGREEMENT between AURA SYSTEMS, INC., AURA CERAMICS, INC., AURASOUND, INC. AURA MEDICAL SYSTEMS, INC., ELECTROTEC PRODUCTIONS, INC., DS OSCILLATOR, INC., PHILIPS SOUND LABS, INC. and ELECTROTEC AUDIO LEASE LIMITED and HW PARTNERS, LP, as Agent for the Funds Dated as of February 22, 2000 SECURITY AGREEMENT SECURITY AGREEMENT (the "Agreement"), dated as of February 22, 2000, between AURA SYSTEMS, INC., a Delaware corporation (the "Company") and each of AURA CERAMICS, INC., a Delaware corporation ("Aura Ceramics"), AURASOUND, INC., a Delaware corporation ("AuraSound"), AURA MEDICAL SYSTEMS, INC., a Delaware corporation ("Aura Medical"), ELECTROTEC PRODUCTIONS, INC., a California corporation ("Electrotec Productions"), DS OSCILLATOR, INC., a California corporation ("DS Oscillator"), PHILIPS SOUND LABS, INC., a Nevada corporation ("Philips Sound") and ELECTROTEC AUDIO LEASE LIMITED, a corporation organized and existing under the laws of England ("Electrotec Audio" and together with the Company, Aura Ceramics, AuraSound, Aura Medical, Electrotec Productions, DS Oscillator, and Philips Sound, each an "Assignor" and collectively, the "Assignors") and HW PARTNERS, LP, as Agent (the "Assignee" or the "Agent") for the benefit of the Funds (as defined herein). Unless otherwise defined in Article IX hereof, terms used herein and defined in the Secured Notes (as defined below) shall be used herein as so defined. W I T N E S S E T H : WHEREAS, each of Infinity Investors Limited, Glacier Capital Limited, Global Growth Limited and Summit Capital Limited (collectively, the "Funds"), is the holder of certain of the Company's Variable Interest Rate Convertible Notes due September 30, 1998 (the "Original Notes") which are secured by certain assets of the Company as specified in that certain Pledge Agreement dated September 30, 1997; WHEREAS, on the date hereof the Company will issue and deliver Secured Notes of even date herewith in an aggregate amount of $12,500,000.00 (as modified, supplemented or amended from time to time, the "Secured Notes") to the Funds in exchange for the Original Notes held by the Funds after giving effect to the Assignment (the "Exchange"); WHEREAS, it is a condition to the Exchange that the Assignors shall have executed and delivered this Agreement (this Agreement, together with the Secured Notes, the Exchange Agreement, the Guaranty, the Stock Pledge Agreement, and all other documents, certificates and instruments executed and delivered in connection with any of the foregoing, the "Transaction Documents"); and NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to the Assignors, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby makes the following representations and warranties to the Agent and the Funds and hereby covenants and agrees with the Agent and each of the Fund as follows: ARTICLE I SECURITY INTERESTS 1.1 Grant of Security Interests. (a) As security for the prompt and complete payment and performance when due of all of its Obligations, each Assignor does hereby grant to the Agent for the benefit of the Funds, a continuing security interest in all of the right, title and interest of such Assignor in, to and under all of the following, whether now existing or hereafter from time to time acquired: (i) each and every Receivable, (ii) all Contracts, together with all Contract Rights arising thereunder, (iii) all Inventory, (iv) all Equipment, (v) all Marks, together with the registrations and right to all renewals thereof, and the goodwill of the business of such Assignor symbolized by the Marks, (vi) all Patents and Copyrights and all reissues, renewals or extensions thereof, (vii) all computer programs of such Assignor and all intellectual property rights therein and all other proprietary information of such Assignor, including, but not limited to, Trade Secret Rights, (viii) all insurance policies, (ix) all Permits, (x) all other Goods, General Intangibles, Chattel Paper, Documents, Instruments and Investment Property, and (xi) all Proceeds and products of any and all of the foregoing (all of the above collectively, the "Collateral"); provided however, that the Collateral shall not include the assets of the Company or AuraSound licensed to (A) Daewoo Electronics Co., Ltd. pursuant to that certain License Agreement dated August 19, 1996 (the "Daewoo License Agreement") only to the extent a security interest in such Collateral is prohibited under the original terms of the Daewoo License Agreement, and (B) Speaker Acquisition Sub pursuant to that certain Assignment and License Agreement dated July 15, 1999 (the "Algo License Agreement") only to the extent a security interest in such Collateral is prohibited under the original terms of the Algo License Agreement. (b) The security interest of the Agent under this Agreement extends to all Collateral of the kind which is the subject of this Agreement which the Assignors may acquire at any time during the continuation of this Agreement. 1.2 Power of Attorney. Each Assignor hereby constitutes and appoints the Agent its true and lawful attorney, irrevocably, with full power after the occurrence of an Event of Default (which has not been cured in accordance with the terms of the Secured Notes) in the name of such Assignor or otherwise to act, require, demand, receive, compound and give acquittance for any and all moneys and claims for moneys due or to become due to such Assignor under or arising out of the Collateral, to endorse any checks or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Agent may deem to be necessary or advisable in the premises to protect and preserve the Collateral, including, without limitation, the endorsement of any draft or order which may be payable to such Assignor and the protection and prosecution of all rights included in the Collateral, which appointment as attorney is coupled with an interest. ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each Assignor represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: 2.1 Necessary Filings. All filings, registrations and recordings necessary or appropriate to create, preserve, protect and perfect the security interest granted by such Assignor to the Agent hereby in respect of all the Collateral have been accomplished and the security interest granted to the Agent pursuant to this Agreement in and to the Collateral constitutes a valid and enforceable security interest therein superior and prior to the rights of all other Persons therein and subject to no other Liens (except that the Collateral may be subject to Permitted Liens) and the Agent is entitled to all the rights, priorities and benefits afforded by the UCC or other relevant law as enacted in any relevant jurisdiction to perfected security interests; provided, however, the Assignor will not, and will not permit any of its Subsidiaries to, nor shall any such Person allow any other Person to, file or record any assignment, Lien, security interest, encumbrance or other right, title or interest, of any Person, upon or with respect to any of the Proprietary Rights of the Assignor with the United States Patent and Trademark Office. Nothing herein shall be deemed or construed as an argument or admission that the Liens upon certain Proprietary Rights of the Assignor created pursuant to the Security Documents are impaired or unperfected nor shall this Agreement impair or prohibit the Company from asserting that failure to record at the United States Patent and Trademark Office results in the Liens upon such Proprietary Rights being unperfected. 2.2 No Liens. Except as otherwise provided herein or in the Stock Pledge Agreement, the Assignor is, and as to Collateral acquired by it from time to time after the date hereof such Assignor will be, the owner of all Collateral free from any Lien, security interest, encumbrance or other right, title or interest of any Person (other than Permitted Liens), and such Assignor shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Agent. 2.3 Other Financing Statements. As of the date hereof, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Collateral (other than Permitted Liens) and so long as any Secured Note remains unpaid or any of the Obligations remain unpaid, such Assignor will not execute or authorize to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of the Permitted Liens (but not including any filing with the United States Patent and Trademark Office) and covering the security interests granted hereby by such Assignor. 2.4 Chief Executive Office; Records. As of the date hereof, the chief executive office of each Assignor is located as set forth in Schedule 2.4 hereof. The Assignor shall give 30 days' prior written notice to the Agent of its intention to move its chief executive office to another location; provided, however, that any such change of location shall only be made after the Agent shall have received evidence that such Assignor shall have taken all actions, reasonably satisfactory to the Agent, subject to Section 2.1 hereof, to maintain the security interest of the Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect in the jurisdiction where the chief executive office of such Assignor is to be relocated. The originals of all documents evidencing all relating to the Collateral and the only original books of account and records of such Assignor relating thereto are, and will continue to be, kept at such chief executive office. If for any reason any Collateral or such other books and records shall be located in any other location, the Assignor shall, with respect to such new location, take, or shall have taken, all action, reasonably satisfactory to the Agent, subject to Section 2.1 hereof, to maintain the security interest of the Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect in any event within the time period provided for the taking of such action required by applicable law. 2.5 Location of Bank Accounts, Inventory and Equipment. All bank accounts (including account numbers, and name and address of the financial institutions), Inventory and Equipment held on the date hereof by the Assignor are located at one of the locations shown on Annex A attached hereto. The Assignor agrees that all bank accounts, Inventory and Equipment now held or subsequently acquired or created by it shall be kept at (or shall be in transport to or from) any one of the locations shown on Annex A hereto. If, for any reason, any bank accounts, Inventory or Equipment shall be located in any other location, the Assignor shall immediately notify the Agent and, with respect to such new location, take, or shall have taken, all actions reasonably satisfactory to the Agent to maintain the security interest of the Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect in any event within the time period provided for the taking of such action required by applicable law; provided however, that failure of the Assignors to give notice to the Agent herein with respect to bank accounts created after the Closing Date containing, in the aggregate, less than $100,000 shall not constitute an Event of Default under the Secured Notes. 2.6 Trade Names; Change of Name. As of the date hereof, the Assignor does not have or operate in any jurisdiction under, or in the preceding 12 months has not had or has not operated in any jurisdiction under, any trade names, fictitious names or other names (including, without limitation, any names of divisions or operations) except its legal name. The Assignor shall not change its legal name or assume or operate in any jurisdiction under any trade, fictitious or other name except those names listed above without giving the Agent 30 days' prior written notice thereof, which notice shall contain the proposed names to be used and jurisdictions in which it proposes to operate under such names. 2.7 Recourse. This Agreement is made with full recourse to each Assignor and pursuant to and upon all the warranties, representations, covenants, and agreements on the part of such Assignor contained herein, and otherwise in writing in connection herewith or therewith. ARTICLE III SPECIAL PROVISIONS CONCERNING INVESTMENT PROPERTY; RECEIVABLES; CONTRACT RIGHTS; INSTRUMENTS 3.1 Additional Representations and Warranties. As of the time when each of its Receivables arises, each Assignor shall be deemed to have represented and warranted that such Receivable, and all records, papers and documents relating thereto (if any) are genuine and, in all respects, are what they purport to be, and that all papers and documents (if any) relating thereto (i) will represent the genuine, legal, valid and binding obligation of the account debtor evidencing indebtedness unpaid and owed by the respective account debtor arising out of the performance of labor or services or the sale or lease and delivery of the merchandise listed therein, or both, (ii) will be the only original writings evidencing and embodying such obligation of the account debtor named therein (other than copies created for general accounting purposes), (iii) will evidence true and valid obligations, enforceable in accordance with their respective terms and (iv) will be in compliance and will conform with all applicable federal, state and local laws and applicable laws of any relevant foreign jurisdiction. 3.2 Maintenance of Records. Each Assignor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, and such Assignor will make the same available to the Agent for inspection, at any and all reasonable times upon reasonable prior notice to such Assignor. If requested by the Agent after an Event of Default has occurred which has not been cured in accordance with the Secured Notes, each Assignor shall, at its own cost and expense, deliver all tangible evidence of its Receivables and Contract Rights (including, without limitation, copies of all documents evidencing the Receivables and all Contracts) and such books and records to the Agent or to its representatives (copies of which evidence and books and records may be retained by such Assignor). If the Agent so directs, each Assignor shall legend, in form and manner reasonably satisfactory to the Agent, the Receivables and Contracts, as well as books, records and documents of such Assignor evidencing or pertaining to such Receivables and Contracts with an appropriate reference to the fact that the Agent has a security interest in such Receivables and Contracts. 3.3 Modification of Terms; etc. Each Assignor shall not rescind or cancel any indebtedness evidenced by any Receivable or under any Contract, or modify any term thereof or make any adjustment with respect thereto, or extend or renew the same, or compromise or settle any material dispute, claim, suit or legal proceeding relating thereto, or sell any Receivable or Contract, or interest therein, without the prior written consent of the Agent, except as permitted by Section 3.4 hereof. 3.4 Collection. Each Assignor shall endeavor in accordance with its customary business practices to cause to be collected from the account debtor named in each of its Receivables or obligor under any Contract, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Receivable or Contract, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable or under such Contract, except that, so long as no Event of Default has occurred (which has not been cured in accordance with the terms of the Secured Notes) in respect of which the Agent has given notice that this exception is no longer applicable, such Assignor may allow in the ordinary course of business as adjustments to amounts owing under its Receivables and Contracts (i) an extension or renewal of the time or times of payment, or settlement for less than the total unpaid balance, which such Assignor finds appropriate in accordance with sound business judgment and (ii) a refund or credit due as a result of returned or damaged merchandise or improperly performed services. The reasonable costs and expenses (including, without limitation, attorneys' fees) of collection, whether incurred by any Assignor or the Agent, shall be borne by the Assignor or the applicable account debtor. 3.5 Instruments. If any Assignor owns or acquires any Instrument or Investment Property, such Assignor will, within ten (10) days thereof, notify the Agent and deliver such Instrument or Investment Property to the Agent appropriately endorsed to the order of the Agent as further security hereunder, provided that an Assignor may transfer an Instrument to the Company whereupon the Company shall deliver immediately such Instrument to the Agent in accordance with this Section 3.5. 3.6 Further Actions. Each Assignor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to its Receivables, Contracts, Instruments, Investment Property and other property or rights covered by the security interest hereby granted, as the Agent may reasonably require to give effect to the purposes of this Agreement. ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS 4.1 Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of all right, title and interest in and to the United States Patent and Trademark Office registrations, and applications for registrations, of the Marks listed in Annex B attached hereto and that Annex B lists all the United States Patent and Trademark Office, or the equivalent office thereof in any foreign country, registrations and applications for registrations, of the Marks that such Assignor now owns or uses in connection with its business and which are material in the conduct of such Assignor's business. Each Assignor represents and warrants that except with respect to those licensed marks set forth in Annex B, it owns, is licensed to use or otherwise has the right to use all Marks that it uses. Each Assignor further warrants that it is aware of no third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any Mark. Except as set forth on Annex B, each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use all trademark registrations and applications listed in Annex C hereto and that said registrations are valid, subsisting, have not been canceled and that such Assignor is not aware of any third-party claim that any of said registrations or applications for registration with respect to a Mark is invalid or unenforceable or is not aware that there is any reason that any of said registrations or applications for registration with respect to a Mark is invalid or unenforceable. 4.2 Licenses and Assignments. Each Assignor hereby agrees not to divest itself of any right under a Mark other than in the ordinary course of business absent prior written approval of the Agent. 4.3 Infringements. Each Assignor agrees, promptly upon learning thereof, to notify the Agent in writing of the name and address of, and to furnish such pertinent information that may be available with respect to, any party who may be infringing or otherwise violating in any of such Assignor's rights in and to any Mark, or with respect to any party claiming that such Assignor's use of any Mark violates any property right of that party. Each Assignor further agrees to prosecute diligently any Person infringing any Mark owned by such Assignor in a manner consistent with its past practice and in accordance with reasonable business practices. Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Mark used in connection with the Company's Non-Core Assets; provided however, that such Assignor shall give timely notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Marks) may take such actions as reasonably necessary at their own expense to protect such Marks. 4.4 Preservation of Marks. Each Assignor agrees to use or license the use of its Marks in interstate commerce during the time in which this Agreement is in effect, sufficiently to preserve such Marks as trademarks or service marks registered under the laws of the United States or the relevant foreign jurisdiction. Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Mark used in connection with such Assignor's Non-Core Assets; provided however, that such Assignor shall give prompt notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Marks) may take such actions as reasonably necessary at their own expense to protect such Marks. 4.5 Maintenance of Registration. Each Assignor shall, at its own expense, diligently process all documents required to maintain trademark registrations, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office or equivalent governmental agency in any foreign jurisdiction for all of its Marks (excluding unregistered Marks), and shall pay all fees and disbursements in connection therewith, and shall not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Agent (which consent shall not be unreasonably withheld). Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Mark used in connection with such Assignor's Non-Core Assets; provided however, that such Assignor shall give prompt notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Marks) may take such actions as reasonably necessary at their own expense to protect such Marks. 4.6 Future Registered Marks. If any Mark registration issues hereafter to any Assignor as a result of any application now or hereafter pending before the United States Patent and Trademark Office or equivalent governmental agency in any foreign jurisdiction, such Assignor shall, within thirty (30) days of receipt of such certificate, deliver a copy of such certificate, and a grant of security in such Mark to the Agent, confirming the grant thereof hereunder, the form of such confirmatory grant to be substantially the same as the form hereof. 4.7 Remedies. If an Event of Default shall occur (which has not been cured in accordance with the terms of the Secured Notes), the Agent may, by written notice to the Assignors, exercise any or all remedies under this Agreement, the UCC or any other applicable law. ARTICLE V SPECIAL PROVISIONS CONCERNING TRADE SECRET RIGHTS, PATENTS AND COPYRIGHTS 5.1 Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of all right, title and interest in and to (i) all Trade Secret Rights, (ii) the Patents of such Assignor listed in Annex C attached hereto and that said Patents constitute all the patents and applications for patents that such Assignor now owns and which are material in the conduct of its business and (iii) the Copyrights of such Assignor listed in Annex D attached hereto and that said Copyrights constitute all the registered copyrights and applications for copyright registrations that such Assignor now owns and which are material in the conduct of its business. Each Assignor represents and warrants that it owns all Patents and Copyrights that it owns, uses or practices under. Each Assignor further warrants that it is aware of no third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any material patent or any material copyright or that such Assignor has misappropriated any material Trade Secret Rights. 5.2 Licenses and Assignments. Each Assignor hereby agrees not to divest itself of any right, title or interest under any Patent or Copyright (other than those Patents and Copyrights with respect to Non-Core Assets in accordance with the Secured Notes) absent prior written approval of the Agent. 5.3 Infringements. Each Assignor agrees, promptly upon learning thereof, to furnish the Agent in writing with all pertinent information available to such Assignor with respect to any infringement or other violation of such Assignor's rights in any Patent or Copyright, or with respect to any claim that the practice of any Patent or the use of any Copyright violates any property right of a third party or with respect to any misappropriation of any material Trade Secret Right or any claim that the practice of any Trade Secret Right violates any property right of a third party. Each Assignor further agrees to prosecute diligently any Person infringing any Patent or Copyright owned by such Assignor or any Person misappropriating any Trade Secret Right. Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Patent or Copyright used in connection with such Assignor's Non-Core Assets; provided however, that such Assignor shall give prompt notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Patents or Copyrights) may take such actions as reasonably necessary at their own expense to protect such Patents or Copyrights. 5.4 Maintenance of Patents or Copyrights. At its own expense, each Assignor shall make timely payment of all post-issuance fees required to maintain in force rights under each of its Patents and Copyrights. Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Patent or Copyright used in connection with such Assignor's Non-Core Assets; provided however, that such Assignor shall give prompt notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Patents or Copyrights) may take such actions as reasonably necessary at their own expense to protect such Patents or Copyrights. 5.5 Prosecution of Patent or Copyright Application. At its own expense, each Assignor shall diligently prosecute all applications for (i) Patents listed on Annex C hereto and (ii) Copyrights listed on Annex D hereto, and, in each case, shall not abandon any such application prior to exhaustion of all administrative and judicial remedies, absent written consent of the Agent (which consent shall not be unreasonably withheld). Notwithstanding anything herein to the contrary, such Assignor may exercise its business judgment hereunder in respect of any Patent or Copyright used in connection with such Assignor's Non-Core Assets; provided however, that such Assignor shall give prompt notice thereof to the Agent, and that the Agent and/or the Funds (if such Assignor declines to protect such Patents or Copyrights) may take such actions as reasonably necessary at their own expense to protect such Patents or Copyrights. 5.6 Other Patents and Copyrights. Within thirty (30) days of the acquisition or issuance of a Patent or Copyright registration, or of filing of an application for a Patent or Copyright registration, each Assignor shall deliver to the Agent a copy of said Patent or Copyright registration, as the case may be, with a grant of security as to such Patent or Copyright, as the case may be, confirming the grant thereof hereunder, the form of such confirmatory grant to be substantially the same as the form hereof. 5.7 Remedies. If an Event of Default shall occur (which has not been cured in accordance with the Secured Notes), the Agent may by written notice to an Assignor take any or all remedies under this Agreement, the UCC or any other applicable law. ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL 6.1 No Impairment. Each Assignor shall do nothing to impair the rights of the Agent in the Collateral except as set forth in the Transaction Documents and subject to Section 2.1 hereof. 6.2 Financing Statements. Each Assignor agrees to execute and deliver to the Agent such financing statements, in form acceptable to the Agent, as the Agent may from time to time reasonably request or as are reasonably necessary or desirable in the reasonable opinion of the Agent to establish and maintain a valid, enforceable and perfected security interest in the Collateral as provided herein (subject to Section 2.1 hereof and Permitted Liens) and the other rights and security contemplated hereby all in accordance with the UCC as enacted in any and all relevant jurisdictions or any other relevant law. Each Assignor will pay any applicable filing fees, recordation taxes and related expenses. Each Assignor hereby authorizes the Agent to file any such financing statements without the signature of such Assignor where permitted by law. ARTICLE VII REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT 7.1 Remedies; Obtaining the Collateral Upon Default. Each Assignor agrees that, if any Event of Default shall have occurred (which has not been cured in accordance with the terms of the Secured Notes), then and in every such case, subject to any mandatory requirements of applicable law then in effect, the Agent, in addition to any rights now or hereafter existing under applicable law, shall have all rights as a secured creditor under the UCC in all relevant jurisdictions or any other applicable law and may, without limitation: (i) personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof and/or any documents or instruments relating thereto, from such Assignor or any other Person who then has possession of any part thereof with or, to the extent permitted by applicable law, without notice or process of law, and for that purpose may, in accordance with applicable laws, enter upon such Assignor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Assignor; (ii) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Contracts) constituting or relating to the Collateral to make any payment required by the terms of such instrument or agreement directly to the Agent; (iii) sell, assign or otherwise liquidate, or direct such Assignor to sell, assign or otherwise liquidate, any or all of the Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation; and (iv) take possession of the Collateral or any part thereof and/or any documents or instruments relating thereto, by directing such Assignor in writing to deliver the same to the Agent at any place or places reasonably designated by the Agent, in which event such Assignor shall at its own expense: (A) forthwith cause the same to be moved to the place or places so designated by the Agent and there delivered to the Agent, (B) store and keep any Collateral so delivered to the Agent at such place or places pending further action by the Agent as provided in Section 7.2, and (C) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition, it being understood that such Assignor's obligation so to deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Agent shall be entitled to a decree requiring specific performance by such Assignor of said obligation. 7.2 Remedies; Disposition of the Collateral. Upon the occurrence of an Event of Default (which has not been cured in accordance with the terms of the Secured Notes), any Collateral repossessed by the Agent under or pursuant to Section 7.1 and any other Collateral whether or not so repossessed by the Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on commercially reasonable terms. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Agent or after any commercially reasonable overhaul or repair. Any such disposition which shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than ten (10) days' written notice to such Assignor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the ten (10) days after the giving of such notice, to the right of such Assignor or any nominee of such Assignor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than ten (10) days' written notice to such Assignor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the Agent's option, be subject to reserve), after publication of notice of such auction not less than ten (10) days prior thereto in two newspapers in general circulation in Los Angeles, California. To the extent permitted by any such requirement of law, the Agent, the Funds, or certain of them, may bid for and become the purchaser (by bidding in the Obligations or otherwise) of the Collateral or any item thereof, offered for sale in accordance with this Section without accountability to such Assignor (except to the extent of surplus money received as provided in Section 7.4). If, under mandatory requirements of applicable law, the Agent shall be required to make disposition of the Collateral within a period of time which does not permit the giving of notice to such Assignor as hereinabove specified, the Agent need give such Assignor only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of applicable law. Each Assignor agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such sale or sales of all or any portion of the Collateral valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrations or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at such Assignor's expense. 7.3 Waiver. If the Agent seeks to exercise its remedies hereunder and take possession of any of the Collateral by court process, EACH ASSIGNOR HEREBY IRREVOCABLY WAIVES (A) ANY BOND AND ANY SURETY OR SECURITY RELATING THERETO REQUIRED BY LAW AS AN INCIDENT TO SUCH POSSESSION, (B) ANY DEMAND FOR POSSESSION PRIOR TO THE COMMENCEMENT OF ANY SUIT OR ACTION TO RECOVER POSSESSION THEREOF AND (C) ANY REQUIREMENT THAT THE AGENT RETAIN POSSESSION OF, AND NOT DISPOSE OF, ANY SUCH COLLATERAL UNTIL AFTER TRIAL OR FINAL JUDGMENT. THE FAILURE OF THE AGENT AT ANY TIME OR TIMES TO REQUIRE ASSIGNOR TO STRICTLY COMPLY WITH ANY OF THE PROVISIONS OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT SHALL NOT WAIVE OR DIMINISH ANY RIGHT OF THE AGENT LATER TO DEMAND AND RECEIVE STRICT COMPLIANCE THEREWITH. ANY WAIVER OF ANY DEFAULT SHALL NOT WAIVE OR AFFECT ANY OTHER DEFAULT, WHETHER PRIOR OR SUBSEQUENT, AND WHETHER OR NOT SIMILAR. NONE OF THE PROVISIONS OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT SHALL BE DEEMED TO HAVE BEEN WAIVED BY ANY ACT OR KNOWLEDGE OF THE AGENT OR ITS AGENTS OR EMPLOYEES, BUT ONLY BY A SPECIFIC WRITTEN WAIVER SIGNED BY AN AUTHORIZED OFFICER OF THE AGENT AND DELIVERED TO THE ASSIGNOR. EACH ASSIGNOR WAIVES DEMAND, PROTEST, NOTICE OF PROTEST AND NOTICE OF DEFAULT OR DISHONOR, NOTICE OF PAYMENT AND NONPAYMENT, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY COMMERCIAL PAPER, INSTRUMENT, ACCOUNT, GENERAL INTANGIBLE, DOCUMENT, CHATTEL PAPER, INVESTMENT PROPERTY OR GUARANTY AT ANY TIME HELD BY THE AGENT OR THE FUNDS ON WHICH ASSIGNOR IS OR MAY IN ANY WAY BE LIABLE, AND NOTICE OF ANY ACTION TAKEN BY THE AGENT, UNLESS EXPRESSLY REQUIRED BY THIS AGREEMENT, AND NOTICE OF ACCEPTANCE THEREOF. 7.4 Application of Proceeds. (a) All moneys collected by the Agent upon any sale or other disposition of the Collateral, together with all other moneys received by the Agent hereunder, shall be applied as follows: (i) to the payment of any and all expenses and fees (including reasonable attorneys' fees) incurred by the Agent in obtaining, taking possession of, or removing, insuring, repairing, storing and disposing of Collateral and any and all amounts incurred by the Agent in connection therewith; (ii) next, any surplus then remaining to the payment of the Obligations under the Secured Notes in the following order of priority: (A) all accrued and unpaid interest on overdue principal and interest; (B) all other accrued and unpaid interest; and (C) all outstanding principal; and (iii) next, any surplus then remaining to the payment of any other Obligations under this Agreement or any other Transaction Document. (b) It is understood that each Assignor shall remain liable to the extent of any deficiency between (i) the amount of the Obligations for which it is liable that are satisfied with proceeds of the Collateral and (ii) the aggregate outstanding amount of such Obligations. 7.5 Remedies Cumulative. Each and every right, power and remedy hereby specifically given to the Agent shall be in addition to every other right, power and remedy specifically given under this Agreement or the other Transaction Documents or now or hereafter existing at law or in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of exercise of one shall not be deemed a waiver of the right to exercise any other or others. No delay or omission of the Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy nor shall be construed to be a waiver of any Event of Default or an acquiescence therein. In the event that the Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Agent may recover expenses, including attorneys' fees, and the amounts thereof shall be included in such judgment. 7.6 Discontinuance of Proceedings. In case the Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Agent, then and in every such case, the Assignors, the Agent and each holder of any of the Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Agent shall continue as if no such proceeding had been instituted (except to the extent of a determination adverse to the Agent in such a proceeding). ARTICLE VIII INDEMNITY 8.1 Indemnity. (a) Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 hereof, each Assignor agrees to indemnify, reimburse and hold the Agent, each Fund and their respective successors, permitted assigns, directors, officers, Affiliates, employees, attorneys, agents and servants (hereinafter in this Section 8.1 referred to individually as "Indemnitee," and collectively as "Indemnitees") harmless from any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, suits, judgments and any and all reasonable costs and expenses, including reasonable attorneys' fees and expenses (for the purposes of this Section 8.1, the foregoing are collectively called "Expenses") of whatsoever kind and nature imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement, any other Transaction Document or the documents executed in connection herewith and therewith or in any other way connected with the enforcement of any of the terms of, or the preservation of, any rights hereunder or thereunder, or in any way relating to or arising out of the manufacture, ownership, ordering, purchase, delivery, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition, or use of the Collateral (including, without limitation, latent or other defects, whether or not discoverable), or the violation by such Assignor of the laws of any country, state or other governmental body or unit, any tort (including, without limitation, claims arising or imposed under the doctrine of strict liability, or for or on account of injury to or the death of any Person (including any Indemnitee), or property damage), or contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section 8.1(a) for Expenses to the extent caused by the gross negligence or willful misconduct of such Indemnitee. Each Assignor agrees that upon written notice by any Indemnitee of the assertion of such an Expense, such Assignor shall assume full responsibility for the defense thereof if such Assignor would have an indemnification obligation under this Section 8.1(a). The Indemnitee agrees to use its best efforts to promptly notify such Assignor of any such assertion of which such Indemnitee has knowledge. (b) Without limiting the application of Section 8.1(a), each Assignor agrees, jointly and severally, to pay, or reimburse the Agent for (if the Agent shall have incurred fees, costs or expenses because such Assignor shall have failed to comply with its obligations under this Agreement or any other Transaction Document), any and all reasonable fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Agent's Liens on, and security interest in, the Collateral granted hereunder, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral and all other reasonable fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. (c) Without limiting the application of Section 8.1(a) or (b), each Assignor agrees to pay, indemnify and hold each Indemnitee harmless from and against any loss, costs, damages and expenses which such Indemnitee may suffer, expend or incur in consequence of any misrepresentation by such Assignor in this Agreement, or in any statement or writing contemplated by or made or delivered pursuant to or in connection with this Agreement. (d) If and to the extent that the obligations of an Assignor under this Section 8.1 are unenforceable for any reason, such Assignor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 8.2 Indemnity Obligations Secured by Collateral; Survival. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement under this Agreement shall constitute Obligations secured by the Collateral. The indemnity obligations of the Company contained in this Article VIII shall continue in full force and effect notwithstanding the full payment of all the Secured Notes, and the payment of all of the other Obligations and notwithstanding the discharge thereof. 8.3 Non-Core Assets. The entirety of this Article VIII notwithstanding, so long as no Event of Default shall occur and has not been cured in accordance with the terms of the Secured Notes, all indemnifications, security interests, liens and claims of the Agent hereunder in respect of the Non-Core Assets which are sold by an Assignor in accordance with its rights under the Transaction Documents shall be released concurrently with the closing of such sale, and the Agent and the Funds shall execute all documents reasonably required by the purchaser of such Non-Core Assets to so evidence. ARTICLE IX DEFINITIONS The following terms shall have the meanings herein specified unless the context otherwise requires. Such definitions shall be equally applicable to the singular and plural forms of the terms defined. "Agent" shall have the meaning specified in the first paragraph of this Agreement. "Agreement" shall mean this Security Agreement as the same may be modified, supplemented or amended from time to time. "Assignor" or "Assignors" shall have the meaning specified in the first paragraph of this Agreement. "Chattel Paper" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York. "Collateral" shall have the meaning provided in Section 1.1(a). "Contract Rights" shall mean all rights of the Assignor (including, without limitation, all rights to payment) under each Contract. "Contracts" shall mean all contracts between the Assignor and one or more additional parties. "Copyrights" shall mean any United States or foreign copyright owned by the Assignor now or hereafter, including any registration of any copyrights, in the United States Copyright Office or the equivalent thereof in any foreign country, as well as any application for a United States or foreign copyright registration now or hereafter made with the United States Copyright Office or the equivalent thereof in any foreign jurisdiction by the Assignor. "Documents" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York. "Equipment" shall mean any "equipment," as such term is defined in the UCC as in effect on the date hereof in the State of New York, now or hereafter owned by the Assignor and, in any event, shall include, but shall not be limited to, all machinery, equipment, furnishings now or hereafter owned by such Assignor and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto, including "fixtures" as such term is defined in the UCC as in effect on the date hereof in the State of New York. "Funds" shall have the meaning provided in the first whereas clause of this Agreement. "General Intangibles" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York. "Goods" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York. "Indemnitee" shall have the meaning provided in Section 8.1. "Instrument" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York. "Inventory" shall mean merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same; in all stages of production -- from raw materials through work-in-process to finished goods -- and all products and proceeds of whatever sort and wherever located and any portion thereof which may be returned, rejected, reclaimed or repossessed by the Agent from the Assignor's customers, and shall specifically include all "inventory" as such term is defined in the UCC as in effect on the date hereof in the State of New York, now or hereafter owned by the Assignor, but shall exclude Equipment. "Investment Property" shall have the meaning assigned that term under the UCC as in effect on the date hereof in the State of New York (excluding the Pledged Stock). "Marks" shall mean all right, title and interest in and to any United States or foreign trademarks, service marks and trade names now held or hereafter acquired by the Assignor, including any registration or application for registration of any trademarks and service marks now held or hereafter acquired by the Assignor, which are registered in the United States Patent and Trademark Office or the equivalent thereof in any State of the United States or in any foreign country, as well as any unregistered marks used by the Assignor, and any trade dress including logos, designs, company names, business names, fictitious business names and other business identifiers used by the Assignor in the United States or any foreign country. "Obligation" shall mean: (a) all indebtedness, obligations and liabilities (including, without limitation, guarantees and other contingent liabilities) of the Assignor to the Funds or the Agent arising under or in connection with the Secured Notes or any other Transaction Document; (b) any and all sums advanced by the Agent in order to preserve the Collateral or preserve its security interest in the Collateral; and (c) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations or liabilities of the Assignor, after an Event of Default shall have occurred (which has not been cured in accordance with the terms of the Secured Notes), the reasonable expenses of re-taking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral, or of any exercise by the Agent of its rights hereunder, together with reasonable attorneys' fees and court costs. "Patents" shall mean any United States or foreign patent to which the Assignor now or hereafter has title and any divisions or continuations thereof, as well as any application for a United States or foreign patent now or hereafter made by such Assignor. "Permits" shall mean, to the extent permitted to be assigned by the terms thereof or by applicable law, all licenses, permits, rights, orders, variances, franchises or authorizations of or from any governmental authority or agency. "Pledged Stock" shall have the meaning assigned that term in the Stock Pledge Agreement. "Proceeds" shall have the meaning assigned that term under the UCC as in effect in the State of New York on the date hereof or under other relevant law and, in any event, shall include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Agent or the Assignor from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to the Assignor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting under color of governmental authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Receivables" shall mean any "account" as such term is defined in the UCC as in effect on the date hereof in the State of New York, now or hereafter owned by the Assignor and, in any event, shall include, but shall not be limited to, all of such Assignor's rights to payment for goods sold or leased or services performed by such Assignor, whether now in existence or arising from time to time hereafter, including, without limitation, rights evidenced by an account, note, contract, security agreement, chattel paper, or other evidence of indebtedness or security, together with (a) all security pledged, assigned, hypothecated or granted to or held by such Assignor to secure the foregoing, (b) all of such Assignor's right, title and interest in and to any goods, the sale of which gave rise thereto, (c) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (d) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith, (e) all books, records, ledger cards, and invoices relating thereto, (f) evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto, all notices to other creditors or secured parties, and certificates from filing or other registration officers, (g) all credit information, reports and memoranda relating thereto, and (h) all other writings related in any way to the foregoing. "Trade Secret Rights" shall mean the rights of the Assignor in any Trade Secret it holds. "Trade Secrets" means any secretly held existing engineering and other data, information, production procedures and other know-how relating to the design, manufacture, assembly, installation, use, operation, marketing, sale and servicing of any products or business of an Assignor worldwide whether written or not written. ARTICLE X MISCELLANEOUS 10.1. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 11.4 prior to 4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified below later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Assignors: c/o Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California Attn: Michael Froch, Esq. Facsimile No.: (310) 643-8719 With copies to: Robinson, Diamant & Brill 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Attn: Lawrence A. Diamant, Esq. Facsimile No.: (310) 277-7584 If to the Agent: Mr. Stuart J. Chasanoff c/o HW Partners LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 or such other address as may be designated in writing hereafter, in the same manner, by such person. 10.2 Waiver; Amendment. This Agreement may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. No delay on the part of the Agent in exercising any of its rights, remedies, powers and privileges hereunder or partial or single exercise thereof, shall constitute a waiver thereof. No notice to or demand on the Assignor shall constitute a waiver of any of the rights of the Agent to any other or further action without notice or demand. 10.3 Obligations Absolute. The obligations of each Assignor hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of any Assignor; (b) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement or any other Transaction Document except as specifically set forth in a waiver granted pursuant to the restrictions of Section 10.2 hereof; or (c) any amendment to or modification of any other Transaction Document or any security for any of the Obligations, whether or not such Assignor shall have notice or knowledge of any of the foregoing. The rights and remedies of the Agent herein provided are cumulative and not exclusive of any rights or remedies which the Agent would otherwise have. 10.4 Successors and Assigns. This Agreement shall be binding upon each Assignor and its successors and assigns and shall inure to the benefit of the Agent and the Funds and their respective successors and assigns. All agreements, statements, representations and warranties made by such Assignor herein or in any certificate or other instrument delivered by such Assignor or on its behalf under this Agreement shall be considered to have been relied upon by the Agent and the Funds and shall survive the execution and delivery of this Agreement and the other Transaction Documents, regardless of any investigation made by the Agent or the Funds or on their behalf. 10.5 Headings Descriptive. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10.6 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.7 Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of New York. 10.8 Assignors' Duties. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Assignor shall remain liable to perform all of the Obligations assumed by it under this Agreement or any other Transaction Document with respect to the Collateral, and the Agent and the Funds shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement or any other Transaction Document, nor shall the Agent or the Funds be required or obligated in any manner to perform or fulfill any of the obligations of the Assignor under or with respect to any Collateral. 10.9 Termination; Release. After all the Obligations have been paid in full in accordance with the Transaction Documents, this Agreement and the security interests created hereby shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 8.1 hereof shall survive such termination), and the Agent, at the request and expense of the Assignor, will promptly execute and deliver to such Assignor a proper instrument or instruments (including UCC termination statements on form UCC-3) acknowledging the termination of this Agreement and will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Agent and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement. 10.10 Entire Agreement. This Agreement, together with the exhibits, annexes and schedules hereto, and the other Transaction Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 10.11 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Assignor, the Funds and the Agent. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] [SIGNATURE PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officer or agent as of the date first indicated above. AURA SYSTEMS, INC., as Assignor By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title: Vice President AURA CERAMICS, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary AURASOUND, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary AURA MEDICAL SYSTEMS, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary ELECTROTEC PRODUCTIONS, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary DS OSCILLATOR, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary PHILIPS SOUND LABS, INC., as Assignor By: Name: Steven C. Veen Title: Vice President By: Name: Michael Froch Title: Secretary ELECTROTEC AUDIO LEASE LIMITED, as Assignor By: Name: Title: HW PARTNERS, LP, as Assignee and Agent for the Funds By: HW Finance, LLC Its Managing Partner By: Name: Stuart J. Chasanoff Title:Senior Vice President
SCHEDULE OF EQUIPMENT AND INVENTORY LOCATIONS Location Inventory Equipment ANNEX B TO SECURITY AGREEMENT SCHEDULE OF MARKS ANNEX C TO SECURITY AGREEMENT SCHEDULE OF PATENTS AND PATENT APPLICATIONS ANNEX D TO SECURITY AGREEMENT SCHEDULE OF COPYRIGHTS AND COPYRIGHT APPLICATIONS
(ii) (i) TABLE OF CONTENTS Page ARTICLE I SECURITY INTERESTS....................................................2 1.1 Grant of Security Interests..................................2 1.2 Power of Attorney............................................2 ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS.....................3 2.1 Necessary Filings............................................3 2.2 No Liens.....................................................3 2.3 Other Financing Statements...................................3 2.4 Chief Executive Office; Records..............................3 2.5 Location of Inventory and Equipment..........................4 2.6 Trade Names; Change of Name..................................4 2.7 Recourse.....................................................4 ARTICLE III SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT RIGHTS; INSTRUMENTS.............................4 3.1 Additional Representations and Warranties....................4 3.2 Maintenance of Records.......................................5 3.3 Modification of Terms; etc...................................5 3.4 Collection...................................................5 3.5 Instruments..................................................6 3.6 Further Actions..............................................6 ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS..............................6 4.1 Additional Representations and Warranties....................6 4.2 Licenses and Assignments.....................................6 4.3 Infringements................................................6 4.4 Preservation of Marks........................................7 4.5 Maintenance of Registration..................................7 4.6 Future Registered Marks......................................7 4.7 Remedies.....................................................7 ARTICLE V SPECIAL PROVISIONS CONCERNING TRADE SECRET RIGHTS, PATENTS AND COPYRIGHTS...........................8 5.1 Additional Representations and Warranties....................8 5.2 Licenses and Assignments.....................................8 5.3 Infringements................................................8 5.4 Maintenance of Patents or Copyrights.........................8 5.5 Prosecution of Patent or Copyright Application...............9 5.6 Other Patents and Copyrights.................................9 5.7 Remedies.....................................................9 ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL..................................9 6.1 No Impairment................................................9 6.2 Financing Statements.........................................9 ARTICLE VII REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT.........................10 7.1 Remedies; Obtaining the Collateral Upon Default.............10 7.2 Remedies; Disposition of the Collateral.....................11 7.3 Waiver......................................................11 7.4 Application of Proceeds.....................................12 7.5 Remedies Cumulative.........................................13 7.6 Discontinuance of Proceedings...............................13 ARTICLE VIII INDEMNITY 13 8.1 Indemnity...................................................13 8.2 Indemnity Obligations Secured by Collateral; Survival.......14 ARTICLE IX DEFINITIONS..........................................................15 ARTICLE X MISCELLANEOUS........................................................18 10.1. Notices.....................................................18 10.2 Waiver; Amendment...........................................19 10.3 Obligations Absolute...............................19 10.4 Successors and Assigns......................................19 10.5 Headings Descriptive........................................19 10.6 Severability................................................19 10.7 Governing Law...............................................20 10.8 Assignors'Duties............................................20 10.9 Termination; Release........................................20 10.10 Entire Agreement............................................20 10.11 Counterparts................................................20 ANNEX A Schedule of Equipment and Inventory Locations ANNEX B Schedule of Marks ANNEX C Schedule of Patents and Applications ANNEX D Schedule of Copyrights and Applications EX-10.30 8 0008.txt SECURED NOTE 2/22/2000 INFINITY INVESTORS NEITHER THIS SECURED NOTE NOR THE GUARANTIES OF THE SUBSIDIARIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. AURA SYSTEMS, INC. SECURED NOTE $10,411,928 February 22, 2000 El Segundo, California FOR VALUE RECEIVED, Aura Systems, Inc., a Delaware corporation (the "Company"), promises to pay to the order of Infinity Investors Limited, a corporation organized and existing under the laws of Nevis, West Indies (the "Holder") or its assigns, the principal amount of Ten Million Four Hundred Eleven Thousand Nine Hundred Twenty Eight ($10,411,928) on November 30, 2002 (the "Maturity Date") and to pay interest (computed on the basis of a 360-day year of 30-day months) ("Interest") (a) on the principal amount hereof outstanding at the rate of eight percent (8%) per annum from the date hereof, payable in arrears on (i) August 1, 2000 and quarterly thereafter on each 1st day of November, February, May and August, (ii) the Maturity Date, (iii) each date this Secured Note, or any portion hereof, is converted, and (iv) the date the principal amount of this Secured Note shall be declared to be or shall automatically become due and payable, and (b) to the extent permitted by law, on any overdue amount hereunder at the rate of sixteen percent (16%) per annum. Should any interest or other charges paid hereunder result in the computation or earning of interest hereunder in excess of the maximum rate or amount permitted by applicable law, such excess shall be credited against (and be deemed to have been a payment in reduction of) principal owing hereunder, and any portion of such excess which portion exceeds the principal owing hereunder shall be paid to the Company. Principal and accrued but unpaid Interest hereunder shall be due and payable on demand on or after the Maturity Date or in accordance with Section 5 hereof after the occurrence of an Event of Default (which has not been cured in accordance with the terms hereof), unless converted by the Holder in accordance with Section 8 hereof. If any payment of interest hereunder becomes due and payable on a day which is not a Business Day, the due date thereof shall be the next preceding day which is a Business Day, and the interest payable on such next preceding Business Day shall be the interest which would otherwise have been payable on the due date which was not a Business Day. Payments of principal and interest shall be made in immediately available funds, in lawful money of the United States of America at the locations set forth hereunder, or at such other place as the Holder shall have designated for such purpose in writing, and may be paid by cashier's check or wire transfer to the address or account designated by the Holder for such purpose. This Secured Note (the "Secured Note") is secured by, and is one of the secured notes referred to in (i) that certain Security Agreement of even date herewith between the Company, the Guarantors (defined below) and HW Partners, LP, as Agent for the Funds, and (ii) that certain Stock Pledge Agreement of even date herewith between the Company and the Agent for the Funds. This Secured Note is guaranteed by, and is one of the Secured Notes referred to in, that certain Guaranty of even date herewith of the Guarantors (defined below) made for the benefit of the Funds, which Guaranty is secured by the Security Agreement. The Company further agrees as follows: SECTION 1. Definitions and Principles of Construction. 1.1. Defined Terms. As used in this Secured Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined, except as otherwise provided): "Affiliate" shall mean, with respect to any specified Person, (i) any other Person that, directly or indirectly, is controlled by, or is under common control with, or controls such Person, (ii) any other Person in which, directly or indirectly, such Person holds, of record or beneficially, five percent or more of the equity or voting securities, (iii) any other Person that holds, of record or beneficially, five percent or more of the equity or voting securities of such Person, or (iv) any director, officer, partner or individual holding a similar position in respect of such Person. "Agent" shall mean HW Partners, LP, a Texas limited partnership. "Applicable Discount" shall mean, with respect to any applicable prepayment of principal under this Secured Note in accordance with the terms hereof, a percentage which on the Execution Date shall be equal to twenty percent (20%) and thereafter shall decrease on a daily, straight line basis to zero percent (0%) on the Maturity Date. "Aura Ceramics" shall mean Aura Ceramics, Inc., a Delaware corporation. "AuraGen" shall mean that certain power generator developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries under the trademark AuraGen or any successor or replacement mark thereto, or any similar, derivative or related product line which may be developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries. "AuraSound" shall mean AuraSound, Inc., a Delaware corporation. "Authority" shall mean any governmental, regulatory or administrative body, agency, commission, board, arbitrator or authority, any court or judicial authority, or any public, private or industry regulatory authority, whether international, national, federal, state or local. "Bankruptcy Code" shall mean title 11 of the United States Code (11 U.S.C. ss. 101 et seq.), as amended from time to time. Section references to the Bankruptcy Code are to the Bankruptcy Code as in effect on the date of this Agreement and any subsequent provisions of the Bankruptcy Code, amendatory thereof, supplemental thereto or substituted therefor. "Board of Directors" shall mean the Board of Directors of the Company. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other government actions to close. "Claim" shall mean any action, claim, lawsuit, demand, suit, inquiry, hearing, investigation, notice of a violation, litigation, proceeding, arbitration, appeals or other dispute, whether civil, criminal, administrative or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code as in effect on the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property subject to the Security Documents. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean shares now or hereafter authorized of the class of common stock of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as common stock. "Company" shall mean Aura Systems, Inc., a Delaware corporation. "Contingent Obligation" shall mean, as to any specified Person, any obligation of such Person arising under, pursuant to or derived from any derivatives transactions or guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (subject to any limitation therein) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Contract" shall mean any agreement, contract, commitment, instrument or other binding arrangement or understanding, whether written or oral. "Conversion Date" shall have the meaning set forth in Section 8.3 hereof. "Conversion Event" shall mean any Event of Default (after giving effect to the applicable cure, if any). "Conversion Price" shall have the meaning set forth in Section 8.2 hereof. "CNA" shall mean American Casualty Company of Reading, Pennsylvania. "CNA Restructuring Agreement" shall mean that certain agreement by and between the Company and CNA in the form of Exhibit A hereto. "Date Data" shall mean any data of any type that includes date information or which is otherwise derived from, dependent on or related to date information. "Date-Sensitive System" shall mean any software, microcode or hardware system or component, including any electronic or electronically controlled system or component, that processes any Date Data and that is installed, in development or on order by the Company or any of its Subsidiaries for its internal use, or that the Company or any of its Subsidiaries sells, leases, licenses, assigns or otherwise provides, or the provision or operation of which the Company or any of its Subsidiaries provides the benefit, to its customers, vendors, suppliers, affiliates or any other third party. "Deadline" shall have the meaning given to such term in Section 8.8 hereof. "DFS" shall mean Deutsche Financial Services. "DFS Claims" shall mean the claims of DFS relating to the obligations of the Company with respect to debts owed by NewCom to DFS and guaranteed by the Company. "Disclosure Materials" shall mean, collectively, the exhibits and schedules to this Secured Note and the other Transaction Documents furnished by or on behalf of the Company. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA as in effect on the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" (i) within the meaning of Section 414(b), (c), (m) or (o) of the Code or (ii) as a result of the Company or a Subsidiary of the Company being or having been a general partner of such person. "Event of Default" shall have the meaning set forth in Section 5 hereof. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended from time to time. "Exchange Agreement" shall mean that certain Exchange Agreement of even date herewith executed and delivered by the Company, the Agent and the Funds, as the same may be amended, modified or supplemented. "Execution Date" shall mean the date of this Secured Note. "Existing Indebtedness" shall have the meaning given to such term in Section 2.11 hereof. "Existing Liens" shall have the meaning given to such term in Section 4.1(c) hereof. "Existing Secured Indebtedness" means Existing Indebtedness secured by the Existing Liens (other than judgment liens). "Financial Statements" shall have the meaning given to such term in Section 2.7(a) hereof. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Funds" shall mean Infinity Investors Limited, Global Growth Limited, Glacier Capital Limited and Summit Capital Limited. "GAAP" shall mean generally accepted accounting principles in the United States consistently applied during a relevant period. "GSS" shall mean GSS Array Technologies Public Company Limited. "Guarantee" shall mean any guarantee or other Contingent Obligation (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (i) any endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (ii) any Contract (x) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (y) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (z) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy an obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. "Guarantor" shall mean each Subsidiary of the Company executing the Guaranty or otherwise made a party thereto in accordance with the terms thereof. "Guaranty" shall mean that certain Guaranty of even date herewith executed and delivered by the Guarantors and the Agent, as the same may be amended, modified or supplemented. "Holder" shall have the meaning given to such term in the first paragraph of this Secured Note. "Indebtedness" shall mean, as to any specified Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person (x) evidenced by any notes, bonds, debentures or similar instruments made or issued by such Person, (y) for borrowed money or (z) for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person, (iii) all liabilities secured by any Lien upon any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized in accordance with GAAP under leases under which such Person is the lessee and (v) all Contingent Obligations and Guarantees of such Person. "Independent Director" shall mean a director of the Company who has no relationship to the Company that may interfere with the exercise of such individual's independence from the Company or its management. For purposes hereof, "relationship" shall include, without limitation, (i) being employed by the Company or any of its Affiliates at any time during the year in which such individual was elected to the Board of Directors of the Company or at any time during any of the three calendar years preceding the year of such election, (ii) accepting any compensation from the Company or any of its Affiliates other than compensation for board service or benefits under a tax-qualified retirement plan, (iii) being a member of the immediate family of an individual who at any time during the year in which such director was elected to the Board of Directors of the Company is, or has been at any time during any of the three calendar years preceding the year of such election, employed by the Company or any of its Affiliates as an executive officer, (iv) being a partner in, or a controlling shareholder or an executive officer of, any for-profit organization to which the Company or any of its Affiliates made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities) that exceed five percent (5%) of such organization's consolidated gross revenues for that year, or $200,000, whichever is more, at any time during any of the three calendar years preceding the year of election of the director to the Company's Board of Directors, and (v) being employed as an executive of another company where any of the Company's executives serve on such other company's compensation committee. "Interest" shall have the meaning given to such term in the first paragraph of this Secured Note. "Isosceles" shall mean Isosceles Fund Ltd. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Material Adverse Effect" shall mean, with respect to the Company and its Subsidiaries taken as a whole, any material adverse effect on the ability of the Company or the Subsidiaries to perform any of their obligations under any Transaction Document. "Maturity Date" shall have the meaning given to such term in the first paragraph of this Secured Note. "Merger" shall have the meaning set forth in Section 8.6(c) hereof. "NEC" shall mean NEC Technologies, Inc., a Delaware corporation. "NewCom" shall mean NewCom, Inc., a Delaware corporation. "Non-Core Assets" shall mean those assets and properties of the Company or any of its Subsidiaries which are not used in connection with, or related to, directly or indirectly, the AuraGen business of the Company or any aspect thereof, including, without limitation, the capital stock of any Subsidiary so long as neither such Subsidiary nor any of its assets or properties are used directly or indirectly in the conduct of the AuraGen business or any aspect thereof. "Notice of Conversion" shall have the meaning set forth in Section 8.1 hereof. "Obligations" shall mean all present and future obligations, liabilities and other amounts owing to the Holder pursuant to this or any other Secured Note or any other Transaction Document. "Option" shall mean any subscription, option, warrant, right, security, Contract, commitment, understanding, or stock appreciation, phantom stock option, profit participation or arrangement by which the Company is bound to issue any additional shares of its capital stock or rights pursuant to which any Person has a right to purchase shares of the Company's capital stock. "Order" shall mean any decree, order, judgment, injunction, rule, ruling, Lien, voting right, or consent of or by an Authority. "OSHA" shall mean the Occupational Safety and Health Administration. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permits" shall mean all permits, licenses, registrations, certificates, Orders or approvals from any Authority or other Person (including, without limitation, those relating to the occupancy or use of owned or leased real property) issued to or held by the Company. "Permitted Liens" shall have the meaning given to such term in Section 4.1 hereof. "Person" shall mean an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA which is maintained or contributed to by (or to which there is an obligation to contribute of) the Company or a Subsidiary of the Company or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Company, or a Subsidiary of the Company or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Preferred Stock" shall have the meaning given to such term in Section 3.15 hereof. "Proprietary Rights" shall mean all (i) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility, model, certificate of invention and design patents, patent applications, registrations and applications for registrations, (ii) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, (iii) copyrights and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data and documentation, (vi) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (vii) other proprietary rights relating to any of the foregoing and (viii) copies and tangible embodiments thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any prospectus subject to completion, and any such Prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Shares and, in each case, by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Registration Statement" shall mean any registration statement of the Company which covers any of the Shares, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regulation" shall mean any rule, law, code, statute, regulation, ordinance, requirement, announcement or other binding action of or by an Authority. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Restructuring" shall mean the restructuring of the Company's financial affairs. "Rose Glen" shall mean RGC International Investors, LDC, a limited duration company of the Cayman Islands. "SEC Documents" shall have the meaning set forth in Section 2.23 hereof. "Secured Note" shall mean this Secured Note, as the same may be amended, modified or supplemented and any replacement or substitution therefor. "Securities Act" shall mean the United States Securities Act of 1933, as amended from time to time. "Security Agreement" shall mean that certain Security Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Security Documents" shall mean (i) the Security Agreement, (ii) the Stock Pledge Agreement, and (iii) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "Shares" shall mean shares of Common Stock issued to the Holder upon conversion of this Secured Note or exercise of the Warrants. "Stock Pledge Agreement" shall mean that certain Stock Pledge Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Subsidiaries" has the meaning given to such term in Section 2.1 hereof; provided, however, that for purposes of this Secured Note and the other Transaction Documents, the term "Subsidiaries" shall not include NewCom. "Taxes" shall mean any taxes, including, without limitation, income, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), stamp, leasing, lease, user, excise, duty, franchise, transfer, license, withholding, payroll, employment, foreign, fuel, excess profits, occupational and interest equalization, windfall profits, severance, and other charges (including interest and penalties). "Trading Day" shall mean (i) a day on which the Common Stock is traded on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (ii) if the Common Stock is not listed or quoted on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Transaction Documents" shall mean and include (i) this Secured Note, (ii) the Security Documents, (iii) the Guaranty, (iv) the Exchange Agreement and (v) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Warrants" shall mean the Warrants of even date herewith to purchase Common Stock at an exercise price of $0.375 per share. "Working Capital Indebtedness" shall mean Indebtedness incurred by the Company for working capital purposes, on commercially reasonable terms, in arm's length transactions and approved in each case by no less than two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) prior to the incurrence thereof. "Year 2000 Compliant" shall mean (i) with respect to Date Data, that such data is in proper format and accurate for all dates in the twentieth and twenty-first centuries, and (ii) with respect to Date-Sensitive Systems, that each such system accurately processes all Date Data, including for the twentieth and twenty-first centuries, without loss or any functionality or performance, including but not limited to calculating, comparing, sequencing, storing and displaying such Date Data (including all leap year considerations), when used as a stand-alone system or in combination with other software or hardware. 1.2. Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Secured Note unless otherwise specified. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Secured Note shall refer to this Secured Note as a whole and not to any particular provision of this Secured Note. (b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP in conformity with those used in the preparation of the financial statements described in Section 3.1 hereof. SECTION 2. Representations and Warranties. In order to induce the Holder to accept this Secured Note, the Company makes the following representations, warranties and agreements, all of which shall survive the issuance and delivery of this Secured Note, with the occurrence of the issuance and delivery of this Secured Note being deemed to constitute a representation and warranty that the matters specified in this Section 2 are true and correct in all material respects on and as of the Execution Date (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date): 2.1. Corporate Status. Each of the Company, Aura Ceramics and AuraSound is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. The Company has no subsidiaries or equity investment in any other Person other than as set forth in Schedule 2.1 hereto (collectively, the "Subsidiaries"), and the only Subsidiaries with assets or property having more than minimal value are Aura Ceramics, AuraSound and Aura Realty. 2.2. Corporate Power and Authority; Enforcement. Each of the Company, Aura Ceramics and AuraSound has the requisite corporate power and authority to execute, deliver and perform the terms and provisions of each Transaction Document to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of such Transaction Document. Each of the Company, Aura Ceramics and AuraSound has duly executed and delivered each Transaction Document to which it is a party, and each such Transaction Document constitutes the legal, valid and binding obligation of the Company, Aura Ceramics and AuraSound enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application (regardless of whether enforcement is sought in equity or at law). 2.3. Capitalization. The authorized, issued and outstanding capital stock of the Company and its Subsidiaries is set forth on Schedule 2.3 hereto (as may be supplemented in accordance with Section 3.19 hereof). No shares of Common Stock are entitled to preemptive or similar rights. Except for the Secured Notes and as otherwise specifically disclosed in Schedule 2.3 hereto, there are no outstanding Options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company, Aura Ceramics nor AuraSound is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter or similar organizational documents. 2.4. Issuance of Secured Note. This Secured Note has been duly and validly authorized, issued and delivered and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms free and clear of all Liens. 2.5. No Violation. Neither the execution, delivery or performance by the Company of this Secured Note or Warrants or of the Company or any of its Subsidiaries of any of the other Transaction Documents nor compliance by any of them with the terms and provisions hereof and thereof, nor the consummation of the transactions contemplated hereby or thereby, will (i) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or other restriction of any court or Authority (including federal and state securities laws and regulations), (ii) conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of, 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, amendment, acceleration or cancellation of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Company or its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement, Contract or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of its property or assets is bound, affected or to which it may be subject (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), or (iii) conflict or be inconsistent with or violate any provision of the certificate of incorporation, bylaws or other charter or similar organizational document (each as amended through the date hereof) of the Company or any of its Subsidiaries. The businesses of the Company and its Subsidiaries have not been, and are not currently being, conducted in violation of any law, ordinance or regulation of any Authority, except for violations which, individually or in the aggregate, do not have, or could not reasonably be expected to have, a Material Adverse Effect. 2.6. Consents and Approvals. No consent, waiver, authorization or order of, or any filing or registration with, any court or other federal, state, local or other governmental Authority or other Person (except (A) as have been obtained or made on or prior to the Execution Date and which remain in full force and effect on such date and (B) for the filing and effectiveness of the Registration Statement referred to in Section 3.14 hereof) is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Transaction Document or (ii) the legality, validity, binding effect or enforceability of any such Transaction Document. 2.7. Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. (a) The audited consolidated year-end balance sheets of the Company for each of the fiscal years ended February 28, 1998 and 1997 and related consolidated statements of income, cash flow and shareholders' equity of the Company and its Subsidiaries for the fiscal years, ended on such dates, copies of which are attached hereto as Schedule 2.7(a) (collectively, the "Financial Statements"), fairly present the financial condition of the Company and its Subsidiaries as of such dates and the consolidated results of the operations of the Company and its Subsidiaries for such fiscal years. All of the foregoing financial statements have been prepared (i) in accordance with GAAP (except as stated therein or in the notes thereto) and (ii) from the books and records of the Company, except that the unaudited financial statements have no notes attached thereto and do not have year-end adjustments (none of which would be recurring). All properties used in the Company's business operations as of each Financial Statement date are reflected in the Financial Statements in accordance with and to the extent required by GAAP. (b) On and as of the Execution Date and after giving effect hereto, the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith, (i) the sum of the tangible and intangible assets, at a fair valuation, of the Company and Aura Ceramics on a stand-alone basis and of the Company and its Subsidiaries taken as a whole will exceed their debts; (ii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole have not incurred and do not intend to incur, and do not believe that they will incur, debts beyond their ability to pay such debts as such debts mature; and (iii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole will have sufficient capital with which to conduct their businesses. The amount of Contingent Obligations at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. A copy of the pro forma consolidated balance sheet of the Company after giving effect hereto, to the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith is attached hereto as Schedule 2.7(b) hereto. (c) Except as fully disclosed in the Financial Statements and Schedule 2.11 hereto, there were as of the Execution Date no Indebtedness, liabilities or obligations with respect to the Company or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent, unliquidated or otherwise, known or unknown to the Company, whether or not due) which, either individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. As of the Execution Date, the Company does not know of any basis for the assertion against it or any of its Subsidiaries of any Indebtedness, liability or obligation of any nature whatsoever that is not fully disclosed in the Financial Statements or Schedule 2.11 hereto which, either individually or in the aggregate, has, or could reasonably be expected to have, a Material Adverse Effect. (d) The projections delivered to the Agent on the Execution Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the projections which are based upon or include information known to the Company to be misleading in any material respect or which fail to take into account material information known to the Company regarding the matters reported therein. The Company believes that the projections are reasonable and attainable, it being recognized by the Holder, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the projections may differ from the projected results and that the differences may be material. 2.8. Ranking. The Obligations under this Secured Note and the other Transaction Documents constitute unconditional secured Indebtedness of the Company and the Guarantors, and (with respect to the Company, Aura Ceramics and AuraSound) rank and will rank (i) at least pari passu in priority of payment and in all other respects with all other present and future secured Indebtedness of such Persons subject to the priority rights of holders of (A) Existing Secured Indebtedness as of the Execution Date as set forth on Schedule 2.8(i)(A) hereto, (B) validly created and fully perfected senior secured Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof incurred by the Company after the Execution Date, and (C) obligations of the Company, Aura Ceramics and AuraSound existing on the Execution Date secured by valid and perfected judgment liens against such Persons as set forth in Schedule 2.8(i)(C) hereto; provided, however, that the Company may supplement such Schedule 2.8(i)(C) to reflect judgment liens validly created and fully perfected through the Execution Date which the Company had no knowledge of and were not identified in UCC certificates set forth in Schedule 2.8(i)(C), and senior to all other Indebtedness of such Persons. 2.9. Litigation; Proceedings. There is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory Authority (federal, state, county, local or foreign) which (A) relates to or challenges the legality, validity or enforceability hereof or of any of the Transaction Documents or of any transaction contemplated hereby or thereby, (B) could, individually or in the aggregate, adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents, or (C) has, or could reasonably be expected to have, a Material Adverse Effect from and after the Execution Date (except for the DFS Claims). 2.10. No Default or Violation. On and as of the Execution Date (except as otherwise provided herein, in the Transaction Documents or as disclosed in Schedule 2.10 hereto), neither the Company nor Aura Ceramics: (i) will be in default under or in violation of any indenture, loan or credit agreement or any other agreement evidencing Indebtedness of the Company or any of its Subsidiaries or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), (ii) will be in violation of any order of any court, arbitrator, governmental body or Authority, or (iii) will be in violation of any statute, rule or regulation of any Authority, except as could not, in any such case, individually or in the aggregate, (A) adversely affect the legality, validity or enforceability of any transaction contemplated hereby or any of the Transaction Documents, or (B) adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents or (C) has, or could reasonably be expected to have, a Material Adverse Effect. 2.11. Indebtedness. Schedule 2.11 hereto sets forth a true and complete list (subject to variances not to exceed seven and one-half percent (7 1/2%) in the aggregate) of all Indebtedness (excluding Indebtedness under the Secured Notes and the other Transaction Documents) of the Company, Aura Ceramics, and Aura Realty as of the Execution Date and which is to remain outstanding (the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof, accrued interest in respect thereof and the name of any Person which directly or indirectly guaranteed such debt. 2.12. True and Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund (including, without limitation, all information contained in the Transaction Documents) for purposes of or in connection with this Secured Note, any other Transaction Document or any transaction contemplated hereby or thereby is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund will be true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. There is no fact which the Company has not disclosed to the Agent or the Funds herein and of which the Company, its Subsidiaries, or any of their respective officers, directors or executive employees is aware and which has, or could reasonably be expected to have, a Material Adverse Effect. 2.13. Tax Returns and Payments. Except as disclosed in Schedule 2.13 hereto, each of the Company, Aura Ceramics, AuraSound and Aura Realty (i) has filed all income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on its financial statements in accordance with GAAP, and (ii) has at all times paid, or has provided adequate reserves (in the good faith judgment of the management of such Person) for the payment of, all income taxes applicable for all prior fiscal years and for the current fiscal year to date. Except as disclosed in Schedule 2.13 hereto, there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Company, Aura Ceramics, AuraSound, or Aura Realty, threatened by any Authority regarding any taxes relating to such Person. As of the Execution Date, neither the Company, Aura Ceramics, AuraSound, nor Aura Realty has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of such Person, or is aware of any circumstances that would cause the taxable years or other taxable periods of such Person not to be subject to the normally applicable statute of limitations. 2.14. Compliance with ERISA. (a) Schedule 2.14 hereto sets forth each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been made; neither the Company nor any Subsidiary of the Company nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Company or any Subsidiary of the Company or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Company and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the Execution Date, would not exceed $100,000; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Company, any Subsidiary of the Company, or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Company or any Subsidiary of the Company or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Company and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. (b) Neither the Company nor any of its Subsidiaries has, or has ever had, a Foreign Pension Plan. 2.15. Compliance with Law and Applicable Government Regulations. Each of the Company and its Subsidiaries is presently in compliance with regard to its operations, practices, real property, plants, structures, machinery, equipment and other property, and all other aspects of its business, with all applicable Regulations and Orders, including, but not limited to, all Regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, Taxes, consumer protection, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety, except for such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. There are no Claims pending or, to the Company's knowledge, threatened, nor has the Company received any written notice regarding any violations of any Regulations or Orders enforced by any Authority including any requirement of OSHA or any pollution and environmental control agency (including air and water) which have, or could reasonably be expected to have, a Material Adverse Effect. 2.16. Security Documents. The provisions of each of the Security Documents will, on the Closing Date, create in favor of the Agent, for the benefit of the Funds, as security for the Obligations hereunder and under all other Exchange Documents, a valid security interest in all of the right, title and interest of the relevant assignor or pledgor thereunder in and to the Collateral described therein and, with respect to the Company, Aura Ceramics and AuraSound, superior to all Liens subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 (and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k)). 2.17. Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the United States Investment Company Act of 1940, as amended. 2.18. Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. 2.19. Labor Relations. Each of the Company and its Subsidiaries is on the Execution Date in compliance with all federal, state and local Regulations or Orders affecting employment and employment practices applicable to each such Person, including terms and conditions of employment and wages and hours, except for certain failure to make salary or other compensation payments to management and such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. The Company and its Subsidiaries have on the Execution Date no collective bargaining agreements and there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization. Neither the Company nor any of its Subsidiaries is engaged on the Execution Date in any unfair labor practice that has, or could reasonably be expected to have, a Material Adverse Effect. There is as of the Execution Date (A) no unfair labor practice complaint pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, (B) no strike, labor dispute, slowdown or stoppage pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries and (C) to the best knowledge of the Company, no union representation question existing with respect to the employees of the Company or any of its Subsidiaries and, to the best knowledge of the Company, no union organizing activities are taking place, except (with respect to any matter specified in clause (A), (B) or (C) above, either individually or in the aggregate) which does not have, nor could reasonably be expected to have, a Material Adverse Effect. 2.20. Proprietary Rights, Licenses, Franchises and Formulas. Each of the Company and its Subsidiaries owns all Proprietary Rights, licenses, franchises and formulas, or rights with respect to any of the foregoing, and has obtained assignments of all leases and other rights of whatever nature necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, has, or could reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that the Company or any of its Subsidiaries infringes upon the asserted rights of any other Person under any intellectual property, except for claims which could not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that such intellectual property owned or licensed by the Company or any of its Subsidiaries or which such Person otherwise has the right to use is invalid and unenforceable, except for claims which could not, individually or in the aggregate, have, or reasonably could be expected to have, a Material Adverse Effect. The consummation of the transactions contemplated hereby or by any of the other Transaction Documents will not alter or impair any rights of the Company or any of its Subsidiaries to use any intellectual property in a way that would not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. The Company is the legal and beneficial owner of all right, title and interest in, to, and under the Proprietary Rights with respect to AuraGen, and the Company has not entered into any agreement or understanding with any Person concerning any sale, lease, transfer, option, license, assignment or other disposition of such Proprietary Rights. 2.21. Certain Fees. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby or by any of the other Transaction Documents. 2.22. Private Offering. The offer, issuance and sale of this Secured Note are exempt from registration under the Securities Act or any state securities or blue sky law. Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of this Secured Note under the Securities Act) which might subject the offering, issuance or sale of this Secured Note to the registration requirements of the Securities Act. 2.23. SEC Documents. Attached hereto as Schedule 2.23 is a true and complete list of all forms, reports and documents required to be filed by the Company and its Subsidiaries under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the "SEC Documents"), which the Company has failed to file as of the Execution Date. 2.24. Directors and Management Compensation. Schedule 2.24 hereto sets forth a list of all officers, directors and key employees (meaning those earning more than $50,000.00 annually including all bonuses and non-cash consideration) of the Company and its Subsidiaries, together with a description of their respective positions and total compensation and a list of all other outstanding obligations owed by the Company to each of such Persons. On and as of the Execution Date, the Company and its Subsidiaries will not have any liability to any of their employees, officers or directors (except as set forth in Schedule 2.24(i)) other than for the payment of salaries and director fees to be paid in the ordinary course of business. 2.25. Absence of Certain Changes. Since November 30, 1998, except as fully disclosed on Schedule 2.25 hereto or otherwise provided in this Secured Note, there has not been any (a) material adverse change in the business, operations, properties, assets, condition (financial or otherwise), results, plans, strategies or prospects of the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect; (b) damage, destruction or loss, whether covered by insurance or not, which has, or could reasonably be expected to have, a Material Adverse Effect with regard to the Company's or any of its Subsidiaries' property and business; (c) declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the Company's or any of its Subsidiaries' capital stock, or any redemption or other acquisition of such stock by the Company or any of its Subsidiaries; (d) increase in the compensation payable to or to become payable by the Company or any of its Subsidiaries to its officers, Insiders or employees (other than in the ordinary course) or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers, Insiders or employees (other than in the ordinary course) or any Affiliate of the Company or any of its Subsidiaries; (e) entry into any material Contract not in the ordinary course of business, including, without limitation, any borrowing or capital expenditure; (f) change by the Company or any of its Subsidiaries in accounting methods or principles; or (g) consensual Lien placed on any property of the Company or any of its Subsidiaries other than Permitted Liens. 2.26. Year 2000 Compliance. As of the Execution Date, except as set forth on Schedule 2.26 hereto, all Date Data and Date-Sensitive Systems, if any, of the Company and its Subsidiaries are Year 2000 Compliant. The Company and its Subsidiaries have obtained written representations or assurances from each entity that (x) provides Date Data to the Company or any of its Subsidiaries, or (y) processes in any way Date Data for the Company or any of its Subsidiaries or otherwise provides any material product or service to the Company or any of its Subsidiaries that is dependent on Year 2000 Compliant Date Data or a Year 2000 Compliant Date-Sensitive System, that all of such entity's Date Data and Date-Sensitive Systems that are used for, or on behalf of, the Company or any of its Subsidiaries are Year 2000 Compliant. 2.27. Capital Expenditures and Investments. Each Contract of the Company and its Subsidiaries for capital expenditures and investments involving $50,000 or more entered into on or after November 30, 1998 is fully disclosed in Schedule 2.27 hereto. 2.28. Dealings with Affiliates. Schedule 2.28 hereto sets forth a complete and accurate list, including the parties, of all oral or written Contracts to which the Company and its Subsidiaries are, will be or have been a party, at any time from November 30, 1998 to and including the Execution Date, and to which any one or more of their Affiliates is also a party. Except as set forth on Schedule 2.28 hereto, since November 30, 1998, the Company and its Subsidiaries have not made any payments, loaned any funds or property or made any credit arrangement with any Affiliate or employee of the Company or any of its Subsidiaries except for the payment of employee salaries and director compensation in the ordinary course of business. 2.29. Solicitation Materials. The Company did not solicit any offer to buy or sell this Secured Note by means of any form of general solicitation or advertising. 2.30. Aura Ceramics. On and as of the Closing Date, the Company has not entered into any binding agreement for the sale, lease or other disposition of all or substantially all of the assets of Aura Ceramics. 2.31. Aura Tech. Aura Tech, Inc. has no assets and has never owned any assets. SECTION 3. Affirmative Covenants. The Company covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 3.1. Information Covenants. It will furnish to the Agent for distribution to the Holder and each of the Funds: (a) Quarterly Financial Statements. As soon as available and in any event within 45 days after the close of the first three fiscal quarters in each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal quarter and the related consolidated statements of income and retained earnings and statement of cash flows, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be in reasonable detail and certified by the Chief Financial Officer of the Company to the effect that such financial statements have been prepared in accordance with GAAP and that they fairly present the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes and (ii) management's discussion and analysis of the important operational and financial developments during the fiscal quarter and year-to-date periods in the form customarily prepared by management or as otherwise agreed with the Agent. (b) Annual Financial Statements. As soon as available and in any event within 90 days after the close of each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal year and the related consolidated statements of income and retained earnings and statement of cash flows for such fiscal year, in each case setting forth comparative budgeted figures for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year, and certified by a firm of independent certified public accountants of recognized international standing as shall be reasonably acceptable to the Agent, in each case to the effect that such financial statements have been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and cash flows, and (ii) management's discussion and analysis of the important operational and financial developments during such fiscal year, in the form customarily prepared by management or as otherwise agreed with the Agent. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 3.1(a) or (b), a certificate of the Chief Financial Officer of the Company to the effect that, to the best of such officer's knowledge, no Event of Default has occurred and is continuing or, if any Event of Default has occurred and is continuing, specifying the nature and extent thereof. (d) Notice of Default, Judgment or Litigation. From and after the Execution Date, promptly upon, and in any event within 10 Business Days after the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the Company or any of its Subsidiaries obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes an Event of Default, (ii) any judgment by or against the Company or any of its Subsidiaries with respect to any material Indebtedness, (iii) any notice of default given to the Company or any of its Subsidiaries in respect of any Existing Secured Indebtedness, and (iv) any litigation or governmental investigation or proceeding commenced (x) against the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect, (y) with respect to any material Indebtedness of the Company or any of its Subsidiaries or (z) with respect to any Transaction Document or any transaction contemplated hereby or thereby. (e) Other Reports and Filings. Promptly after the filing or delivery thereof, copies of all financial information, proxy materials, reports and other material filings, if any, which the Company or any of its Subsidiaries shall publicly file with any Authority (including, without limitation, the Commission) and with any international or national securities exchange (including, without limitation, the Nasdaq Stock Market, Inc.). (f) Year 2000 Compliance. It will promptly notify the Agent in the event that it discovers or determines that any computer application (including, without limitation, those of its suppliers and vendors) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure does not have, nor could reasonably be expected to have, a Material Adverse Effect. (g) Other Information. From time to time, such other information or documents (financial or otherwise) as the Agent, the Holder or any Fund may reasonably request, including, without limitation, the quarterly financial statements of any of the Company or any of its Subsidiaries prepared in accordance with the provisions of Section 3.1(a). 3.2. Books, Records and Inspections. It will, and will cause each of its Subsidiaries to keep proper books of record and accounts in which full, true and correct entries are made (and with respect to the Company, Aura Ceramics and Aura Realty in conformity with GAAP) and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Company will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent, the Holder or any Fund to visit and inspect, under guidance of officers of the Company or such Subsidiary, any of the properties of the Company or such Subsidiary, and to examine the books of account of the Company or such Subsidiary and discuss the affairs, finances and accounts of the Company or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all upon reasonable prior notice and at such reasonable times and intervals and to such reasonable extent as the Agent, the Holder or such Fund may reasonably request. 3.3. Corporate Existence and Franchises. Within sixty (60) days following the Execution Date, it will, and will cause Aura Ceramics and AuraSound to, do or cause to be done all things necessary to effect, preserve and keep in full force and effect its existence and its good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualification. 3.4. Compliance with Statutes, etc. It will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental Authorities, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. 3.5. Compliance with Environmental Laws. It will comply, and will cause each of its Subsidiaries to comply, in all material respects with all environmental laws applicable to the ownership or use of its real property now or hereafter owned or operated by the Company or any of its Subsidiaries, will promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such real property free and clear of any Liens imposed pursuant to such environmental laws. 3.6. ERISA. As soon as possible and, in any event, within ten (10) days after the Company, any Subsidiary of the Company or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Company will deliver to each of the Funds a certificate of the chief financial officer of the Company setting forth the full details as to such occurrence and the action, if any, that the Company, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given or filed by the Company, such Subsidiary, the Plan administrator or such ERISA Affiliate to or with the PBGC or any other government agency, or a Plan participant and any notices received by the Company, such Subsidiary or ERISA Affiliate from the PBGC or any other government agency, or a Plan participant with respect thereto: that a Reportable Event has occurred (except to the extent that the Company has previously delivered to the Funds a certificate and notices (if any) concerning such event pursuant to the next clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to such Plan within the following 30 days; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan or Foreign Pension Plan has not been timely made; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that the Company, any Subsidiary of the Company or any ERISA Affiliate will or may incur any liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that the Company or any Subsidiary of the Company may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan or any Foreign Pension Plan. The Company will deliver to each of the Funds copies of any records, documents or other information that must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA. The Company will also deliver to each of the Funds a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Funds pursuant to the first sentence hereof, copies of annual reports and any records, documents or other information required to be furnished to the PBGC or any other government agency, and any material notices received by the Company, any Subsidiary of the Company or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be delivered to the Funds no later than ten (10) days after the date such annual report has been filed with the Internal Revenue Service or such records, documents and/or information has been furnished to the PBGC or any other government agency or such notice has been received by the Company, the Subsidiary or the ERISA Affiliate, as applicable. The Company and each of its applicable Subsidiaries shall ensure that all Foreign Pension Plans administered by it or into which it makes payments obtains or retains (as applicable) registered status under and as required by applicable law and is administered in a timely manner in all respects in compliance with all applicable laws except where the failure to do any of the foregoing would not be reasonably likely to result in a material adverse effect upon the business, operations, condition (financial or otherwise) or prospects of the Company or any Subsidiary of the Company. 3.7. End of Fiscal Years; Fiscal Quarters. It will, and will cause each of its Subsidiaries to, provide the Agent prior written notice with respect to the change of their respective fiscal years and fiscal quarters. 3.8. Performance of Obligations. It will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement, loan agreement and each other material agreement, Contract or instrument by which it or any of its properties or assets is bound, except such non-performances which, individually or in the aggregate, do not have, nor could reasonably be expected to have, a Material Adverse Effect. 3.9. Payment of Taxes. It will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 4.1; provided, that neither the Company nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP. 3.10. CNA Restructuring Agreement. No later than the date which is sixty (60) days following the Execution Date, the Company and CNA shall have executed and delivered the CNA Restructuring Agreement and all conditions to the CNA Restructuring Agreement shall have been satisfied and not waived to the satisfaction of the Funds unless otherwise agreed to in writing by the Funds. 3.11. DFS Claims and Isosceles Indebtedness. It will give the Agent prompt written notice (but in no event later than three Business Days) of (i) any settlement, liquidation, arbitral award, judgment or any other resolution of the DFS Claim and any action taken by or for the benefit of DFS to enforce any such award, judgment or other resolution (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets) or (ii) any settlement, liquidation, arbitral award, judgment or any other resolution of the Indebtedness of the Company owed to Isosceles and any action taken by or for the benefit of Isosceles to enforce such Indebtedness (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets). 3.12. Certain Corporate Matters. (a) No later than the date which is 60 days following the Execution Date, the Board of Directors of the Company shall be composed of seven directors, not less than four of whom must be Independent Directors; (b) No later than August 31, 2000, the Board of Directors of the Company shall be composed of nine directors, not less than five of whom must be Independent Directors; and (c) No later than the date which is 30 days following the Execution Date, the Company shall file with the Commission and such other authorities as applicable law may require proxy materials with respect to the matters provided in clauses (a) and (b) above. 3.13. Issuance of Shares. No later than the date which is 90 days following the Execution Date, the Shares shall have been duly authorized for issuance in accordance with the terms of this Secured Note and the other Transaction Documents. 3.14. Registration Statement. No later than the date which is 90 days following the Execution Date, the Company shall have filed with the Commission a Registration Statement with respect to the resale of the Shares. The Company shall use its best efforts to (i) cause such Registration Statement to become effective as soon as possible thereafter and (ii) maintain such Registration Statement's effectiveness. 3.15. Additional Equity. No later than the date which is 180 days following the Execution Date, the Company shall have received, in addition to the New Equity, equity contributions in cash in an amount of not less than $1,600,000 in exchange for new Common Stock. The Company shall be permitted to issue preferred stock ("Preferred Stock") strictly in accordance with the term sheet annexed hereto as Schedule 3.15 as authorized by 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof); provided, however, that the certificate of designation with respect to the Preferred Stock shall not be filed without the prior written consent of the Agent (which shall not be unreasonably withheld) to confirm the provisions in Schedule 3.15. 3.16. Supplemental Information. From time to time, the Company shall promptly supplement or amend information previously delivered to the Funds with respect to any matter hereafter arising which, if existing or occurring at the Execution Date, would have been required to be set forth or disclosed; provided, however, that such supplemental information shall not be deemed to be an amendment to any schedule or exhibit hereto. 3.17 Covenant to Guarantee Obligations and Give Security. In the event that the Company or any of its Subsidiaries shall create or acquire a subsidiary, such Person shall, at its expense: (a) within 10 days after the date of such creation or acquisition, cause each such new Subsidiary to duly execute and deliver to the Agent (i) a Guaranty substantially in the form of Exhibit B hereto, and (ii) such Security Documents as the Agent may request; (b) within 15 days after the date of such creation or acquisition, deliver to the Agent, upon the request of the Agent in its sole discretion, a favorable opinion, addressed to the Agent and each of the Funds, of counsel for such Guarantor acceptable to the Agent, as to such matters as the Agent may reasonably request; and (c) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such actions as the Agent may deem necessary or reasonably desirable in order to obtain the full benefits of such Guaranty and Security Documents. For purposes of this Section 3.17, "subsidiary" shall mean, with respect to the Company or any Subsidiary, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more subsidiaries of such Person, and (ii) any partnership, association, joint venture or other entity in which such Person and/or one of more subsidiaries of such Person has more than a 50% equity interest at the time. 3.18. Further Assurances. The Company will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver, or cause to be made, executed, endorsed, acknowledged, filed and/or delivered, to the Agent from time to time such vouchers, invoices, schedules, conveyances, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral as the Agent may reasonably require in order to provide the Agent with the Liens and rights granted under the Security Documents with respect to the Collateral. 3.19. Guarantors. The Company will supplement Schedule 2.3 hereof within 10 days of the Closing to reflect the authorized, issued and outstanding capital stock of Aura Medical Systems, Inc. and Electrotec Productions, Inc. 3.20. Bank Accounts. The Company will give notice to the Agent subject to and in accordance with Section 2.5 of the Security Agreement regarding the location of all of its bank accounts (including account numbers). 3.21. Non-Recourse Notes. Within forty-five (45) days of the Closing Date, at least fifty percent (50%) of the Indebtedness owing to the holders of the 8% Secured Convertible Non-Recourse Note Due 2008 listed in Schedule 4.1(l) shall have been converted into Common Stock of the Company. 3.22. Guzik Opinion. The legal opinion of Guzik & Associates (Exhibit H to the Exchange Agreement) shall be supplemented to cover the due execution, authorization and delivery of the Transaction Documents by the Guarantors to which they are a party. 3.23. Stock Certificates. The Company shall deliver stock certificates and stock voting powers for the Guarantors to the Agent within 10 days of the Closing Date. SECTION 4. Negative Covenants. The Company hereby covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 4.1. Liens. It will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any of the property or assets (real or personal, tangible or intangible, including, without limitation, Proprietary Rights) of the Company or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to the Company or any of its Subsidiaries), or assign any right to receive income or permit the filing of any notice of Lien under any recording or notice statute; provided that the provisions of this Section 4.1 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Company or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company or any of its Subsidiaries or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; (c) Liens in existence on the Execution Date which are listed, and the property subject thereto described, in Schedule 4.1(c) hereto (the "Existing Liens"), but only to the respective date, if any, set forth in such Schedule 4.1(c) for the removal, replacement and termination of any such Liens; (d) Liens created pursuant to the Security Documents; (e) easements, rights-of-way, restrictions, encroachments and other similar charges or encumbrances, and minor title deficiencies, in each case not securing Indebtedness and not materially interfering with the conduct of the business of the Company or any of its Subsidiaries; (f) statutory and common law landlords' liens under leases to which the Company or any of its Subsidiaries is a party; (g) Liens incurred in the ordinary course of business in connection with workers' compensation claims, unemployment insurance and social security benefits and Liens securing the performance of bids, tenders, leases and contracts in the ordinary course of business, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money), provided that the aggregate outstanding amount of obligations secured by Liens permitted by this clause (g) (and the value of all cash and property encumbered by Liens permitted pursuant to this clause (g)) shall not at any time exceed $100,000; (h) Liens arising after the Execution Date solely by virtue of any statutory provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company or any of its Subsidiaries, and (B) such deposit account is not intended by the Company or any of its Subsidiaries to provide collateral to the depository institution (except to Imperial Bank); (i) Liens in connection with Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof; (j) Liens subordinate to the Liens created pursuant to the Security Documents; provided that (A) any such consensual Lien shall only be created, assumed or suffered to exist if each Person in favor of whom such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent and (B) any such statutory, judgment or other nonconsensual Lien against the Company and Aura Ceramics (including, without limitation, any judgment liens which are not Permitted Liens pursuant to Section 4.1(c)) shall only be created, assumed, or suffered to exist if the total amount of such Liens in the aggregate (excluding the DFS Claims) shall not at any time exceed $1,066,666.67; and (k) any extension, renewal or replacement of the foregoing Liens; provided, however, that the Liens permitted hereunder shall not cover any additional Indebtedness or property (other than like property substituted for property covered by such Lien) except as otherwise permitted pursuant to Section 4.5(c). In connection with the granting of Liens of the type described in Section 4.1(i) by the Company or any of its Subsidiaries, the Agent is hereby authorized by the Funds and shall take any actions reasonably requested by the Company in writing in connection therewith (including, without limitation, by executing appropriate lien subordination agreements in favor of the holder or holders of such Liens solely with respect to the item or items of equipment or other assets subject to such Liens). Notwithstanding the foregoing, any Permitted Liens (other than Existing Liens or Liens under Sections 4.1(d)) upon or with respect to Proprietary Rights and other general intangibles of the Company and its Subsidiaries shall only be created, assumed or suffered to exist to the extent any such Lien shall be subordinate to the Liens created pursuant to the Security Documents and each Person in favor of which such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent. 4.2. Proprietary Rights. Except with respect to Non-Core Assets in accordance with the terms hereof, the Company will not, and will not permit any of its Subsidiaries to, nor shall any such Person allow any other Person to, sell, assign or transfer any interest in any of the Proprietary Rights of the Company, or file or record any consensual Lien, assignment or other instrument, certificate or document having a similar effect with respect to any of the Proprietary Rights of the Company or any of its Subsidiaries with the U.S. Patent and Trademark Office. Nothing herein shall be deemed or construed as an argument or admission that the Liens upon the Proprietary Rights of the Company and its Subsidiaries created pursuant to the Security Documents are impaired or unperfected. 4.3. Consolidation, Merger, Purchase or Sale of Assets, etc. It will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of their property or assets, or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person (or agree to do any of the foregoing at any future time), except that: (a) the Company, Aura Ceramics and AuraSound, taken as a whole, may lease (as lessee) (i) real property in an amount no greater than $1,200,000 in the aggregate in any 12 month period or (ii) personal property in an amount no greater than $500,000 in the aggregate in any 12 month period, or create a capitalized lease obligation; (b) the Company, Aura Ceramics and AuraSound may make sales of inventory in the ordinary course of business and consistent with past practices; (c) the Company and its Subsidiaries may sell, lease, or otherwise dispose of equipment or materials with a value of no greater than $25,000 in the aggregate which, in the reasonable judgment of such Person, are obsolete, worn-out or otherwise no longer useful in the conduct of such Person's business and the Funds shall take such actions as may reasonably be requested by the Company in writing in connection therewith (including, if necessary, executing an appropriate release of the Liens under the Security Documents solely with respect to such equipment and materials); (d) so long as no Event of Default shall occur and has not been cured in accordance with the terms hereof, the Company and its Subsidiaries may sell, lease, or otherwise dispose of Non-Core Assets, including all of the Company's stock of any of its Subsidiaries, at fair value (as determined by no less than 2/3 of the Board of Directors of the Company composed in the manner set forth in Section 3.12(a) or (b) hereof) in arm's length transactions and the Funds shall take such actions as may be reasonably requested by the Company in writing in connection therewith (including, if necessary, by executing an appropriate release solely with respect to such Non-Core Assets of the Liens under the Security Documents and the Obligations, including indemnification obligations, under the Guaranty); (e) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its property (upon voluntary liquidation or otherwise) to the Company; and (f) any Guarantor may merge with and into the Company. Notwithstanding anything to the contrary contained in this Section 4.3, neither the Company nor any of its Subsidiaries may convey, sell, lease, or otherwise dispose of any property having more than minimal value to any existing or future Subsidiary of the Company without the Agent's prior written consent. Neither the Company nor any of its Subsidiaries shall transfer or deliver any Instrument or Investment Property (as defined in the Security Agreement) to any Person (other than the Agent) except as otherwise expressly permitted by the Security Agreement or this Secured Note. 4.4. Dividends. (a) It will not declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Company now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock). (b) Except as otherwise provided in this Secured Note, it will not permit any of its Subsidiaries to declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock of such Subsidiary now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), except that any Subsidiary may pay cash dividends to the Company, including, without limitation, in respect of any sales of Non-Core Assets in accordance with the terms hereof. 4.5. Indebtedness. It will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Secured Note and the other Transaction Documents; (b) Existing Indebtedness; (c) Working Capital Indebtedness incurred by (i) the Company only in connection with the AuraGen business, or (ii) Aura Ceramics only in connection with its existing business as of the Execution Date; (d) Indebtedness incurred by (i) the Company in connection with capital expenditures related only to the AuraGen business in an aggregate amount not to exceed at any one time outstanding $1,000,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date or (ii) Aura Ceramics in connection with capital expenditures related only to its existing business as of the Execution Date not to exceed at any one time outstanding $500,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date; (e) additional unsecured trade Indebtedness incurred by the Company related only to the AuraGen business in the ordinary course in arm's length transactions in an aggregate principal amount not to exceed $2,000,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(e) shall be subordinate to the Secured Notes; and (f) additional unsecured trade Indebtedness incurred by a Subsidiary in the ordinary course in an aggregate principal amount not to exceed $500,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(f) shall be subordinate to the Secured Notes; provided that the foregoing Indebtedness shall only be incurred if immediately prior to such incurrence and after giving effect thereto, no Event of Default shall have occurred which has not been cured in accordance with the terms of this Secured Note. 4.6. Transactions with Affiliates. It will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, with any Affiliate of any of them, other than in the ordinary course of business and on terms and conditions substantially as favorable to the Company or such Subsidiary as would reasonably be obtained by the Company or such Subsidiary at that time in a comparable arm's length transaction with a Person other than an Affiliate. 4.7. Limitation on Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements. Except as otherwise permitted by this Secured Note, it will not, and will not permit any of its Subsidiaries to, (i) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness (including, without limitation, the Restructured NEC Debt and all Restructured Trade Debts) or of any agreement (including, without limitation, any purchase agreement, indenture, loan agreement or security agreement) relating thereto other than any amendments or modifications to the Existing Indebtedness which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, (ii) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or any prepayment or redemption of, any Indebtedness, except that the Company may make such payments or redemptions in the aggregate amount of $500,000 in any 12 month period so long as no Event of Default shall have occurred (except for the DFS Claims), (iii) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness or any agreement relating thereto, other than amendments or modifications which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, or (iv) amend, modify or change their certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation) or bylaws (or equivalent organizational documents), or any agreement entered into by any of them, with respect to their capital stock (including any shareholders' agreement), or enter into any new agreement with respect to their capital stock, other than any amendments, modifications or changes to this clause (iv) or any such new agreements pursuant to this clause (iv) which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents; provided, however, that the Company may (A) enter into a settlement and payment of unsecured Indebtedness of the Company owed to GSS as of the Execution Date in an aggregate amount not to exceed $4,000,000, (B) enter into a settlement and payment of the DFS Claims owed to DFS as of the Execution Date in an aggregate amount not to exceed $5,000,000, and (C) issue capital stock in accordance with Section 4.8 hereof. 4.8. Limitation on Issuance of Capital Stock. (a) The Company will not, and will not permit any of its Subsidiaries to, issue any equity or capital stock which may be redeemed, called or put, or which has any preference or extraordinary rights, other than Preferred Stock as contemplated under and pursuant to this Secured Note. (b) The Company will not, and will not permit any of the Guarantors to, issue or agree to issue any equity or capital stock (including by way of sales of treasury stock, options, warrants to purchase, or securities convertible into, capital stock) unless at a price at or above the then fair value as determined by no less than 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) either at the time of issuance or the time of the relevant agreement. SECTION 5. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 5.1 Payments. The Company shall (i) default in the payment when due of any principal hereunder, or (ii) default, and such default shall continue unremedied for three or more Business Days, in the payment when due of any interest hereunder or any fees or any other amounts (other than principal) owing hereunder or under any other Transaction Document; or 5.2. Representations, etc. Any representation, warranty or statement made by the Company or any of its Subsidiaries herein or in any other Transaction Document or in any certificate delivered to the Agent or any Fund pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made and such misrepresentation is material and continues to be material to the business, operations, assets, revenues, properties, liabilities or prospects of the Company or any of its Subsidiaries on earlier of (i) the date notice of an Event of Default is given to the Company or (ii) the date on which the Company or any of its Subsidiaries becomes aware of such default; or 5.3. Covenants. The Company or any of its Subsidiaries shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Sections 3.1(d), 3.3, 3.10, 3.11, 3.12, 3.13, 3.14., 3.15, 3.17, 3.19, 3.20, 3.21, 3.22, 3.23 or Section 4 hereof, or (b) default in the due performance or observance by it of any other term, covenant or agreement contained in this Secured Note (other than those set forth in Section 5.1 or 5.2 or clause (a) of this Section 5.3) or any other Transaction Document and such default shall continue unremedied for a period of 30 days after written notice thereof to the defaulting party by the Agent or any Fund; or 5.4. Default Under Other Agreements. The Company, the Guarantors or any of their Subsidiaries shall (i) default in any payment of any Existing Secured Indebtedness beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Existing Secured Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any Existing Secured Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Existing Secured Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such Existing Secured Indebtedness to become due prior to its stated maturity; or any Existing Secured Indebtedness of the Company, the Guarantor or any of their Subsidiaries shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; provided, however, that (a) such default shall continue unremedied for a period of 30 days after notice of default has been given to the Company by the holder of Existing Secured Indebtedness asserting the default (or shall continue unremedied up to an additional 60 days beyond such initial 30-day cure period if the holder of Existing Secured Indebtedness asserting the default forbears, waives or extends such default in writing for such additional time and the Funds shall have received commensurate therewith cash or other consideration equal to the cash or other consideration given to such holder of Existing Secured Indebtedness on account of, or in connection with, or related to such holder's forbearance, waiver or extension of the default) and (b) this Section 5.4 shall not apply to any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes. 5.5. Bankruptcy. The Company or any of its Subsidiaries shall commence a voluntary case concerning itself under the Bankruptcy Code; or an involuntary case is commenced against the Company and the petition is not controverted within 10 days after service, or is not dismissed within 30 days, after commencement of the case or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the foregoing Persons. The Company or any of its Subsidiaries shall commence any other proceeding under any reorganization, arrangement, assignment for the benefit of creditors, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any of its Subsidiaries. There is commenced against the Company or Aura Ceramics any such proceeding which remains undismissed for a period of 30 days, or any of the Company and Aura Ceramics is adjudicated insolvent or bankrupt, or any order of relief or other order approving any such case or proceeding is entered, or the Company or Aura Ceramics suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 30 days, or the Company or Aura Ceramics shall generally not pay its debts as they become due or there shall be deemed to have occurred a suspension of payments, or the Company or Aura Ceramics shall be substantively consolidated with any other Person, or any judgment or order which has a Material Adverse Effect shall have been entered against the Company or any of its Subsidiaries pursuant to Bankruptcy Code sections 506(c), 542, 543, 544, 545, 547, 548, 549, 550, 551, 552(b) and 553. The Company or any of its Subsidiaries makes a general assignment for the benefit of creditors, or any corporate action is taken by the Company or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 5.6. Security Documents. Any of the Security Documents shall cease to be valid and in full force and effect, or, except as otherwise permitted hereby, shall cease to give the Agent, for the benefit of the Funds, the Lien purported to be created thereby; or 5.7. Guaranty. At any time after the execution and delivery thereof, any Guaranty or any provision thereof shall cease to be in full force or effect as to any Guarantor, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under its Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to its Guaranty; or 5.8. Material Adverse Change. Any event or condition shall occur or exist which, in the reasonable judgment of the Agent, has, or could reasonably be expected to have, a Material Adverse Effect; or 5.9. Denial of Liability. (a) The Company or any of its Subsidiaries shall deny its obligations under this Secured Note or any other Transaction Document; (b) any law, rule or regulation shall purport to render invalid, or preclude enforcement of, any provision of this Secured Note or any other Transaction Document or impair performance of the Company's or any Subsidiary's obligations hereunder or under any other Transaction Document or (c) any dominant authority asserting or exercising de jure or de facto governmental or police powers shall, by moratorium laws or otherwise, cancel, suspend or defer the obligation of the Company or any of its Subsidiaries to pay any amount required to be paid hereunder or under any other Transaction Document; or 5.10. DFS. DFS shall obtain (i) a settlement of the DFS Claims in excess of $5 million, or (ii) an arbitral award, judgment, or other resolution of the DFS Claims in excess of $5,000,000 and DFS obtains property or assets of the Company or any of its Subsidiaries in excess of $50,000 in connection therewith (including, without limitation, by way of levy, attachment, garnishment, foreclosure or possession); or 5.11. Isosceles. Isosceles shall fail to convert its existing Indebtedness owed by the Company into Common Stock of the Company within six months of the Execution Date, or Isosceles at any time obtains a judgment, attaches, garnishes, takes possession or otherwise forecloses on the Company's assets or property in respect of such Indebtedness; then, and in any such event, and at any time thereafter, if any Event of Default shall occur (which has not been cured in accordance with the terms of this Secured Note), the Holder may take any or all of the following actions, without prejudice to the rights of the Holder to enforce its claims against the Company or any of its Subsidiaries (provided that if an Event of Default specified in Section 5.5 above shall occur with respect to the Company or any of its Subsidiaries, the result which would occur upon the giving of written notice by the Holder as specified in clause (i) below shall occur automatically without the giving of any such notice): (i) (x) declare the principal of and any accrued interest in respect of all Obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and each of the Guarantors, or (y) convert all or any portion of the Obligations owing hereunder; and (ii) exercise any other rights available under the Transaction Documents or applicable law; and immediately, with respect to any violation (without any right to cure) of the representation contained in Section 2.30 hereof and/or the covenant contained in Section 4.3(d) or 4.8 hereof, the Conversion Price shall be reduced from $0.60 to $0.30. SECTION 6. Maturity. If this Secured Note is not converted at the option of the Holder in accordance with Section 8 hereof, the principal amount of this Secured Note, together with accrued but unpaid interest, shall be due and payable on demand on the Maturity Date. SECTION 7. Optional Prepayment. Upon giving the Agent at least three Business Days' prior written notice (which shall be irrevocable), the Company shall have the right to prepay amounts of principal under this Secured Note at any time, without premium or penalty, in an aggregate principal amount of at least $1,000,000, together with interest accrued as of the date of such prepayment; provided, however, that, with respect to any such prepayment, so long as no Event of Default shall occur which has not been cured in accordance with the terms of Section 5 hereof, the principal amount hereunder shall be reduced by an amount equal to the sum of the principal so prepaid and the Applicable Discount. Notwithstanding anything to the contrary contained herein, the Applicable Discount shall not apply to any prepayments from proceeds of any issuance of Preferred Stock as set forth in Schedule 3.15 hereof. SECTION 8. Conversion. 8.1. Conversion Events. Upon the occurrence and during the continuation of any Conversion Event, all or any portion of any Obligations due under this Secured Note may be converted into Shares at the option of the Holder following delivery of a notice of conversion to the Company in the manner set forth in Section 11.4 (the "Notice of Conversion") at any time on or prior to the Maturity Date, subject to the terms and conditions set forth in this Section 8. Upon conversion into Shares, any amounts converted hereunder shall be discharged. 8.2. Conversion Price. The number of Shares into which any amount under this Secured Note may be converted shall be determined by dividing the amount subject to conversion as set forth in the Notice of Conversion by $0.60 (the "Conversion Price"). 8.3. Method of Conversion. Before the Holder shall be entitled to receive Shares upon the conversion of any amount under this Secured Note, the Holder shall surrender this Secured Note solely for the purposes of the conversion thereof together with a Notice of Conversion to the office of the Company or its designated agent. The Notice of Conversion shall state therein the amount(s) in which the certificate(s) for Shares are to be issued. The time of conversion (the "Conversion Date") shall be the close of business on the calendar day following the date on which a Notice of Conversion is sent to the Company in accordance with Section 11.4. Interest on the amount under this Secured Note subject to conversion as set forth in the Notice of Conversion shall cease to accrue on and after the Conversion Date. Upon the conversion of any amount under this Secured Note, the Company shall execute and deliver on the Conversion Date, in exchange and substitution for and upon cancellation of this Secured Note, a new secured note in the principal amount equal to the amount of this Secured Note less such amount subject to conversion. 8.4. Issuance of Shares. The Company shall, as soon as practicable after the Conversion Date, but in no event more than three (3) business days thereafter, issue and deliver to the Holder certificates representing the number of Shares to which the Holder shall be entitled as aforesaid; provided, however, that the Company may pay in full in cash all Obligations owing to the Funds hereunder and under the Transaction Documents within three (3) business days after the Conversion Date in lieu of the Company's obligations to issue and deliver the certificates representing the Shares to the Holder under this Section 8.4. 8.5. No Fractional Shares. No fractional Shares shall be issuable upon conversion of any amount under this Secured Note subject to conversion as set forth in the Notice of Conversion. If the conversion of such amount would result in the issuance of a fractional Share, such fractional share shall be rounded up to the nearest whole share and issued to the Holder. 8.6. Adjustment of Conversion Price; Merger. (a) If at any time or from time to time while any amount under this Secured Note is outstanding (i) the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock, or (ii) the Company shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or (iii) the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price in effect immediately before such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. If the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (b) If the Shares issuable upon conversion of any amount under this Secured Note, if any, shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 8.6(a)), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Shares shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of Shares that would have been subject to receipt by the Holder upon conversion of any amount under this Secured Note immediately before that change. (c) In case of any consolidation or merger of the Company permitted by Section 4.3(f) hereof (each such transaction, a "Merger"), the survivor of the Merger shall succeed to the covenants, stipulations, promises and agreements contained in this Secured Note. In the event of a Merger, the Company shall make appropriate provisions so that the Holder shall have the right thereafter to convert any amount under this Secured Note into the kind and amount of securities receivable upon such Merger by a Holder of the number of securities into which any amount under this Secured Note might have been converted immediately prior to a Merger. The above provisions shall similarly apply to successive Mergers. (d) Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 8.6, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a notice setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. 8.7. Reservation of Stock. The Company shall, at all times on and after the date which is 90 days following the Execution Date, reserve and keep available out its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of any amount under this Secured Note into Shares, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of any amount under this Secured Note into Shares; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of any amount under this Secured Note into Shares, then the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its articles of incorporation. 8.8. Failure to Issue and/or Deliver Shares. (a) The Company shall issue and deliver, within five (5) Trading Days after the Holder has fulfilled all conditions and submitted all necessary documents duly executed and in proper form required for conversion (the "Deadline"), to the Holder or any party receiving the Secured Notes by transfer from Holder, at the address of the Holder on the books of the Company, a certificate or certificates for the number of Shares to which the Holder shall be entitled. The Company understands that a delay in the issuance and/or delivery of the Shares beyond the Deadline could result in economic loss to the Holder. As compensation to the Holder for such a loss, and not as penalty, the Company agrees to pay liquidated damages to the Holder for late issuance of Shares upon conversion in accordance with the following schedule (where "No. of Business Days Late" is the number of Business Days from the Deadline until (and including) the Business Day on which the Holder receives the Shares):
Liquidated Damages (per one hundred thousand dollars of principal outstanding hereunder, based on an amount not less than the stated principal amount due on the Maturity Date) No. of Business Days Late 2 $50 3 $100 4 $150 5 $200 6 $250 7 $300 8 $350 9 $400 10 $450 11 $500 >11 $500 plus an additional $100 for each Business Day beyond 11 Business Days.
(b) The Company shall pay the Holder any liquidated damages incurred under this Section 8.8 by wire transfer of immediately available funds to an account designated by Holder upon the earlier to occur of (i) issuance of the Shares to the Holder or (ii) each monthly anniversary of the receipt by the Company of such Holder's Notice of Conversion. Nothing herein shall waive the Company's obligations to deliver Shares upon a total or partial conversion of this Secured Note or limit Holder's rights to pursue actual damages for the Company's failure to issue and deliver Shares to such Holder in accordance with the terms of this Secured Note. (c) The Company agrees that, in addition to any other remedies which may be available to the Holder, including, but not limited, to, remedies available hereunder or under the other Transaction Documents, in the event the Company fails for any reason to effect delivery to Holder of certificates representing Shares within five (5) Trading Days following receipt by the Company of a Notice of Conversion, a Holder will be entitled to revoke the Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. SECTION 9. Other Provisions Relating to Rights of the Holder of this Secured Note. 9.1. Shareholder Rights. This Secured Note shall not entitle the Holder to any of the rights of a shareholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of shareholders or any other proceedings of the Company; provided, however, this Section 9.1 shall not affect the rights of the Holder under the Stock Pledge Agreement or in its capacity as a shareholder of the Company pursuant to any Common Stock held by the Holder, including, without limitation, upon conversion of any amount under this Secured Note pursuant to Section 8 hereof or otherwise. 9.2. Lost, Stolen, Mutilated or Destroyed Note. If this Secured Note shall be mutilated, lost, stolen, or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Secured Note, or in lieu of or in substitution for a lost, stolen, or destroyed Secured Note, a new Secured Note for the principal amount of this Secured Note so mutilated, lost, stolen, or destroyed but only upon receipt of evidence (which may consist of a signed affidavit of the Holder), of such loss, theft, or destruction of this Secured Note. SECTION 10. Other Agreements. 10.1. Transfer Restrictions. (a) If the Holder should decide to dispose of this Secured Note, the Holder understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, or (ii) pursuant to an available exemption from registration under the Securities Act. (b) The Holder agrees to the imprinting, so long as required by the terms of the Securities Act, of the following legend on certificates representing the Shares: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. (c) The legend set forth in clause (b) above and in the first paragraph of this Secured Note shall be removed as soon as allowed under the Securities Act or the regulations promulgated thereunder. The Company agrees that it will provide the Holder, upon request, with any required opinion of counsel and a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable, at no charge. 10.2. Filing and Furnishing of Reports and Information. (a) The Company's Common Stock is registered under Section 12(g) of the Securities Act. On and after the date which is 90 days following the Execution Date and for so long as the Holder owns this Secured Note or Shares, the Company shall timely file all reports required to be filed by the Company with the Commission after the Execution Date pursuant to Section 13(a) or 15(d) of the Exchange Act and to furnish to the Holder within 10 days of each such filing true and complete copies of all such filings and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. The Company will take all necessary action to meet the "registrant eligibility" requirements set forth in the general instructions to Form S-3. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to the Holder annual and quarterly financial statements, together with a management discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings would have been required to have been made under the Exchange Act. (b) The Company shall deliver copies to the Holder of any documents or financial statements it delivers to any secured lender concurrently with such delivery to such lender, subject to the confidentiality provisions of Section 6.12 of that certain Exchange Agreement dated February 14, 2000, between the Company and the Funds. 10.3. Blue Sky Laws. The Company shall qualify this Secured Note and the Shares under the securities or "Blue Sky" laws of such jurisdictions as the Holder may request and shall continue such qualification at all times as long as the Holder owns any Shares. 10.4. Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Secured Note or the Shares in a manner that would require the registration under the Securities Act of the sale of this Secured Note or the Shares to the Holder. SECTION 11. Miscellaneous. 11.1. Fees and Expenses. The Company and the Funds shall pay the fees and expenses of their respective advisers, counsel, accountants and other experts, if any, and all other expenses incurred incident to the negotiation, preparation, execution, delivery and performance of this Secured Note and the other Transaction Documents. The Company shall pay all stamp and other taxes (other than income) and duties levied in connection with the issuance of the Secured Notes and Shares pursuant hereto. 11.2. Indemnification. (a) Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 of the Security Agreement, the Company agrees to indemnify and hold harmless, to the extent permitted by law, the Holder and its respective officers and directors, employees, advisors, attorneys, agents, and representatives against any and all claims, causes of action, losses, liabilities, damages or expenses incurred by any of them as a result of, arising out of, or in any way related to, or by reason of, any breach or default by the Company under any provision of this Secured Note or any other Transaction Document, including, but not limited to, any breach by the Company of its representations and warranties set forth in Section 2.1 hereto. (b) Any person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (c) The indemnification provided for under this Secured Note shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company's indemnification is unavailable for any reason. 11.3. Entire Agreement; Amendments. This Secured Note and the other Transaction Documents, together with the exhibits and schedules hereto and thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 11.4. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 11.4 prior to 4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified below later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: Michael Froch, Esq. Facsimile No.: (310) 643-8719 With copies to: Robinson, Diamant & Brill 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Attn: Lawrence A. Diamant, Esq. Facsimile No.: (310) 277-7584 If to the Holder: Infinity Investors Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 and Mr. Stuart J. Chasanoff c/o HW Partners LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 or such other address as may be designated in writing hereafter, in the same manner, by such person. 11.5. Amendments; Waivers. No provision of this Secured Note may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Holder, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Secured Note shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 11.6. Headings Descriptive. The headings herein are for convenience only, do not constitute a part of this Secured Note and shall not be deemed to limit or affect any of the provisions hereof. 11.7. Benefit of Secured Note; Assignments; Participations. (a) This Secured Note shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its rights or obligations hereunder or under any other Transaction Documents. (b) The Holder may sell, assign, transfer or grant participations in all or a portion of its rights and outstanding Obligations hereunder to any person, each of which assignees shall become a party to this Secured Note as a Holder, provided that the new Secured Note will be issued, at the Company's expense, to such new Holder and to the assigning Holder upon the request of such new Holder or assigning Holder, such new Secured Note to be in conformity with the requirements under the Transaction Documents (with appropriate modifications) to the extent needed to reflect the revised outstanding Obligations. The assigning Holder will notify the Company of any assignment pursuant to this Section 11.7(b); provided, however, that the failure to give any such notice, or any error in such notice, shall not affect any of the obligations of the Company hereunder or under any other Transaction Document. (c) Nothing in this Secured Note shall prevent or prohibit any Holder from pledging its rights hereunder. 11.8. No Third-Party Beneficiaries. This Secured Note is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 11.9. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS SECURED NOTE AND THE OTHER TRANSACTION DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURED NOTE OR ANY SUCH OTHER TRANSACTION DOCUMENT MAY BE BROUGHT IN (i) THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND/OR (ii) THE COURTS OF THE DEFENDANT'S RESPECTIVE CORPORATE DOMICILE, AND, BY THE ISSUANCE AND DELIVERY OF THIS SECURED NOTE, EACH PARTY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS SECURED NOTE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.4 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE HOLDER OF THIS SECURED NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY AND/OR ANY GUARANTOR IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS SECURED NOTE OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURED NOTE, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS SECURED NOTE. 11.10. Publicity. The Company and the Holder shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases, filings or public statements that are required by law or any regulatory body or governmental authority of competent jurisdiction. 11.11. Severability. In case any one or more of the provisions of this Secured Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Secured Note shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and, upon so agreeing, shall incorporate such substitute provision in this Secured Note. 11.12. Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Holder will be entitled to specific performance of the obligations of the Company under this Secured Note. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 11.13. Survival. Each of the representations and warranties of the Company contained in Section 2 and the other agreements and covenants of the parties contained in this Secured Note shall survive issuance of this Secured Note until repayment in full of the Obligations evidenced hereby. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] IN WITNESS WHEREOF, the Company has caused this Secured Note to be signed in its name by its duly authorized officers this 22nd day of February, 2000. AURA SYSTEMS, INC. By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title:Senior Vice President STATE OF ____________ ) )SS: COUNTY OF __________ ) The foregoing instrument was acknowledged before me this day of _________, ___ by _________________________ as ___________________of Aura Systems, Inc. on behalf of the corporation. He personally appeared before me, is personally known to me or produced __________________ as identification, and [did] [did not] take an oath. Notary: [NOTARIAL SEAL] Print Name: Notary Public, State of My commission expires: NOTICE OF CONVERSION The undersigned, being the holder of the attached Secured Note due the Maturity Date (as defined in the Secured Note) of Aura Systems, Inc. (the "Company"), hereby exercises the option to convert $[________] under the Secured Note into Shares (as defined in the Secured Note) of the Company in accordance with the terms of the Secured Note. The amount of principal and accrued but unpaid interest outstanding on the Secured Note as of the date hereof is $____________ and the number of Shares to be issued upon conversion is _____________. The undersigned directs that the Shares be issued in the name of and delivered as soon as practicable and in accordance with the provisions of the Secured Note to: Full address: Date: Name: [HOLDER] EX-10.31 9 0009.txt SECURED NOTE 2/22/2000 GLOBAL GROWTH LIMITED NEITHER THIS SECURED NOTE NOR THE GUARANTIES OF THE SUBSIDIARIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. AURA SYSTEMS, INC. SECURED NOTE $410,712 February 22, 2000 El Segundo, California FOR VALUE RECEIVED, Aura Systems, Inc., a Delaware corporation (the "Company"), promises to pay to the order of Global Growth Limited, a corporation organized and existing under the laws of Nevis, West Indies (the "Holder") or its assigns, the principal amount of Four Hundred Ten Thousand Seven Hundred Twelve ($410,712) on November 30, 2002 (the "Maturity Date") and to pay interest (computed on the basis of a 360-day year of 30-day months) ("Interest") (a) on the principal amount hereof outstanding at the rate of eight percent (8%) per annum from the date hereof, payable in arrears on (i) August 1, 2000 and quarterly thereafter on each 1st day of November, February, May and August, (ii) the Maturity Date, (iii) each date this Secured Note, or any portion hereof, is converted, and (iv) the date the principal amount of this Secured Note shall be declared to be or shall automatically become due and payable, and (b) to the extent permitted by law, on any overdue amount hereunder at the rate of sixteen percent (16%) per annum. Should any interest or other charges paid hereunder result in the computation or earning of interest hereunder in excess of the maximum rate or amount permitted by applicable law, such excess shall be credited against (and be deemed to have been a payment in reduction of) principal owing hereunder, and any portion of such excess which portion exceeds the principal owing hereunder shall be paid to the Company. Principal and accrued but unpaid Interest hereunder shall be due and payable on demand on or after the Maturity Date or in accordance with Section 5 hereof after the occurrence of an Event of Default (which has not been cured in accordance with the terms hereof), unless converted by the Holder in accordance with Section 8 hereof. If any payment of interest hereunder becomes due and payable on a day which is not a Business Day, the due date thereof shall be the next preceding day which is a Business Day, and the interest payable on such next preceding Business Day shall be the interest which would otherwise have been payable on the due date which was not a Business Day. Payments of principal and interest shall be made in immediately available funds, in lawful money of the United States of America at the locations set forth hereunder, or at such other place as the Holder shall have designated for such purpose in writing, and may be paid by cashier's check or wire transfer to the address or account designated by the Holder for such purpose. This Secured Note (the "Secured Note") is secured by, and is one of the secured notes referred to in (i) that certain Security Agreement of even date herewith between the Company, the Guarantors (defined below) and HW Partners, LP, as Agent for the Funds, and (ii) that certain Stock Pledge Agreement of even date herewith between the Company and the Agent for the Funds. This Secured Note is guaranteed by, and is one of the Secured Notes referred to in, that certain Guaranty of even date herewith of the Guarantors (defined below) made for the benefit of the Funds, which Guaranty is secured by the Security Agreement. The Company further agrees as follows: SECTION 1. Definitions and Principles of Construction. 1.1. Defined Terms. As used in this Secured Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined, except as otherwise provided): "Affiliate" shall mean, with respect to any specified Person, (i) any other Person that, directly or indirectly, is controlled by, or is under common control with, or controls such Person, (ii) any other Person in which, directly or indirectly, such Person holds, of record or beneficially, five percent or more of the equity or voting securities, (iii) any other Person that holds, of record or beneficially, five percent or more of the equity or voting securities of such Person, or (iv) any director, officer, partner or individual holding a similar position in respect of such Person. "Agent" shall mean HW Partners, LP, a Texas limited partnership. "Applicable Discount" shall mean, with respect to any applicable prepayment of principal under this Secured Note in accordance with the terms hereof, a percentage which on the Execution Date shall be equal to twenty percent (20%) and thereafter shall decrease on a daily, straight line basis to zero percent (0%) on the Maturity Date. "Aura Ceramics" shall mean Aura Ceramics, Inc., a Delaware corporation. "AuraGen" shall mean that certain power generator developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries under the trademark AuraGen or any successor or replacement mark thereto, or any similar, derivative or related product line which may be developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries. "AuraSound" shall mean AuraSound, Inc., a Delaware corporation. "Authority" shall mean any governmental, regulatory or administrative body, agency, commission, board, arbitrator or authority, any court or judicial authority, or any public, private or industry regulatory authority, whether international, national, federal, state or local. "Bankruptcy Code" shall mean title 11 of the United States Code (11 U.S.C. ss. 101 et seq.), as amended from time to time. Section references to the Bankruptcy Code are to the Bankruptcy Code as in effect on the date of this Agreement and any subsequent provisions of the Bankruptcy Code, amendatory thereof, supplemental thereto or substituted therefor. "Board of Directors" shall mean the Board of Directors of the Company. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other government actions to close. "Claim" shall mean any action, claim, lawsuit, demand, suit, inquiry, hearing, investigation, notice of a violation, litigation, proceeding, arbitration, appeals or other dispute, whether civil, criminal, administrative or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code as in effect on the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property subject to the Security Documents. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean shares now or hereafter authorized of the class of common stock of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as common stock. "Company" shall mean Aura Systems, Inc., a Delaware corporation. "Contingent Obligation" shall mean, as to any specified Person, any obligation of such Person arising under, pursuant to or derived from any derivatives transactions or guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (subject to any limitation therein) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Contract" shall mean any agreement, contract, commitment, instrument or other binding arrangement or understanding, whether written or oral. "Conversion Date" shall have the meaning set forth in Section 8.3 hereof. "Conversion Event" shall mean any Event of Default (after giving effect to the applicable cure, if any). "Conversion Price" shall have the meaning set forth in Section 8.2 hereof. "CNA" shall mean American Casualty Company of Reading, Pennsylvania. "CNA Restructuring Agreement" shall mean that certain agreement by and between the Company and CNA in the form of Exhibit A hereto. "Date Data" shall mean any data of any type that includes date information or which is otherwise derived from, dependent on or related to date information. "Date-Sensitive System" shall mean any software, microcode or hardware system or component, including any electronic or electronically controlled system or component, that processes any Date Data and that is installed, in development or on order by the Company or any of its Subsidiaries for its internal use, or that the Company or any of its Subsidiaries sells, leases, licenses, assigns or otherwise provides, or the provision or operation of which the Company or any of its Subsidiaries provides the benefit, to its customers, vendors, suppliers, affiliates or any other third party. "Deadline" shall have the meaning given to such term in Section 8.8 hereof. "DFS" shall mean Deutsche Financial Services. "DFS Claims" shall mean the claims of DFS relating to the obligations of the Company with respect to debts owed by NewCom to DFS and guaranteed by the Company. "Disclosure Materials" shall mean, collectively, the exhibits and schedules to this Secured Note and the other Transaction Documents furnished by or on behalf of the Company. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA as in effect on the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" (i) within the meaning of Section 414(b), (c), (m) or (o) of the Code or (ii) as a result of the Company or a Subsidiary of the Company being or having been a general partner of such person. "Event of Default" shall have the meaning set forth in Section 5 hereof. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended from time to time. "Exchange Agreement" shall mean that certain Exchange Agreement of even date herewith executed and delivered by the Company, the Agent and the Funds, as the same may be amended, modified or supplemented. "Execution Date" shall mean the date of this Secured Note. "Existing Indebtedness" shall have the meaning given to such term in Section 2.11 hereof. "Existing Liens" shall have the meaning given to such term in Section 4.1(c) hereof. "Existing Secured Indebtedness" means Existing Indebtedness secured by the Existing Liens (other than judgment liens). "Financial Statements" shall have the meaning given to such term in Section 2.7(a) hereof. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Funds" shall mean Infinity Investors Limited, Global Growth Limited, Glacier Capital Limited and Summit Capital Limited. "GAAP" shall mean generally accepted accounting principles in the United States consistently applied during a relevant period. "GSS" shall mean GSS Array Technologies Public Company Limited. "Guarantee" shall mean any guarantee or other Contingent Obligation (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (i) any endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (ii) any Contract (x) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (y) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (z) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy an obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. "Guarantor" shall mean each Subsidiary of the Company executing the Guaranty or otherwise made a party thereto in accordance with the terms thereof. "Guaranty" shall mean that certain Guaranty of even date herewith executed and delivered by the Guarantors and the Agent, as the same may be amended, modified or supplemented. "Holder" shall have the meaning given to such term in the first paragraph of this Secured Note. "Indebtedness" shall mean, as to any specified Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person (x) evidenced by any notes, bonds, debentures or similar instruments made or issued by such Person, (y) for borrowed money or (z) for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person, (iii) all liabilities secured by any Lien upon any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized in accordance with GAAP under leases under which such Person is the lessee and (v) all Contingent Obligations and Guarantees of such Person. "Independent Director" shall mean a director of the Company who has no relationship to the Company that may interfere with the exercise of such individual's independence from the Company or its management. For purposes hereof, "relationship" shall include, without limitation, (i) being employed by the Company or any of its Affiliates at any time during the year in which such individual was elected to the Board of Directors of the Company or at any time during any of the three calendar years preceding the year of such election, (ii) accepting any compensation from the Company or any of its Affiliates other than compensation for board service or benefits under a tax-qualified retirement plan, (iii) being a member of the immediate family of an individual who at any time during the year in which such director was elected to the Board of Directors of the Company is, or has been at any time during any of the three calendar years preceding the year of such election, employed by the Company or any of its Affiliates as an executive officer, (iv) being a partner in, or a controlling shareholder or an executive officer of, any for-profit organization to which the Company or any of its Affiliates made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities) that exceed five percent (5%) of such organization's consolidated gross revenues for that year, or $200,000, whichever is more, at any time during any of the three calendar years preceding the year of election of the director to the Company's Board of Directors, and (v) being employed as an executive of another company where any of the Company's executives serve on such other company's compensation committee. "Interest" shall have the meaning given to such term in the first paragraph of this Secured Note. "Isosceles" shall mean Isosceles Fund Ltd. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Material Adverse Effect" shall mean, with respect to the Company and its Subsidiaries taken as a whole, any material adverse effect on the ability of the Company or the Subsidiaries to perform any of their obligations under any Transaction Document. "Maturity Date" shall have the meaning given to such term in the first paragraph of this Secured Note. "Merger" shall have the meaning set forth in Section 8.6(c) hereof. "NEC" shall mean NEC Technologies, Inc., a Delaware corporation. "NewCom" shall mean NewCom, Inc., a Delaware corporation. "Non-Core Assets" shall mean those assets and properties of the Company or any of its Subsidiaries which are not used in connection with, or related to, directly or indirectly, the AuraGen business of the Company or any aspect thereof, including, without limitation, the capital stock of any Subsidiary so long as neither such Subsidiary nor any of its assets or properties are used directly or indirectly in the conduct of the AuraGen business or any aspect thereof. "Notice of Conversion" shall have the meaning set forth in Section 8.1 hereof. "Obligations" shall mean all present and future obligations, liabilities and other amounts owing to the Holder pursuant to this or any other Secured Note or any other Transaction Document. "Option" shall mean any subscription, option, warrant, right, security, Contract, commitment, understanding, or stock appreciation, phantom stock option, profit participation or arrangement by which the Company is bound to issue any additional shares of its capital stock or rights pursuant to which any Person has a right to purchase shares of the Company's capital stock. "Order" shall mean any decree, order, judgment, injunction, rule, ruling, Lien, voting right, or consent of or by an Authority. "OSHA" shall mean the Occupational Safety and Health Administration. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permits" shall mean all permits, licenses, registrations, certificates, Orders or approvals from any Authority or other Person (including, without limitation, those relating to the occupancy or use of owned or leased real property) issued to or held by the Company. "Permitted Liens" shall have the meaning given to such term in Section 4.1 hereof. "Person" shall mean an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA which is maintained or contributed to by (or to which there is an obligation to contribute of) the Company or a Subsidiary of the Company or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Company, or a Subsidiary of the Company or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Preferred Stock" shall have the meaning given to such term in Section 3.15 hereof. "Proprietary Rights" shall mean all (i) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility, model, certificate of invention and design patents, patent applications, registrations and applications for registrations, (ii) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, (iii) copyrights and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data and documentation, (vi) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (vii) other proprietary rights relating to any of the foregoing and (viii) copies and tangible embodiments thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any prospectus subject to completion, and any such Prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Shares and, in each case, by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Registration Statement" shall mean any registration statement of the Company which covers any of the Shares, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regulation" shall mean any rule, law, code, statute, regulation, ordinance, requirement, announcement or other binding action of or by an Authority. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Restructuring" shall mean the restructuring of the Company's financial affairs. "Rose Glen" shall mean RGC International Investors, LDC, a limited duration company of the Cayman Islands. "SEC Documents" shall have the meaning set forth in Section 2.23 hereof. "Secured Note" shall mean this Secured Note, as the same may be amended, modified or supplemented and any replacement or substitution therefor. "Securities Act" shall mean the United States Securities Act of 1933, as amended from time to time. "Security Agreement" shall mean that certain Security Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Security Documents" shall mean (i) the Security Agreement, (ii) the Stock Pledge Agreement, and (iii) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "Shares" shall mean shares of Common Stock issued to the Holder upon conversion of this Secured Note or exercise of the Warrants. "Stock Pledge Agreement" shall mean that certain Stock Pledge Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Subsidiaries" has the meaning given to such term in Section 2.1 hereof; provided, however, that for purposes of this Secured Note and the other Transaction Documents, the term "Subsidiaries" shall not include NewCom. "Taxes" shall mean any taxes, including, without limitation, income, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), stamp, leasing, lease, user, excise, duty, franchise, transfer, license, withholding, payroll, employment, foreign, fuel, excess profits, occupational and interest equalization, windfall profits, severance, and other charges (including interest and penalties). "Trading Day" shall mean (i) a day on which the Common Stock is traded on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (ii) if the Common Stock is not listed or quoted on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Transaction Documents" shall mean and include (i) this Secured Note, (ii) the Security Documents, (iii) the Guaranty, (iv) the Exchange Agreement and (v) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Warrants" shall mean the Warrants of even date herewith to purchase Common Stock at an exercise price of $0.375 per share. "Working Capital Indebtedness" shall mean Indebtedness incurred by the Company for working capital purposes, on commercially reasonable terms, in arm's length transactions and approved in each case by no less than two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) prior to the incurrence thereof. "Year 2000 Compliant" shall mean (i) with respect to Date Data, that such data is in proper format and accurate for all dates in the twentieth and twenty-first centuries, and (ii) with respect to Date-Sensitive Systems, that each such system accurately processes all Date Data, including for the twentieth and twenty-first centuries, without loss or any functionality or performance, including but not limited to calculating, comparing, sequencing, storing and displaying such Date Data (including all leap year considerations), when used as a stand-alone system or in combination with other software or hardware. 1.2. Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Secured Note unless otherwise specified. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Secured Note shall refer to this Secured Note as a whole and not to any particular provision of this Secured Note. (b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP in conformity with those used in the preparation of the financial statements described in Section 3.1 hereof. SECTION 2. Representations and Warranties. In order to induce the Holder to accept this Secured Note, the Company makes the following representations, warranties and agreements, all of which shall survive the issuance and delivery of this Secured Note, with the occurrence of the issuance and delivery of this Secured Note being deemed to constitute a representation and warranty that the matters specified in this Section 2 are true and correct in all material respects on and as of the Execution Date (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date): 2.1. Corporate Status. Each of the Company, Aura Ceramics and AuraSound is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. The Company has no subsidiaries or equity investment in any other Person other than as set forth in Schedule 2.1 hereto (collectively, the "Subsidiaries"), and the only Subsidiaries with assets or property having more than minimal value are Aura Ceramics, AuraSound and Aura Realty. 2.2. Corporate Power and Authority; Enforcement. Each of the Company, Aura Ceramics and AuraSound has the requisite corporate power and authority to execute, deliver and perform the terms and provisions of each Transaction Document to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of such Transaction Document. Each of the Company, Aura Ceramics and AuraSound has duly executed and delivered each Transaction Document to which it is a party, and each such Transaction Document constitutes the legal, valid and binding obligation of the Company, Aura Ceramics and AuraSound enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application (regardless of whether enforcement is sought in equity or at law). 2.3. Capitalization. The authorized, issued and outstanding capital stock of the Company and its Subsidiaries is set forth on Schedule 2.3 hereto (as may be supplemented in accordance with Section 3.19 hereof). No shares of Common Stock are entitled to preemptive or similar rights. Except for the Secured Notes and as otherwise specifically disclosed in Schedule 2.3 hereto, there are no outstanding Options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company, Aura Ceramics nor AuraSound is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter or similar organizational documents. 2.4. Issuance of Secured Note. This Secured Note has been duly and validly authorized, issued and delivered and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms free and clear of all Liens. 2.5. No Violation. Neither the execution, delivery or performance by the Company of this Secured Note or Warrants or of the Company or any of its Subsidiaries of any of the other Transaction Documents nor compliance by any of them with the terms and provisions hereof and thereof, nor the consummation of the transactions contemplated hereby or thereby, will (i) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or other restriction of any court or Authority (including federal and state securities laws and regulations), (ii) conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of, 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, amendment, acceleration or cancellation of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Company or its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement, Contract or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of its property or assets is bound, affected or to which it may be subject (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), or (iii) conflict or be inconsistent with or violate any provision of the certificate of incorporation, bylaws or other charter or similar organizational document (each as amended through the date hereof) of the Company or any of its Subsidiaries. The businesses of the Company and its Subsidiaries have not been, and are not currently being, conducted in violation of any law, ordinance or regulation of any Authority, except for violations which, individually or in the aggregate, do not have, or could not reasonably be expected to have, a Material Adverse Effect. 2.6. Consents and Approvals. No consent, waiver, authorization or order of, or any filing or registration with, any court or other federal, state, local or other governmental Authority or other Person (except (A) as have been obtained or made on or prior to the Execution Date and which remain in full force and effect on such date and (B) for the filing and effectiveness of the Registration Statement referred to in Section 3.14 hereof) is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Transaction Document or (ii) the legality, validity, binding effect or enforceability of any such Transaction Document. 2.7. Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. (a) The audited consolidated year-end balance sheets of the Company for each of the fiscal years ended February 28, 1998 and 1997 and related consolidated statements of income, cash flow and shareholders' equity of the Company and its Subsidiaries for the fiscal years, ended on such dates, copies of which are attached hereto as Schedule 2.7(a) (collectively, the "Financial Statements"), fairly present the financial condition of the Company and its Subsidiaries as of such dates and the consolidated results of the operations of the Company and its Subsidiaries for such fiscal years. All of the foregoing financial statements have been prepared (i) in accordance with GAAP (except as stated therein or in the notes thereto) and (ii) from the books and records of the Company, except that the unaudited financial statements have no notes attached thereto and do not have year-end adjustments (none of which would be recurring). All properties used in the Company's business operations as of each Financial Statement date are reflected in the Financial Statements in accordance with and to the extent required by GAAP. (b) On and as of the Execution Date and after giving effect hereto, the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith, (i) the sum of the tangible and intangible assets, at a fair valuation, of the Company and Aura Ceramics on a stand-alone basis and of the Company and its Subsidiaries taken as a whole will exceed their debts; (ii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole have not incurred and do not intend to incur, and do not believe that they will incur, debts beyond their ability to pay such debts as such debts mature; and (iii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole will have sufficient capital with which to conduct their businesses. The amount of Contingent Obligations at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. A copy of the pro forma consolidated balance sheet of the Company after giving effect hereto, to the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith is attached hereto as Schedule 2.7(b) hereto. (c) Except as fully disclosed in the Financial Statements and Schedule 2.11 hereto, there were as of the Execution Date no Indebtedness, liabilities or obligations with respect to the Company or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent, unliquidated or otherwise, known or unknown to the Company, whether or not due) which, either individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. As of the Execution Date, the Company does not know of any basis for the assertion against it or any of its Subsidiaries of any Indebtedness, liability or obligation of any nature whatsoever that is not fully disclosed in the Financial Statements or Schedule 2.11 hereto which, either individually or in the aggregate, has, or could reasonably be expected to have, a Material Adverse Effect. (d) The projections delivered to the Agent on the Execution Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the projections which are based upon or include information known to the Company to be misleading in any material respect or which fail to take into account material information known to the Company regarding the matters reported therein. The Company believes that the projections are reasonable and attainable, it being recognized by the Holder, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the projections may differ from the projected results and that the differences may be material. 2.8. Ranking. The Obligations under this Secured Note and the other Transaction Documents constitute unconditional secured Indebtedness of the Company and the Guarantors, and (with respect to the Company, Aura Ceramics and AuraSound) rank and will rank (i) at least pari passu in priority of payment and in all other respects with all other present and future secured Indebtedness of such Persons subject to the priority rights of holders of (A) Existing Secured Indebtedness as of the Execution Date as set forth on Schedule 2.8(i)(A) hereto, (B) validly created and fully perfected senior secured Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof incurred by the Company after the Execution Date, and (C) obligations of the Company, Aura Ceramics and AuraSound existing on the Execution Date secured by valid and perfected judgment liens against such Persons as set forth in Schedule 2.8(i)(C) hereto; provided, however, that the Company may supplement such Schedule 2.8(i)(C) to reflect judgment liens validly created and fully perfected through the Execution Date which the Company had no knowledge of and were not identified in UCC certificates set forth in Schedule 2.8(i)(C), and senior to all other Indebtedness of such Persons. 2.9. Litigation; Proceedings. There is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory Authority (federal, state, county, local or foreign) which (A) relates to or challenges the legality, validity or enforceability hereof or of any of the Transaction Documents or of any transaction contemplated hereby or thereby, (B) could, individually or in the aggregate, adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents, or (C) has, or could reasonably be expected to have, a Material Adverse Effect from and after the Execution Date (except for the DFS Claims). 2.10. No Default or Violation. On and as of the Execution Date (except as otherwise provided herein, in the Transaction Documents or as disclosed in Schedule 2.10 hereto), neither the Company nor Aura Ceramics: (i) will be in default under or in violation of any indenture, loan or credit agreement or any other agreement evidencing Indebtedness of the Company or any of its Subsidiaries or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), (ii) will be in violation of any order of any court, arbitrator, governmental body or Authority, or (iii) will be in violation of any statute, rule or regulation of any Authority, except as could not, in any such case, individually or in the aggregate, (A) adversely affect the legality, validity or enforceability of any transaction contemplated hereby or any of the Transaction Documents, or (B) adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents or (C) has, or could reasonably be expected to have, a Material Adverse Effect. 2.11. Indebtedness. Schedule 2.11 hereto sets forth a true and complete list (subject to variances not to exceed seven and one-half percent (7 1/2%) in the aggregate) of all Indebtedness (excluding Indebtedness under the Secured Notes and the other Transaction Documents) of the Company, Aura Ceramics, and Aura Realty as of the Execution Date and which is to remain outstanding (the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof, accrued interest in respect thereof and the name of any Person which directly or indirectly guaranteed such debt. 2.12. True and Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund (including, without limitation, all information contained in the Transaction Documents) for purposes of or in connection with this Secured Note, any other Transaction Document or any transaction contemplated hereby or thereby is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund will be true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. There is no fact which the Company has not disclosed to the Agent or the Funds herein and of which the Company, its Subsidiaries, or any of their respective officers, directors or executive employees is aware and which has, or could reasonably be expected to have, a Material Adverse Effect. 2.13. Tax Returns and Payments. Except as disclosed in Schedule 2.13 hereto, each of the Company, Aura Ceramics, AuraSound and Aura Realty (i) has filed all income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on its financial statements in accordance with GAAP, and (ii) has at all times paid, or has provided adequate reserves (in the good faith judgment of the management of such Person) for the payment of, all income taxes applicable for all prior fiscal years and for the current fiscal year to date. Except as disclosed in Schedule 2.13 hereto, there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Company, Aura Ceramics, AuraSound, or Aura Realty, threatened by any Authority regarding any taxes relating to such Person. As of the Execution Date, neither the Company, Aura Ceramics, AuraSound, nor Aura Realty has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of such Person, or is aware of any circumstances that would cause the taxable years or other taxable periods of such Person not to be subject to the normally applicable statute of limitations. 2.14. Compliance with ERISA. (a) Schedule 2.14 hereto sets forth each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been made; neither the Company nor any Subsidiary of the Company nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Company or any Subsidiary of the Company or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Company and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the Execution Date, would not exceed $100,000; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Company, any Subsidiary of the Company, or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Company or any Subsidiary of the Company or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Company and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. (b) Neither the Company nor any of its Subsidiaries has, or has ever had, a Foreign Pension Plan. 2.15. Compliance with Law and Applicable Government Regulations. Each of the Company and its Subsidiaries is presently in compliance with regard to its operations, practices, real property, plants, structures, machinery, equipment and other property, and all other aspects of its business, with all applicable Regulations and Orders, including, but not limited to, all Regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, Taxes, consumer protection, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety, except for such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. There are no Claims pending or, to the Company's knowledge, threatened, nor has the Company received any written notice regarding any violations of any Regulations or Orders enforced by any Authority including any requirement of OSHA or any pollution and environmental control agency (including air and water) which have, or could reasonably be expected to have, a Material Adverse Effect. 2.16. Security Documents. The provisions of each of the Security Documents will, on the Closing Date, create in favor of the Agent, for the benefit of the Funds, as security for the Obligations hereunder and under all other Exchange Documents, a valid security interest in all of the right, title and interest of the relevant assignor or pledgor thereunder in and to the Collateral described therein and, with respect to the Company, Aura Ceramics and AuraSound, superior to all Liens subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 (and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k)). 2.17. Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the United States Investment Company Act of 1940, as amended. 2.18. Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. 2.19. Labor Relations. Each of the Company and its Subsidiaries is on the Execution Date in compliance with all federal, state and local Regulations or Orders affecting employment and employment practices applicable to each such Person, including terms and conditions of employment and wages and hours, except for certain failure to make salary or other compensation payments to management and such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. The Company and its Subsidiaries have on the Execution Date no collective bargaining agreements and there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization. Neither the Company nor any of its Subsidiaries is engaged on the Execution Date in any unfair labor practice that has, or could reasonably be expected to have, a Material Adverse Effect. There is as of the Execution Date (A) no unfair labor practice complaint pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, (B) no strike, labor dispute, slowdown or stoppage pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries and (C) to the best knowledge of the Company, no union representation question existing with respect to the employees of the Company or any of its Subsidiaries and, to the best knowledge of the Company, no union organizing activities are taking place, except (with respect to any matter specified in clause (A), (B) or (C) above, either individually or in the aggregate) which does not have, nor could reasonably be expected to have, a Material Adverse Effect. 2.20. Proprietary Rights, Licenses, Franchises and Formulas. Each of the Company and its Subsidiaries owns all Proprietary Rights, licenses, franchises and formulas, or rights with respect to any of the foregoing, and has obtained assignments of all leases and other rights of whatever nature necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, has, or could reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that the Company or any of its Subsidiaries infringes upon the asserted rights of any other Person under any intellectual property, except for claims which could not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that such intellectual property owned or licensed by the Company or any of its Subsidiaries or which such Person otherwise has the right to use is invalid and unenforceable, except for claims which could not, individually or in the aggregate, have, or reasonably could be expected to have, a Material Adverse Effect. The consummation of the transactions contemplated hereby or by any of the other Transaction Documents will not alter or impair any rights of the Company or any of its Subsidiaries to use any intellectual property in a way that would not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. The Company is the legal and beneficial owner of all right, title and interest in, to, and under the Proprietary Rights with respect to AuraGen, and the Company has not entered into any agreement or understanding with any Person concerning any sale, lease, transfer, option, license, assignment or other disposition of such Proprietary Rights. 2.21. Certain Fees. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby or by any of the other Transaction Documents. 2.22. Private Offering. The offer, issuance and sale of this Secured Note are exempt from registration under the Securities Act or any state securities or blue sky law. Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of this Secured Note under the Securities Act) which might subject the offering, issuance or sale of this Secured Note to the registration requirements of the Securities Act. 2.23. SEC Documents. Attached hereto as Schedule 2.23 is a true and complete list of all forms, reports and documents required to be filed by the Company and its Subsidiaries under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the "SEC Documents"), which the Company has failed to file as of the Execution Date. 2.24. Directors and Management Compensation. Schedule 2.24 hereto sets forth a list of all officers, directors and key employees (meaning those earning more than $50,000.00 annually including all bonuses and non-cash consideration) of the Company and its Subsidiaries, together with a description of their respective positions and total compensation and a list of all other outstanding obligations owed by the Company to each of such Persons. On and as of the Execution Date, the Company and its Subsidiaries will not have any liability to any of their employees, officers or directors (except as set forth in Schedule 2.24(i)) other than for the payment of salaries and director fees to be paid in the ordinary course of business. 2.25. Absence of Certain Changes. Since November 30, 1998, except as fully disclosed on Schedule 2.25 hereto or otherwise provided in this Secured Note, there has not been any (a) material adverse change in the business, operations, properties, assets, condition (financial or otherwise), results, plans, strategies or prospects of the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect; (b) damage, destruction or loss, whether covered by insurance or not, which has, or could reasonably be expected to have, a Material Adverse Effect with regard to the Company's or any of its Subsidiaries' property and business; (c) declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the Company's or any of its Subsidiaries' capital stock, or any redemption or other acquisition of such stock by the Company or any of its Subsidiaries; (d) increase in the compensation payable to or to become payable by the Company or any of its Subsidiaries to its officers, Insiders or employees (other than in the ordinary course) or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers, Insiders or employees (other than in the ordinary course) or any Affiliate of the Company or any of its Subsidiaries; (e) entry into any material Contract not in the ordinary course of business, including, without limitation, any borrowing or capital expenditure; (f) change by the Company or any of its Subsidiaries in accounting methods or principles; or (g) consensual Lien placed on any property of the Company or any of its Subsidiaries other than Permitted Liens. 2.26. Year 2000 Compliance. As of the Execution Date, except as set forth on Schedule 2.26 hereto, all Date Data and Date-Sensitive Systems, if any, of the Company and its Subsidiaries are Year 2000 Compliant. The Company and its Subsidiaries have obtained written representations or assurances from each entity that (x) provides Date Data to the Company or any of its Subsidiaries, or (y) processes in any way Date Data for the Company or any of its Subsidiaries or otherwise provides any material product or service to the Company or any of its Subsidiaries that is dependent on Year 2000 Compliant Date Data or a Year 2000 Compliant Date-Sensitive System, that all of such entity's Date Data and Date-Sensitive Systems that are used for, or on behalf of, the Company or any of its Subsidiaries are Year 2000 Compliant. 2.27. Capital Expenditures and Investments. Each Contract of the Company and its Subsidiaries for capital expenditures and investments involving $50,000 or more entered into on or after November 30, 1998 is fully disclosed in Schedule 2.27 hereto. 2.28. Dealings with Affiliates. Schedule 2.28 hereto sets forth a complete and accurate list, including the parties, of all oral or written Contracts to which the Company and its Subsidiaries are, will be or have been a party, at any time from November 30, 1998 to and including the Execution Date, and to which any one or more of their Affiliates is also a party. Except as set forth on Schedule 2.28 hereto, since November 30, 1998, the Company and its Subsidiaries have not made any payments, loaned any funds or property or made any credit arrangement with any Affiliate or employee of the Company or any of its Subsidiaries except for the payment of employee salaries and director compensation in the ordinary course of business. 2.29. Solicitation Materials. The Company did not solicit any offer to buy or sell this Secured Note by means of any form of general solicitation or advertising. 2.30. Aura Ceramics. On and as of the Closing Date, the Company has not entered into any binding agreement for the sale, lease or other disposition of all or substantially all of the assets of Aura Ceramics. 2.31. Aura Tech. Aura Tech, Inc. has no assets and has never owned any assets. SECTION 3. Affirmative Covenants. The Company covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 3.1. Information Covenants. It will furnish to the Agent for distribution to the Holder and each of the Funds: (a) Quarterly Financial Statements. As soon as available and in any event within 45 days after the close of the first three fiscal quarters in each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal quarter and the related consolidated statements of income and retained earnings and statement of cash flows, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be in reasonable detail and certified by the Chief Financial Officer of the Company to the effect that such financial statements have been prepared in accordance with GAAP and that they fairly present the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes and (ii) management's discussion and analysis of the important operational and financial developments during the fiscal quarter and year-to-date periods in the form customarily prepared by management or as otherwise agreed with the Agent. (b) Annual Financial Statements. As soon as available and in any event within 90 days after the close of each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal year and the related consolidated statements of income and retained earnings and statement of cash flows for such fiscal year, in each case setting forth comparative budgeted figures for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year, and certified by a firm of independent certified public accountants of recognized international standing as shall be reasonably acceptable to the Agent, in each case to the effect that such financial statements have been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and cash flows, and (ii) management's discussion and analysis of the important operational and financial developments during such fiscal year, in the form customarily prepared by management or as otherwise agreed with the Agent. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 3.1(a) or (b), a certificate of the Chief Financial Officer of the Company to the effect that, to the best of such officer's knowledge, no Event of Default has occurred and is continuing or, if any Event of Default has occurred and is continuing, specifying the nature and extent thereof. (d) Notice of Default, Judgment or Litigation. From and after the Execution Date, promptly upon, and in any event within 10 Business Days after the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the Company or any of its Subsidiaries obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes an Event of Default, (ii) any judgment by or against the Company or any of its Subsidiaries with respect to any material Indebtedness, (iii) any notice of default given to the Company or any of its Subsidiaries in respect of any Existing Secured Indebtedness, and (iv) any litigation or governmental investigation or proceeding commenced (x) against the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect, (y) with respect to any material Indebtedness of the Company or any of its Subsidiaries or (z) with respect to any Transaction Document or any transaction contemplated hereby or thereby. (e) Other Reports and Filings. Promptly after the filing or delivery thereof, copies of all financial information, proxy materials, reports and other material filings, if any, which the Company or any of its Subsidiaries shall publicly file with any Authority (including, without limitation, the Commission) and with any international or national securities exchange (including, without limitation, the Nasdaq Stock Market, Inc.). (f) Year 2000 Compliance. It will promptly notify the Agent in the event that it discovers or determines that any computer application (including, without limitation, those of its suppliers and vendors) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure does not have, nor could reasonably be expected to have, a Material Adverse Effect. (g) Other Information. From time to time, such other information or documents (financial or otherwise) as the Agent, the Holder or any Fund may reasonably request, including, without limitation, the quarterly financial statements of any of the Company or any of its Subsidiaries prepared in accordance with the provisions of Section 3.1(a). 3.2. Books, Records and Inspections. It will, and will cause each of its Subsidiaries to keep proper books of record and accounts in which full, true and correct entries are made (and with respect to the Company, Aura Ceramics and Aura Realty in conformity with GAAP) and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Company will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent, the Holder or any Fund to visit and inspect, under guidance of officers of the Company or such Subsidiary, any of the properties of the Company or such Subsidiary, and to examine the books of account of the Company or such Subsidiary and discuss the affairs, finances and accounts of the Company or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all upon reasonable prior notice and at such reasonable times and intervals and to such reasonable extent as the Agent, the Holder or such Fund may reasonably request. 3.3. Corporate Existence and Franchises. Within sixty (60) days following the Execution Date, it will, and will cause Aura Ceramics and AuraSound to, do or cause to be done all things necessary to effect, preserve and keep in full force and effect its existence and its good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualification. 3.4. Compliance with Statutes, etc. It will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental Authorities, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. 3.5. Compliance with Environmental Laws. It will comply, and will cause each of its Subsidiaries to comply, in all material respects with all environmental laws applicable to the ownership or use of its real property now or hereafter owned or operated by the Company or any of its Subsidiaries, will promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such real property free and clear of any Liens imposed pursuant to such environmental laws. 3.6. ERISA. As soon as possible and, in any event, within ten (10) days after the Company, any Subsidiary of the Company or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Company will deliver to each of the Funds a certificate of the chief financial officer of the Company setting forth the full details as to such occurrence and the action, if any, that the Company, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given or filed by the Company, such Subsidiary, the Plan administrator or such ERISA Affiliate to or with the PBGC or any other government agency, or a Plan participant and any notices received by the Company, such Subsidiary or ERISA Affiliate from the PBGC or any other government agency, or a Plan participant with respect thereto: that a Reportable Event has occurred (except to the extent that the Company has previously delivered to the Funds a certificate and notices (if any) concerning such event pursuant to the next clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to such Plan within the following 30 days; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan or Foreign Pension Plan has not been timely made; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that the Company, any Subsidiary of the Company or any ERISA Affiliate will or may incur any liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that the Company or any Subsidiary of the Company may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan or any Foreign Pension Plan. The Company will deliver to each of the Funds copies of any records, documents or other information that must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA. The Company will also deliver to each of the Funds a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Funds pursuant to the first sentence hereof, copies of annual reports and any records, documents or other information required to be furnished to the PBGC or any other government agency, and any material notices received by the Company, any Subsidiary of the Company or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be delivered to the Funds no later than ten (10) days after the date such annual report has been filed with the Internal Revenue Service or such records, documents and/or information has been furnished to the PBGC or any other government agency or such notice has been received by the Company, the Subsidiary or the ERISA Affiliate, as applicable. The Company and each of its applicable Subsidiaries shall ensure that all Foreign Pension Plans administered by it or into which it makes payments obtains or retains (as applicable) registered status under and as required by applicable law and is administered in a timely manner in all respects in compliance with all applicable laws except where the failure to do any of the foregoing would not be reasonably likely to result in a material adverse effect upon the business, operations, condition (financial or otherwise) or prospects of the Company or any Subsidiary of the Company. 3.7. End of Fiscal Years; Fiscal Quarters. It will, and will cause each of its Subsidiaries to, provide the Agent prior written notice with respect to the change of their respective fiscal years and fiscal quarters. 3.8. Performance of Obligations. It will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement, loan agreement and each other material agreement, Contract or instrument by which it or any of its properties or assets is bound, except such non-performances which, individually or in the aggregate, do not have, nor could reasonably be expected to have, a Material Adverse Effect. 3.9. Payment of Taxes. It will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 4.1; provided, that neither the Company nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP. 3.10. CNA Restructuring Agreement. No later than the date which is sixty (60) days following the Execution Date, the Company and CNA shall have executed and delivered the CNA Restructuring Agreement and all conditions to the CNA Restructuring Agreement shall have been satisfied and not waived to the satisfaction of the Funds unless otherwise agreed to in writing by the Funds. 3.11. DFS Claims and Isosceles Indebtedness. It will give the Agent prompt written notice (but in no event later than three Business Days) of (i) any settlement, liquidation, arbitral award, judgment or any other resolution of the DFS Claim and any action taken by or for the benefit of DFS to enforce any such award, judgment or other resolution (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets) or (ii) any settlement, liquidation, arbitral award, judgment or any other resolution of the Indebtedness of the Company owed to Isosceles and any action taken by or for the benefit of Isosceles to enforce such Indebtedness (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets). 3.12. Certain Corporate Matters. (a) No later than the date which is 60 days following the Execution Date, the Board of Directors of the Company shall be composed of seven directors, not less than four of whom must be Independent Directors; (b) No later than August 31, 2000, the Board of Directors of the Company shall be composed of nine directors, not less than five of whom must be Independent Directors; and (c) No later than the date which is 30 days following the Execution Date, the Company shall file with the Commission and such other authorities as applicable law may require proxy materials with respect to the matters provided in clauses (a) and (b) above. 3.13. Issuance of Shares. No later than the date which is 90 days following the Execution Date, the Shares shall have been duly authorized for issuance in accordance with the terms of this Secured Note and the other Transaction Documents. 3.14. Registration Statement. No later than the date which is 90 days following the Execution Date, the Company shall have filed with the Commission a Registration Statement with respect to the resale of the Shares. The Company shall use its best efforts to (i) cause such Registration Statement to become effective as soon as possible thereafter and (ii) maintain such Registration Statement's effectiveness. 3.15. Additional Equity. No later than the date which is 180 days following the Execution Date, the Company shall have received, in addition to the New Equity, equity contributions in cash in an amount of not less than $1,600,000 in exchange for new Common Stock. The Company shall be permitted to issue preferred stock ("Preferred Stock") strictly in accordance with the term sheet annexed hereto as Schedule 3.15 as authorized by 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof); provided, however, that the certificate of designation with respect to the Preferred Stock shall not be filed without the prior written consent of the Agent (which shall not be unreasonably withheld) to confirm the provisions in Schedule 3.15. 3.16. Supplemental Information. From time to time, the Company shall promptly supplement or amend information previously delivered to the Funds with respect to any matter hereafter arising which, if existing or occurring at the Execution Date, would have been required to be set forth or disclosed; provided, however, that such supplemental information shall not be deemed to be an amendment to any schedule or exhibit hereto. 3.17 Covenant to Guarantee Obligations and Give Security. In the event that the Company or any of its Subsidiaries shall create or acquire a subsidiary, such Person shall, at its expense: (a) within 10 days after the date of such creation or acquisition, cause each such new Subsidiary to duly execute and deliver to the Agent (i) a Guaranty substantially in the form of Exhibit B hereto, and (ii) such Security Documents as the Agent may request; (b) within 15 days after the date of such creation or acquisition, deliver to the Agent, upon the request of the Agent in its sole discretion, a favorable opinion, addressed to the Agent and each of the Funds, of counsel for such Guarantor acceptable to the Agent, as to such matters as the Agent may reasonably request; and (c) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such actions as the Agent may deem necessary or reasonably desirable in order to obtain the full benefits of such Guaranty and Security Documents. For purposes of this Section 3.17, "subsidiary" shall mean, with respect to the Company or any Subsidiary, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more subsidiaries of such Person, and (ii) any partnership, association, joint venture or other entity in which such Person and/or one of more subsidiaries of such Person has more than a 50% equity interest at the time. 3.18. Further Assurances. The Company will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver, or cause to be made, executed, endorsed, acknowledged, filed and/or delivered, to the Agent from time to time such vouchers, invoices, schedules, conveyances, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral as the Agent may reasonably require in order to provide the Agent with the Liens and rights granted under the Security Documents with respect to the Collateral. 3.19. Guarantors. The Company will supplement Schedule 2.3 hereof within 10 days of the Closing to reflect the authorized, issued and outstanding capital stock of Aura Medical Systems, Inc. and Electrotec Productions, Inc. 3.20. Bank Accounts. The Company will give notice to the Agent subject to and in accordance with Section 2.5 of the Security Agreement regarding the location of all of its bank accounts (including account numbers). 3.21. Non-Recourse Notes. Within forty-five (45) days of the Closing Date, at least fifty percent (50%) of the Indebtedness owing to the holders of the 8% Secured Convertible Non-Recourse Note Due 2008 listed in Schedule 4.1(l) shall have been converted into Common Stock of the Company. 3.22. Guzik Opinion. The legal opinion of Guzik & Associates (Exhibit H to the Exchange Agreement) shall be supplemented to cover the due execution, authorization and delivery of the Transaction Documents by the Guarantors to which they are a party. 3.23. Stock Certificates. The Company shall deliver stock certificates and stock voting powers for the Guarantors to the Agent within 10 days of the Closing Date. SECTION 4. Negative Covenants. The Company hereby covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 4.1. Liens. It will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any of the property or assets (real or personal, tangible or intangible, including, without limitation, Proprietary Rights) of the Company or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to the Company or any of its Subsidiaries), or assign any right to receive income or permit the filing of any notice of Lien under any recording or notice statute; provided that the provisions of this Section 4.1 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Company or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company or any of its Subsidiaries or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; (c) Liens in existence on the Execution Date which are listed, and the property subject thereto described, in Schedule 4.1(c) hereto (the "Existing Liens"), but only to the respective date, if any, set forth in such Schedule 4.1(c) for the removal, replacement and termination of any such Liens; (d) Liens created pursuant to the Security Documents; (e) easements, rights-of-way, restrictions, encroachments and other similar charges or encumbrances, and minor title deficiencies, in each case not securing Indebtedness and not materially interfering with the conduct of the business of the Company or any of its Subsidiaries; (f) statutory and common law landlords' liens under leases to which the Company or any of its Subsidiaries is a party; (g) Liens incurred in the ordinary course of business in connection with workers' compensation claims, unemployment insurance and social security benefits and Liens securing the performance of bids, tenders, leases and contracts in the ordinary course of business, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money), provided that the aggregate outstanding amount of obligations secured by Liens permitted by this clause (g) (and the value of all cash and property encumbered by Liens permitted pursuant to this clause (g)) shall not at any time exceed $100,000; (h) Liens arising after the Execution Date solely by virtue of any statutory provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company or any of its Subsidiaries, and (B) such deposit account is not intended by the Company or any of its Subsidiaries to provide collateral to the depository institution (except to Imperial Bank); (i) Liens in connection with Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof; (j) Liens subordinate to the Liens created pursuant to the Security Documents; provided that (A) any such consensual Lien shall only be created, assumed or suffered to exist if each Person in favor of whom such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent and (B) any such statutory, judgment or other nonconsensual Lien against the Company and Aura Ceramics (including, without limitation, any judgment liens which are not Permitted Liens pursuant to Section 4.1(c)) shall only be created, assumed, or suffered to exist if the total amount of such Liens in the aggregate (excluding the DFS Claims) shall not at any time exceed $1,066,666.67; and (k) any extension, renewal or replacement of the foregoing Liens; provided, however, that the Liens permitted hereunder shall not cover any additional Indebtedness or property (other than like property substituted for property covered by such Lien) except as otherwise permitted pursuant to Section 4.5(c). In connection with the granting of Liens of the type described in Section 4.1(i) by the Company or any of its Subsidiaries, the Agent is hereby authorized by the Funds and shall take any actions reasonably requested by the Company in writing in connection therewith (including, without limitation, by executing appropriate lien subordination agreements in favor of the holder or holders of such Liens solely with respect to the item or items of equipment or other assets subject to such Liens). Notwithstanding the foregoing, any Permitted Liens (other than Existing Liens or Liens under Sections 4.1(d)) upon or with respect to Proprietary Rights and other general intangibles of the Company and its Subsidiaries shall only be created, assumed or suffered to exist to the extent any such Lien shall be subordinate to the Liens created pursuant to the Security Documents and each Person in favor of which such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent. 4.2. Proprietary Rights. Except with respect to Non-Core Assets in accordance with the terms hereof, the Company will not, and will not permit any of its Subsidiaries to, nor shall any such Person allow any other Person to, sell, assign or transfer any interest in any of the Proprietary Rights of the Company, or file or record any consensual Lien, assignment or other instrument, certificate or document having a similar effect with respect to any of the Proprietary Rights of the Company or any of its Subsidiaries with the U.S. Patent and Trademark Office. Nothing herein shall be deemed or construed as an argument or admission that the Liens upon the Proprietary Rights of the Company and its Subsidiaries created pursuant to the Security Documents are impaired or unperfected. 4.3. Consolidation, Merger, Purchase or Sale of Assets, etc. It will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of their property or assets, or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person (or agree to do any of the foregoing at any future time), except that: (a) the Company, Aura Ceramics and AuraSound, taken as a whole, may lease (as lessee) (i) real property in an amount no greater than $1,200,000 in the aggregate in any 12 month period or (ii) personal property in an amount no greater than $500,000 in the aggregate in any 12 month period, or create a capitalized lease obligation; (b) the Company, Aura Ceramics and AuraSound may make sales of inventory in the ordinary course of business and consistent with past practices; (c) the Company and its Subsidiaries may sell, lease, or otherwise dispose of equipment or materials with a value of no greater than $25,000 in the aggregate which, in the reasonable judgment of such Person, are obsolete, worn-out or otherwise no longer useful in the conduct of such Person's business and the Funds shall take such actions as may reasonably be requested by the Company in writing in connection therewith (including, if necessary, executing an appropriate release of the Liens under the Security Documents solely with respect to such equipment and materials); (d) so long as no Event of Default shall occur and has not been cured in accordance with the terms hereof, the Company and its Subsidiaries may sell, lease, or otherwise dispose of Non-Core Assets, including all of the Company's stock of any of its Subsidiaries, at fair value (as determined by no less than 2/3 of the Board of Directors of the Company composed in the manner set forth in Section 3.12(a) or (b) hereof) in arm's length transactions and the Funds shall take such actions as may be reasonably requested by the Company in writing in connection therewith (including, if necessary, by executing an appropriate release solely with respect to such Non-Core Assets of the Liens under the Security Documents and the Obligations, including indemnification obligations, under the Guaranty); (e) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its property (upon voluntary liquidation or otherwise) to the Company; and (f) any Guarantor may merge with and into the Company. Notwithstanding anything to the contrary contained in this Section 4.3, neither the Company nor any of its Subsidiaries may convey, sell, lease, or otherwise dispose of any property having more than minimal value to any existing or future Subsidiary of the Company without the Agent's prior written consent. Neither the Company nor any of its Subsidiaries shall transfer or deliver any Instrument or Investment Property (as defined in the Security Agreement) to any Person (other than the Agent) except as otherwise expressly permitted by the Security Agreement or this Secured Note. 4.4. Dividends. (a) It will not declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Company now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock). (b) Except as otherwise provided in this Secured Note, it will not permit any of its Subsidiaries to declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock of such Subsidiary now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), except that any Subsidiary may pay cash dividends to the Company, including, without limitation, in respect of any sales of Non-Core Assets in accordance with the terms hereof. 4.5. Indebtedness. It will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Secured Note and the other Transaction Documents; (b) Existing Indebtedness; (c) Working Capital Indebtedness incurred by (i) the Company only in connection with the AuraGen business, or (ii) Aura Ceramics only in connection with its existing business as of the Execution Date; (d) Indebtedness incurred by (i) the Company in connection with capital expenditures related only to the AuraGen business in an aggregate amount not to exceed at any one time outstanding $1,000,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date or (ii) Aura Ceramics in connection with capital expenditures related only to its existing business as of the Execution Date not to exceed at any one time outstanding $500,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date; (e) additional unsecured trade Indebtedness incurred by the Company related only to the AuraGen business in the ordinary course in arm's length transactions in an aggregate principal amount not to exceed $2,000,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(e) shall be subordinate to the Secured Notes; and (f) additional unsecured trade Indebtedness incurred by a Subsidiary in the ordinary course in an aggregate principal amount not to exceed $500,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(f) shall be subordinate to the Secured Notes; provided that the foregoing Indebtedness shall only be incurred if immediately prior to such incurrence and after giving effect thereto, no Event of Default shall have occurred which has not been cured in accordance with the terms of this Secured Note. 4.6. Transactions with Affiliates. It will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, with any Affiliate of any of them, other than in the ordinary course of business and on terms and conditions substantially as favorable to the Company or such Subsidiary as would reasonably be obtained by the Company or such Subsidiary at that time in a comparable arm's length transaction with a Person other than an Affiliate. 4.7. Limitation on Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements. Except as otherwise permitted by this Secured Note, it will not, and will not permit any of its Subsidiaries to, (i) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness (including, without limitation, the Restructured NEC Debt and all Restructured Trade Debts) or of any agreement (including, without limitation, any purchase agreement, indenture, loan agreement or security agreement) relating thereto other than any amendments or modifications to the Existing Indebtedness which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, (ii) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or any prepayment or redemption of, any Indebtedness, except that the Company may make such payments or redemptions in the aggregate amount of $500,000 in any 12 month period so long as no Event of Default shall have occurred (except for the DFS Claims), (iii) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness or any agreement relating thereto, other than amendments or modifications which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, or (iv) amend, modify or change their certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation) or bylaws (or equivalent organizational documents), or any agreement entered into by any of them, with respect to their capital stock (including any shareholders' agreement), or enter into any new agreement with respect to their capital stock, other than any amendments, modifications or changes to this clause (iv) or any such new agreements pursuant to this clause (iv) which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents; provided, however, that the Company may (A) enter into a settlement and payment of unsecured Indebtedness of the Company owed to GSS as of the Execution Date in an aggregate amount not to exceed $4,000,000, (B) enter into a settlement and payment of the DFS Claims owed to DFS as of the Execution Date in an aggregate amount not to exceed $5,000,000, and (C) issue capital stock in accordance with Section 4.8 hereof. 4.8. Limitation on Issuance of Capital Stock. (a) The Company will not, and will not permit any of its Subsidiaries to, issue any equity or capital stock which may be redeemed, called or put, or which has any preference or extraordinary rights, other than Preferred Stock as contemplated under and pursuant to this Secured Note. (b) The Company will not, and will not permit any of the Guarantors to, issue or agree to issue any equity or capital stock (including by way of sales of treasury stock, options, warrants to purchase, or securities convertible into, capital stock) unless at a price at or above the then fair value as determined by no less than 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) either at the time of issuance or the time of the relevant agreement. SECTION 5. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 5.1 Payments. The Company shall (i) default in the payment when due of any principal hereunder, or (ii) default, and such default shall continue unremedied for three or more Business Days, in the payment when due of any interest hereunder or any fees or any other amounts (other than principal) owing hereunder or under any other Transaction Document; or 5.2. Representations, etc. Any representation, warranty or statement made by the Company or any of its Subsidiaries herein or in any other Transaction Document or in any certificate delivered to the Agent or any Fund pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made and such misrepresentation is material and continues to be material to the business, operations, assets, revenues, properties, liabilities or prospects of the Company or any of its Subsidiaries on earlier of (i) the date notice of an Event of Default is given to the Company or (ii) the date on which the Company or any of its Subsidiaries becomes aware of such default; or 5.3. Covenants. The Company or any of its Subsidiaries shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Sections 3.1(d), 3.3, 3.10, 3.11, 3.12, 3.13, 3.14., 3.15, 3.17, 3.19, 3.20, 3.21, 3.22, 3.23 or Section 4 hereof, or (b) default in the due performance or observance by it of any other term, covenant or agreement contained in this Secured Note (other than those set forth in Section 5.1 or 5.2 or clause (a) of this Section 5.3) or any other Transaction Document and such default shall continue unremedied for a period of 30 days after written notice thereof to the defaulting party by the Agent or any Fund; or 5.4. Default Under Other Agreements. The Company, the Guarantors or any of their Subsidiaries shall (i) default in any payment of any Existing Secured Indebtedness beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Existing Secured Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any Existing Secured Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Existing Secured Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such Existing Secured Indebtedness to become due prior to its stated maturity; or any Existing Secured Indebtedness of the Company, the Guarantor or any of their Subsidiaries shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; provided, however, that (a) such default shall continue unremedied for a period of 30 days after notice of default has been given to the Company by the holder of Existing Secured Indebtedness asserting the default (or shall continue unremedied up to an additional 60 days beyond such initial 30-day cure period if the holder of Existing Secured Indebtedness asserting the default forbears, waives or extends such default in writing for such additional time and the Funds shall have received commensurate therewith cash or other consideration equal to the cash or other consideration given to such holder of Existing Secured Indebtedness on account of, or in connection with, or related to such holder's forbearance, waiver or extension of the default) and (b) this Section 5.4 shall not apply to any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes. 5.5. Bankruptcy. The Company or any of its Subsidiaries shall commence a voluntary case concerning itself under the Bankruptcy Code; or an involuntary case is commenced against the Company and the petition is not controverted within 10 days after service, or is not dismissed within 30 days, after commencement of the case or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the foregoing Persons. The Company or any of its Subsidiaries shall commence any other proceeding under any reorganization, arrangement, assignment for the benefit of creditors, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any of its Subsidiaries. There is commenced against the Company or Aura Ceramics any such proceeding which remains undismissed for a period of 30 days, or any of the Company and Aura Ceramics is adjudicated insolvent or bankrupt, or any order of relief or other order approving any such case or proceeding is entered, or the Company or Aura Ceramics suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 30 days, or the Company or Aura Ceramics shall generally not pay its debts as they become due or there shall be deemed to have occurred a suspension of payments, or the Company or Aura Ceramics shall be substantively consolidated with any other Person, or any judgment or order which has a Material Adverse Effect shall have been entered against the Company or any of its Subsidiaries pursuant to Bankruptcy Code sections 506(c), 542, 543, 544, 545, 547, 548, 549, 550, 551, 552(b) and 553. The Company or any of its Subsidiaries makes a general assignment for the benefit of creditors, or any corporate action is taken by the Company or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 5.6. Security Documents. Any of the Security Documents shall cease to be valid and in full force and effect, or, except as otherwise permitted hereby, shall cease to give the Agent, for the benefit of the Funds, the Lien purported to be created thereby; or 5.7. Guaranty. At any time after the execution and delivery thereof, any Guaranty or any provision thereof shall cease to be in full force or effect as to any Guarantor, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under its Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to its Guaranty; or 5.8. Material Adverse Change. Any event or condition shall occur or exist which, in the reasonable judgment of the Agent, has, or could reasonably be expected to have, a Material Adverse Effect; or 5.9. Denial of Liability. (a) The Company or any of its Subsidiaries shall deny its obligations under this Secured Note or any other Transaction Document; (b) any law, rule or regulation shall purport to render invalid, or preclude enforcement of, any provision of this Secured Note or any other Transaction Document or impair performance of the Company's or any Subsidiary's obligations hereunder or under any other Transaction Document or (c) any dominant authority asserting or exercising de jure or de facto governmental or police powers shall, by moratorium laws or otherwise, cancel, suspend or defer the obligation of the Company or any of its Subsidiaries to pay any amount required to be paid hereunder or under any other Transaction Document; or 5.10. DFS. DFS shall obtain (i) a settlement of the DFS Claims in excess of $5 million, or (ii) an arbitral award, judgment, or other resolution of the DFS Claims in excess of $5,000,000 and DFS obtains property or assets of the Company or any of its Subsidiaries in excess of $50,000 in connection therewith (including, without limitation, by way of levy, attachment, garnishment, foreclosure or possession); or 5.11. Isosceles. Isosceles shall fail to convert its existing Indebtedness owed by the Company into Common Stock of the Company within six months of the Execution Date, or Isosceles at any time obtains a judgment, attaches, garnishes, takes possession or otherwise forecloses on the Company's assets or property in respect of such Indebtedness; then, and in any such event, and at any time thereafter, if any Event of Default shall occur (which has not been cured in accordance with the terms of this Secured Note), the Holder may take any or all of the following actions, without prejudice to the rights of the Holder to enforce its claims against the Company or any of its Subsidiaries (provided that if an Event of Default specified in Section 5.5 above shall occur with respect to the Company or any of its Subsidiaries, the result which would occur upon the giving of written notice by the Holder as specified in clause (i) below shall occur automatically without the giving of any such notice): (i) (x) declare the principal of and any accrued interest in respect of all Obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and each of the Guarantors, or (y) convert all or any portion of the Obligations owing hereunder; and (ii) exercise any other rights available under the Transaction Documents or applicable law; and immediately, with respect to any violation (without any right to cure) of the representation contained in Section 2.30 hereof and/or the covenant contained in Section 4.3(d) or 4.8 hereof, the Conversion Price shall be reduced from $0.60 to $0.30. SECTION 6. Maturity. If this Secured Note is not converted at the option of the Holder in accordance with Section 8 hereof, the principal amount of this Secured Note, together with accrued but unpaid interest, shall be due and payable on demand on the Maturity Date. SECTION 7. Optional Prepayment. Upon giving the Agent at least three Business Days' prior written notice (which shall be irrevocable), the Company shall have the right to prepay amounts of principal under this Secured Note at any time, without premium or penalty, in an aggregate principal amount of at least $1,000,000, together with interest accrued as of the date of such prepayment; provided, however, that, with respect to any such prepayment, so long as no Event of Default shall occur which has not been cured in accordance with the terms of Section 5 hereof, the principal amount hereunder shall be reduced by an amount equal to the sum of the principal so prepaid and the Applicable Discount. Notwithstanding anything to the contrary contained herein, the Applicable Discount shall not apply to any prepayments from proceeds of any issuance of Preferred Stock as set forth in Schedule 3.15 hereof. SECTION 8. Conversion. 8.1. Conversion Events. Upon the occurrence and during the continuation of any Conversion Event, all or any portion of any Obligations due under this Secured Note may be converted into Shares at the option of the Holder following delivery of a notice of conversion to the Company in the manner set forth in Section 11.4 (the "Notice of Conversion") at any time on or prior to the Maturity Date, subject to the terms and conditions set forth in this Section 8. Upon conversion into Shares, any amounts converted hereunder shall be discharged. 8.2. Conversion Price. The number of Shares into which any amount under this Secured Note may be converted shall be determined by dividing the amount subject to conversion as set forth in the Notice of Conversion by $0.60 (the "Conversion Price"). 8.3. Method of Conversion. Before the Holder shall be entitled to receive Shares upon the conversion of any amount under this Secured Note, the Holder shall surrender this Secured Note solely for the purposes of the conversion thereof together with a Notice of Conversion to the office of the Company or its designated agent. The Notice of Conversion shall state therein the amount(s) in which the certificate(s) for Shares are to be issued. The time of conversion (the "Conversion Date") shall be the close of business on the calendar day following the date on which a Notice of Conversion is sent to the Company in accordance with Section 11.4. Interest on the amount under this Secured Note subject to conversion as set forth in the Notice of Conversion shall cease to accrue on and after the Conversion Date. Upon the conversion of any amount under this Secured Note, the Company shall execute and deliver on the Conversion Date, in exchange and substitution for and upon cancellation of this Secured Note, a new secured note in the principal amount equal to the amount of this Secured Note less such amount subject to conversion. 8.4. Issuance of Shares. The Company shall, as soon as practicable after the Conversion Date, but in no event more than three (3) business days thereafter, issue and deliver to the Holder certificates representing the number of Shares to which the Holder shall be entitled as aforesaid; provided, however, that the Company may pay in full in cash all Obligations owing to the Funds hereunder and under the Transaction Documents within three (3) business days after the Conversion Date in lieu of the Company's obligations to issue and deliver the certificates representing the Shares to the Holder under this Section 8.4. 8.5. No Fractional Shares. No fractional Shares shall be issuable upon conversion of any amount under this Secured Note subject to conversion as set forth in the Notice of Conversion. If the conversion of such amount would result in the issuance of a fractional Share, such fractional share shall be rounded up to the nearest whole share and issued to the Holder. 8.6. Adjustment of Conversion Price; Merger. (a) If at any time or from time to time while any amount under this Secured Note is outstanding (i) the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock, or (ii) the Company shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or (iii) the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price in effect immediately before such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. If the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (b) If the Shares issuable upon conversion of any amount under this Secured Note, if any, shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 8.6(a)), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Shares shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of Shares that would have been subject to receipt by the Holder upon conversion of any amount under this Secured Note immediately before that change. (c) In case of any consolidation or merger of the Company permitted by Section 4.3(f) hereof (each such transaction, a "Merger"), the survivor of the Merger shall succeed to the covenants, stipulations, promises and agreements contained in this Secured Note. In the event of a Merger, the Company shall make appropriate provisions so that the Holder shall have the right thereafter to convert any amount under this Secured Note into the kind and amount of securities receivable upon such Merger by a Holder of the number of securities into which any amount under this Secured Note might have been converted immediately prior to a Merger. The above provisions shall similarly apply to successive Mergers. (d) Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 8.6, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a notice setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. 8.7. Reservation of Stock. The Company shall, at all times on and after the date which is 90 days following the Execution Date, reserve and keep available out its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of any amount under this Secured Note into Shares, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of any amount under this Secured Note into Shares; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of any amount under this Secured Note into Shares, then the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its articles of incorporation. 8.8. Failure to Issue and/or Deliver Shares. (a) The Company shall issue and deliver, within five (5) Trading Days after the Holder has fulfilled all conditions and submitted all necessary documents duly executed and in proper form required for conversion (the "Deadline"), to the Holder or any party receiving the Secured Notes by transfer from Holder, at the address of the Holder on the books of the Company, a certificate or certificates for the number of Shares to which the Holder shall be entitled. The Company understands that a delay in the issuance and/or delivery of the Shares beyond the Deadline could result in economic loss to the Holder. As compensation to the Holder for such a loss, and not as penalty, the Company agrees to pay liquidated damages to the Holder for late issuance of Shares upon conversion in accordance with the following schedule (where "No. of Business Days Late" is the number of Business Days from the Deadline until (and including) the Business Day on which the Holder receives the Shares):
Liquidated Damages (per one hundred thousand dollars of principal outstanding hereunder, based on an amount not less than the stated principal amount due on the Maturity Date) No. of Business Days Late 2 $50 3 $100 4 $150 5 $200 6 $250 7 $300 8 $350 9 $400 10 $450 11 $500 >11 $500 plus an additional $100 for each Business Day beyond 11 Business Days.
(b) The Company shall pay the Holder any liquidated damages incurred under this Section 8.8 by wire transfer of immediately available funds to an account designated by Holder upon the earlier to occur of (i) issuance of the Shares to the Holder or (ii) each monthly anniversary of the receipt by the Company of such Holder's Notice of Conversion. Nothing herein shall waive the Company's obligations to deliver Shares upon a total or partial conversion of this Secured Note or limit Holder's rights to pursue actual damages for the Company's failure to issue and deliver Shares to such Holder in accordance with the terms of this Secured Note. (c) The Company agrees that, in addition to any other remedies which may be available to the Holder, including, but not limited, to, remedies available hereunder or under the other Transaction Documents, in the event the Company fails for any reason to effect delivery to Holder of certificates representing Shares within five (5) Trading Days following receipt by the Company of a Notice of Conversion, a Holder will be entitled to revoke the Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. SECTION 9. Other Provisions Relating to Rights of the Holder of this Secured Note. 9.1. Shareholder Rights. This Secured Note shall not entitle the Holder to any of the rights of a shareholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of shareholders or any other proceedings of the Company; provided, however, this Section 9.1 shall not affect the rights of the Holder under the Stock Pledge Agreement or in its capacity as a shareholder of the Company pursuant to any Common Stock held by the Holder, including, without limitation, upon conversion of any amount under this Secured Note pursuant to Section 8 hereof or otherwise. 9.2. Lost, Stolen, Mutilated or Destroyed Note. If this Secured Note shall be mutilated, lost, stolen, or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Secured Note, or in lieu of or in substitution for a lost, stolen, or destroyed Secured Note, a new Secured Note for the principal amount of this Secured Note so mutilated, lost, stolen, or destroyed but only upon receipt of evidence (which may consist of a signed affidavit of the Holder), of such loss, theft, or destruction of this Secured Note. SECTION 10. Other Agreements. 10.1. Transfer Restrictions. (a) If the Holder should decide to dispose of this Secured Note, the Holder understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, or (ii) pursuant to an available exemption from registration under the Securities Act. (b) The Holder agrees to the imprinting, so long as required by the terms of the Securities Act, of the following legend on certificates representing the Shares: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. (c) The legend set forth in clause (b) above and in the first paragraph of this Secured Note shall be removed as soon as allowed under the Securities Act or the regulations promulgated thereunder. The Company agrees that it will provide the Holder, upon request, with any required opinion of counsel and a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable, at no charge. 10.2. Filing and Furnishing of Reports and Information. (a) The Company's Common Stock is registered under Section 12(g) of the Securities Act. On and after the date which is 90 days following the Execution Date and for so long as the Holder owns this Secured Note or Shares, the Company shall timely file all reports required to be filed by the Company with the Commission after the Execution Date pursuant to Section 13(a) or 15(d) of the Exchange Act and to furnish to the Holder within 10 days of each such filing true and complete copies of all such filings and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. The Company will take all necessary action to meet the "registrant eligibility" requirements set forth in the general instructions to Form S-3. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to the Holder annual and quarterly financial statements, together with a management discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings would have been required to have been made under the Exchange Act. (b) The Company shall deliver copies to the Holder of any documents or financial statements it delivers to any secured lender concurrently with such delivery to such lender, subject to the confidentiality provisions of Section 6.12 of that certain Exchange Agreement dated February 14, 2000, between the Company and the Funds. 10.3. Blue Sky Laws. The Company shall qualify this Secured Note and the Shares under the securities or "Blue Sky" laws of such jurisdictions as the Holder may request and shall continue such qualification at all times as long as the Holder owns any Shares. 10.4. Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Secured Note or the Shares in a manner that would require the registration under the Securities Act of the sale of this Secured Note or the Shares to the Holder. SECTION 11. Miscellaneous. 11.1. Fees and Expenses. The Company and the Funds shall pay the fees and expenses of their respective advisers, counsel, accountants and other experts, if any, and all other expenses incurred incident to the negotiation, preparation, execution, delivery and performance of this Secured Note and the other Transaction Documents. The Company shall pay all stamp and other taxes (other than income) and duties levied in connection with the issuance of the Secured Notes and Shares pursuant hereto. 11.2. Indemnification. (a) Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 of the Security Agreement, the Company agrees to indemnify and hold harmless, to the extent permitted by law, the Holder and its respective officers and directors, employees, advisors, attorneys, agents, and representatives against any and all claims, causes of action, losses, liabilities, damages or expenses incurred by any of them as a result of, arising out of, or in any way related to, or by reason of, any breach or default by the Company under any provision of this Secured Note or any other Transaction Document, including, but not limited to, any breach by the Company of its representations and warranties set forth in Section 2.1 hereto. (b) Any person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (c) The indemnification provided for under this Secured Note shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company's indemnification is unavailable for any reason. 11.3. Entire Agreement; Amendments. This Secured Note and the other Transaction Documents, together with the exhibits and schedules hereto and thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 11.4. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 11.4 prior to 4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified below later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: Michael Froch, Esq. Facsimile No.: (310) 643-8719 With copies to: Robinson, Diamant & Brill 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Attn: Lawrence A. Diamant, Esq. Facsimile No.: (310) 277-7584 If to the Holder: Global Growth Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 and Mr. Stuart J. Chasanoff c/o HW Partners LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 or such other address as may be designated in writing hereafter, in the same manner, by such person. 11.5. Amendments; Waivers. No provision of this Secured Note may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Holder, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Secured Note shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 11.6. Headings Descriptive. The headings herein are for convenience only, do not constitute a part of this Secured Note and shall not be deemed to limit or affect any of the provisions hereof. 11.7. Benefit of Secured Note; Assignments; Participations. (a) This Secured Note shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its rights or obligations hereunder or under any other Transaction Documents. (b) The Holder may sell, assign, transfer or grant participations in all or a portion of its rights and outstanding Obligations hereunder to any person, each of which assignees shall become a party to this Secured Note as a Holder, provided that the new Secured Note will be issued, at the Company's expense, to such new Holder and to the assigning Holder upon the request of such new Holder or assigning Holder, such new Secured Note to be in conformity with the requirements under the Transaction Documents (with appropriate modifications) to the extent needed to reflect the revised outstanding Obligations. The assigning Holder will notify the Company of any assignment pursuant to this Section 11.7(b); provided, however, that the failure to give any such notice, or any error in such notice, shall not affect any of the obligations of the Company hereunder or under any other Transaction Document. (c) Nothing in this Secured Note shall prevent or prohibit any Holder from pledging its rights hereunder. 11.8. No Third-Party Beneficiaries. This Secured Note is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 11.9. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS SECURED NOTE AND THE OTHER TRANSACTION DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURED NOTE OR ANY SUCH OTHER TRANSACTION DOCUMENT MAY BE BROUGHT IN (i) THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND/OR (ii) THE COURTS OF THE DEFENDANT'S RESPECTIVE CORPORATE DOMICILE, AND, BY THE ISSUANCE AND DELIVERY OF THIS SECURED NOTE, EACH PARTY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS SECURED NOTE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.4 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE HOLDER OF THIS SECURED NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY AND/OR ANY GUARANTOR IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS SECURED NOTE OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURED NOTE, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS SECURED NOTE. 11.10. Publicity. The Company and the Holder shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases, filings or public statements that are required by law or any regulatory body or governmental authority of competent jurisdiction. 11.11. Severability. In case any one or more of the provisions of this Secured Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Secured Note shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and, upon so agreeing, shall incorporate such substitute provision in this Secured Note. 11.12. Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Holder will be entitled to specific performance of the obligations of the Company under this Secured Note. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 11.13. Survival. Each of the representations and warranties of the Company contained in Section 2 and the other agreements and covenants of the parties contained in this Secured Note shall survive issuance of this Secured Note until repayment in full of the Obligations evidenced hereby. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] IN WITNESS WHEREOF, the Company has caused this Secured Note to be signed in its name by its duly authorized officers this 22nd day of February, 2000. AURA SYSTEMS, INC. By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title:Senior Vice President < STATE OF ____________ ) )SS: COUNTY OF __________ ) The foregoing instrument was acknowledged before me this day of _________, ___ by _________________________ as ___________________of Aura Systems, Inc. on behalf of the corporation. He personally appeared before me, is personally known to me or produced __________________ as identification, and [did] [did not] take an oath. Notary: [NOTARIAL SEAL] Print Name: Notary Public, State of My commission expires: (i) 03/09/00 12:29 PM03/09/00 12:29 PM losangeles 38031 v1 Tcf01!.docTcf01!.doc NOTICE OF CONVERSION The undersigned, being the holder of the attached Secured Note due the Maturity Date (as defined in the Secured Note) of Aura Systems, Inc. (the "Company"), hereby exercises the option to convert $[________] under the Secured Note into Shares (as defined in the Secured Note) of the Company in accordance with the terms of the Secured Note. The amount of principal and accrued but unpaid interest outstanding on the Secured Note as of the date hereof is $____________ and the number of Shares to be issued upon conversion is _____________. The undersigned directs that the Shares be issued in the name of and delivered as soon as practicable and in accordance with the provisions of the Secured Note to: Full address: Date: Name: [HOLDER] EX-10.32 10 0010.txt SECURED NOTE 2/22/2000 SUMMIT CAPITAL LIMITED NEITHER THIS SECURED NOTE NOR THE GUARANTIES OF THE SUBSIDIARIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. AURA SYSTEMS, INC. SECURED NOTE $838,680 February 22, 2000 El Segundo, California FOR VALUE RECEIVED, Aura Systems, Inc., a Delaware corporation (the "Company"), promises to pay to the order of Summit Capital Limited, a corporation organized and existing under the laws of Nevis, West Indies (the "Holder") or its assigns, the principal amount of Eight Hundred Thirty Eight Thousand Six Hundred Eighty ($838,680) on November 30, 2002 (the "Maturity Date") and to pay interest (computed on the basis of a 360-day year of 30-day months) ("Interest") (a) on the principal amount hereof outstanding at the rate of eight percent (8%) per annum from the date hereof, payable in arrears on (i) August 1, 2000 and quarterly thereafter on each 1st day of November, February, May and August, (ii) the Maturity Date, (iii) each date this Secured Note, or any portion hereof, is converted, and (iv) the date the principal amount of this Secured Note shall be declared to be or shall automatically become due and payable, and (b) to the extent permitted by law, on any overdue amount hereunder at the rate of sixteen percent (16%) per annum. Should any interest or other charges paid hereunder result in the computation or earning of interest hereunder in excess of the maximum rate or amount permitted by applicable law, such excess shall be credited against (and be deemed to have been a payment in reduction of) principal owing hereunder, and any portion of such excess which portion exceeds the principal owing hereunder shall be paid to the Company. Principal and accrued but unpaid Interest hereunder shall be due and payable on demand on or after the Maturity Date or in accordance with Section 5 hereof after the occurrence of an Event of Default (which has not been cured in accordance with the terms hereof), unless converted by the Holder in accordance with Section 8 hereof. If any payment of interest hereunder becomes due and payable on a day which is not a Business Day, the due date thereof shall be the next preceding day which is a Business Day, and the interest payable on such next preceding Business Day shall be the interest which would otherwise have been payable on the due date which was not a Business Day. Payments of principal and interest shall be made in immediately available funds, in lawful money of the United States of America at the locations set forth hereunder, or at such other place as the Holder shall have designated for such purpose in writing, and may be paid by cashier's check or wire transfer to the address or account designated by the Holder for such purpose. This Secured Note (the "Secured Note") is secured by, and is one of the secured notes referred to in (i) that certain Security Agreement of even date herewith between the Company, the Guarantors (defined below) and HW Partners, LP, as Agent for the Funds, and (ii) that certain Stock Pledge Agreement of even date herewith between the Company and the Agent for the Funds. This Secured Note is guaranteed by, and is one of the Secured Notes referred to in, that certain Guaranty of even date herewith of the Guarantors (defined below) made for the benefit of the Funds, which Guaranty is secured by the Security Agreement. The Company further agrees as follows: SECTION 1. Definitions and Principles of Construction. 1.1. Defined Terms. As used in this Secured Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined, except as otherwise provided): "Affiliate" shall mean, with respect to any specified Person, (i) any other Person that, directly or indirectly, is controlled by, or is under common control with, or controls such Person, (ii) any other Person in which, directly or indirectly, such Person holds, of record or beneficially, five percent or more of the equity or voting securities, (iii) any other Person that holds, of record or beneficially, five percent or more of the equity or voting securities of such Person, or (iv) any director, officer, partner or individual holding a similar position in respect of such Person. "Agent" shall mean HW Partners, LP, a Texas limited partnership. "Applicable Discount" shall mean, with respect to any applicable prepayment of principal under this Secured Note in accordance with the terms hereof, a percentage which on the Execution Date shall be equal to twenty percent (20%) and thereafter shall decrease on a daily, straight line basis to zero percent (0%) on the Maturity Date. "Aura Ceramics" shall mean Aura Ceramics, Inc., a Delaware corporation. "AuraGen" shall mean that certain power generator developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries under the trademark AuraGen or any successor or replacement mark thereto, or any similar, derivative or related product line which may be developed, manufactured, marketed, distributed and/or sold by or for the Company or any of its Subsidiaries. "AuraSound" shall mean AuraSound, Inc., a Delaware corporation. "Authority" shall mean any governmental, regulatory or administrative body, agency, commission, board, arbitrator or authority, any court or judicial authority, or any public, private or industry regulatory authority, whether international, national, federal, state or local. "Bankruptcy Code" shall mean title 11 of the United States Code (11 U.S.C. ss. 101 et seq.), as amended from time to time. Section references to the Bankruptcy Code are to the Bankruptcy Code as in effect on the date of this Agreement and any subsequent provisions of the Bankruptcy Code, amendatory thereof, supplemental thereto or substituted therefor. Board of Directors" shall mean the Board of Directors of the Company. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other government actions to close. "Claim" shall mean any action, claim, lawsuit, demand, suit, inquiry, hearing, investigation, notice of a violation, litigation, proceeding, arbitration, appeals or other dispute, whether civil, criminal, administrative or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code as in effect on the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property subject to the Security Documents. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean shares now or hereafter authorized of the class of common stock of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as common stock. "Company" shall mean Aura Systems, Inc., a Delaware corporation. "Contingent Obligation" shall mean, as to any specified Person, any obligation of such Person arising under, pursuant to or derived from any derivatives transactions or guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (subject to any limitation therein) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Contract" shall mean any agreement, contract, commitment, instrument or other binding arrangement or understanding, whether written or oral. "Conversion Date" shall have the meaning set forth in Section 8.3 hereof. "Conversion Event" shall mean any Event of Default (after giving effect to the applicable cure, if any). "Conversion Price" shall have the meaning set forth in Section 8.2 hereof. "CNA" shall mean American Casualty Company of Reading, Pennsylvania. "CNA Restructuring Agreement" shall mean that certain agreement by and between the Company and CNA in the form of Exhibit A hereto. "Date Data" shall mean any data of any type that includes date information or which is otherwise derived from, dependent on or related to date information. "Date-Sensitive System" shall mean any software, microcode or hardware system or component, including any electronic or electronically controlled system or component, that processes any Date Data and that is installed, in development or on order by the Company or any of its Subsidiaries for its internal use, or that the Company or any of its Subsidiaries sells, leases, licenses, assigns or otherwise provides, or the provision or operation of which the Company or any of its Subsidiaries provides the benefit, to its customers, vendors, suppliers, affiliates or any other third party. "Deadline" shall have the meaning given to such term in Section 8.8 hereof. "DFS" shall mean Deutsche Financial Services. "DFS Claims" shall mean the claims of DFS relating to the obligations of the Company with respect to debts owed by NewCom to DFS and guaranteed by the Company. "Disclosure Materials" shall mean, collectively, the exhibits and schedules to this Secured Note and the other Transaction Documents furnished by or on behalf of the Company. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA as in effect on the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" (i) within the meaning of Section 414(b), (c), (m) or (o) of the Code or (ii) as a result of the Company or a Subsidiary of the Company being or having been a general partner of such person. "Event of Default" shall have the meaning set forth in Section 5 hereof. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended from time to time. "Exchange Agreement" shall mean that certain Exchange Agreement of even date herewith executed and delivered by the Company, the Agent and the Funds, as the same may be amended, modified or supplemented. "Execution Date" shall mean the date of this Secured Note. "Existing Indebtedness" shall have the meaning given to such term in Section 2.11 hereof. "Existing Liens" shall have the meaning given to such term in Section 4.1(c) hereof. "Existing Secured Indebtedness" means Existing Indebtedness secured by the Existing Liens (other than judgment liens). "Financial Statements" shall have the meaning given to such term in Section 2.7(a) hereof. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Funds" shall mean Infinity Investors Limited, Global Growth Limited, Glacier Capital Limited and Summit Capital Limited. "GAAP" shall mean generally accepted accounting principles in the United States consistently applied during a relevant period. "GSS" shall mean GSS Array Technologies Public Company Limited. "Guarantee" shall mean any guarantee or other Contingent Obligation (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (i) any endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (ii) any Contract (x) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (y) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (z) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy an obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. "Guarantor" shall mean each Subsidiary of the Company executing the Guaranty or otherwise made a party thereto in accordance with the terms thereof. "Guaranty" shall mean that certain Guaranty of even date herewith executed and delivered by the Guarantors and the Agent, as the same may be amended, modified or supplemented. "Holder" shall have the meaning given to such term in the first paragraph of this Secured Note. "Indebtedness" shall mean, as to any specified Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person (x) evidenced by any notes, bonds, debentures or similar instruments made or issued by such Person, (y) for borrowed money or (z) for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person, (iii) all liabilities secured by any Lien upon any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized in accordance with GAAP under leases under which such Person is the lessee and (v) all Contingent Obligations and Guarantees of such Person. "Independent Director" shall mean a director of the Company who has no relationship to the Company that may interfere with the exercise of such individual's independence from the Company or its management. For purposes hereof, "relationship" shall include, without limitation, (i) being employed by the Company or any of its Affiliates at any time during the year in which such individual was elected to the Board of Directors of the Company or at any time during any of the three calendar years preceding the year of such election, (ii) accepting any compensation from the Company or any of its Affiliates other than compensation for board service or benefits under a tax-qualified retirement plan, (iii) being a member of the immediate family of an individual who at any time during the year in which such director was elected to the Board of Directors of the Company is, or has been at any time during any of the three calendar years preceding the year of such election, employed by the Company or any of its Affiliates as an executive officer, (iv) being a partner in, or a controlling shareholder or an executive officer of, any for-profit organization to which the Company or any of its Affiliates made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities) that exceed five percent (5%) of such organization's consolidated gross revenues for that year, or $200,000, whichever is more, at any time during any of the three calendar years preceding the year of election of the director to the Company's Board of Directors, and (v) being employed as an executive of another company where any of the Company's executives serve on such other company's compensation committee. "Interest" shall have the meaning given to such term in the first paragraph of this Secured Note. "Isosceles" shall mean Isosceles Fund Ltd. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Material Adverse Effect" shall mean, with respect to the Company and its Subsidiaries taken as a whole, any material adverse effect on the ability of the Company or the Subsidiaries to perform any of their obligations under any Transaction Document. "Maturity Date" shall have the meaning given to such term in the first paragraph of this Secured Note. "Merger" shall have the meaning set forth in Section 8.6(c) hereof. "NEC" shall mean NEC Technologies, Inc., a Delaware corporation. "NewCom" shall mean NewCom, Inc., a Delaware corporation. "Non-Core Assets" shall mean those assets and properties of the Company or any of its Subsidiaries which are not used in connection with, or related to, directly or indirectly, the AuraGen business of the Company or any aspect thereof, including, without limitation, the capital stock of any Subsidiary so long as neither such Subsidiary nor any of its assets or properties are used directly or indirectly in the conduct of the AuraGen business or any aspect thereof. "Notice of Conversion" shall have the meaning set forth in Section 8.1 hereof. "Obligations" shall mean all present and future obligations, liabilities and other amounts owing to the Holder pursuant to this or any other Secured Note or any other Transaction Document. "Option" shall mean any subscription, option, warrant, right, security, Contract, commitment, understanding, or stock appreciation, phantom stock option, profit participation or arrangement by which the Company is bound to issue any additional shares of its capital stock or rights pursuant to which any Person has a right to purchase shares of the Company's capital stock. "Order" shall mean any decree, order, judgment, injunction, rule, ruling, Lien, voting right, or consent of or by an Authority. "OSHA" shall mean the Occupational Safety and Health Administration. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permits" shall mean all permits, licenses, registrations, certificates, Orders or approvals from any Authority or other Person (including, without limitation, those relating to the occupancy or use of owned or leased real property) issued to or held by the Company. "Permitted Liens" shall have the meaning given to such term in Section 4.1 hereof. "Person" shall mean an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA which is maintained or contributed to by (or to which there is an obligation to contribute of) the Company or a Subsidiary of the Company or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Company, or a Subsidiary of the Company or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Preferred Stock" shall have the meaning given to such term in Section 3.15 hereof. "Proprietary Rights" shall mean all (i) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility, model, certificate of invention and design patents, patent applications, registrations and applications for registrations, (ii) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, (iii) copyrights and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data and documentation, (vi) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (vii) other proprietary rights relating to any of the foregoing and (viii) copies and tangible embodiments thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any prospectus subject to completion, and any such Prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Shares and, in each case, by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Registration Statement" shall mean any registration statement of the Company which covers any of the Shares, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regulation" shall mean any rule, law, code, statute, regulation, ordinance, requirement, announcement or other binding action of or by an Authority. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Restructuring" shall mean the restructuring of the Company's financial affairs. "Rose Glen" shall mean RGC International Investors, LDC, a limited duration company of the Cayman Islands. "SEC Documents" shall have the meaning set forth in Section 2.23 hereof. "Secured Note" shall mean this Secured Note, as the same may be amended, modified or supplemented and any replacement or substitution therefor. "Securities Act" shall mean the United States Securities Act of 1933, as amended from time to time. "Security Agreement" shall mean that certain Security Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Security Documents" shall mean (i) the Security Agreement, (ii) the Stock Pledge Agreement, and (iii) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "Shares" shall mean shares of Common Stock issued to the Holder upon conversion of this Secured Note or exercise of the Warrants. "Stock Pledge Agreement" shall mean that certain Stock Pledge Agreement of even date herewith executed and delivered by the Company and the Agent, as the same may be amended, modified or supplemented. "Subsidiaries" has the meaning given to such term in Section 2.1 hereof; provided, however, that for purposes of this Secured Note and the other Transaction Documents, the term "Subsidiaries" shall not include NewCom. "Taxes" shall mean any taxes, including, without limitation, income, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), stamp, leasing, lease, user, excise, duty, franchise, transfer, license, withholding, payroll, employment, foreign, fuel, excess profits, occupational and interest equalization, windfall profits, severance, and other charges (including interest and penalties). "Trading Day" shall mean (i) a day on which the Common Stock is traded on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (ii) if the Common Stock is not listed or quoted on the Nasdaq Stock Market, Inc. or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Transaction Documents" shall mean and include (i) this Secured Note, (ii) the Security Documents, (iii) the Guaranty, (iv) the Exchange Agreement and (v) all other documents, certificates and instruments executed and delivered in connection with any of the foregoing. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Warrants" shall mean the Warrants of even date herewith to purchase Common Stock at an exercise price of $0.375 per share. "Working Capital Indebtedness" shall mean Indebtedness incurred by the Company for working capital purposes, on commercially reasonable terms, in arm's length transactions and approved in each case by no less than two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) prior to the incurrence thereof. "Year 2000 Compliant" shall mean (i) with respect to Date Data, that such data is in proper format and accurate for all dates in the twentieth and twenty-first centuries, and (ii) with respect to Date-Sensitive Systems, that each such system accurately processes all Date Data, including for the twentieth and twenty-first centuries, without loss or any functionality or performance, including but not limited to calculating, comparing, sequencing, storing and displaying such Date Data (including all leap year considerations), when used as a stand-alone system or in combination with other software or hardware. 1.2. Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Secured Note unless otherwise specified. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Secured Note shall refer to this Secured Note as a whole and not to any particular provision of this Secured Note. (b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP in conformity with those used in the preparation of the financial statements described in Section 3.1 hereof. SECTION 2. Representations and Warranties. In order to induce the Holder to accept this Secured Note, the Company makes the following representations, warranties and agreements, all of which shall survive the issuance and delivery of this Secured Note, with the occurrence of the issuance and delivery of this Secured Note being deemed to constitute a representation and warranty that the matters specified in this Section 2 are true and correct in all material respects on and as of the Execution Date (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date): 2.1. Corporate Status. Each of the Company, Aura Ceramics and AuraSound is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to transact the business in which it is engaged and presently proposes to engage. The Company has no subsidiaries or equity investment in any other Person other than as set forth in Schedule 2.1 hereto (collectively, the "Subsidiaries"), and the only Subsidiaries with assets or property having more than minimal value are Aura Ceramics, AuraSound and Aura Realty. 2.2. Corporate Power and Authority; Enforcement. Each of the Company, Aura Ceramics and AuraSound has the requisite corporate power and authority to execute, deliver and perform the terms and provisions of each Transaction Document to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of such Transaction Document. Each of the Company, Aura Ceramics and AuraSound has duly executed and delivered each Transaction Document to which it is a party, and each such Transaction Document constitutes the legal, valid and binding obligation of the Company, Aura Ceramics and AuraSound enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application (regardless of whether enforcement is sought in equity or at law). 2.3. Capitalization. The authorized, issued and outstanding capital stock of the Company and its Subsidiaries is set forth on Schedule 2.3 hereto (as may be supplemented in accordance with Section 3.19 hereof). No shares of Common Stock are entitled to preemptive or similar rights. Except for the Secured Notes and as otherwise specifically disclosed in Schedule 2.3 hereto, there are no outstanding Options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company, Aura Ceramics nor AuraSound is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter or similar organizational documents. 2.4. Issuance of Secured Note. This Secured Note has been duly and validly authorized, issued and delivered and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms free and clear of all Liens. 2.5. No Violation. Neither the execution, delivery or performance by the Company of this Secured Note or Warrants or of the Company or any of its Subsidiaries of any of the other Transaction Documents nor compliance by any of them with the terms and provisions hereof and thereof, nor the consummation of the transactions contemplated hereby or thereby, will (i) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or other restriction of any court or Authority (including federal and state securities laws and regulations), (ii) conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of, 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, amendment, acceleration or cancellation of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Company or its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement, Contract or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of its property or assets is bound, affected or to which it may be subject (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), or (iii) conflict or be inconsistent with or violate any provision of the certificate of incorporation, bylaws or other charter or similar organizational document (each as amended through the date hereof) of the Company or any of its Subsidiaries. The businesses of the Company and its Subsidiaries have not been, and are not currently being, conducted in violation of any law, ordinance or regulation of any Authority, except for violations which, individually or in the aggregate, do not have, or could not reasonably be expected to have, a Material Adverse Effect. 2.6. Consents and Approvals. No consent, waiver, authorization or order of, or any filing or registration with, any court or other federal, state, local or other governmental Authority or other Person (except (A) as have been obtained or made on or prior to the Execution Date and which remain in full force and effect on such date and (B) for the filing and effectiveness of the Registration Statement referred to in Section 3.14 hereof) is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Transaction Document or (ii) the legality, validity, binding effect or enforceability of any such Transaction Document. 2.7. Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. (a) The audited consolidated year-end balance sheets of the Company for each of the fiscal years ended February 28, 1998 and 1997 and related consolidated statements of income, cash flow and shareholders' equity of the Company and its Subsidiaries for the fiscal years, ended on such dates, copies of which are attached hereto as Schedule 2.7(a) (collectively, the "Financial Statements"), fairly present the financial condition of the Company and its Subsidiaries as of such dates and the consolidated results of the operations of the Company and its Subsidiaries for such fiscal years. All of the foregoing financial statements have been prepared (i) in accordance with GAAP (except as stated therein or in the notes thereto) and (ii) from the books and records of the Company, except that the unaudited financial statements have no notes attached thereto and do not have year-end adjustments (none of which would be recurring). All properties used in the Company's business operations as of each Financial Statement date are reflected in the Financial Statements in accordance with and to the extent required by GAAP. (b) On and as of the Execution Date and after giving effect hereto, the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith, (i) the sum of the tangible and intangible assets, at a fair valuation, of the Company and Aura Ceramics on a stand-alone basis and of the Company and its Subsidiaries taken as a whole will exceed their debts; (ii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole have not incurred and do not intend to incur, and do not believe that they will incur, debts beyond their ability to pay such debts as such debts mature; and (iii) the Company and Aura Ceramics on a stand-alone basis and the Company and its Subsidiaries taken as a whole will have sufficient capital with which to conduct their businesses. The amount of Contingent Obligations at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. A copy of the pro forma consolidated balance sheet of the Company after giving effect hereto, to the Restructuring and to all Indebtedness (including under the Transaction Documents) being incurred or assumed by the Company and its Subsidiaries in connection therewith is attached hereto as Schedule 2.7(b) hereto. (c) Except as fully disclosed in the Financial Statements and Schedule 2.11 hereto, there were as of the Execution Date no Indebtedness, liabilities or obligations with respect to the Company or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent, unliquidated or otherwise, known or unknown to the Company, whether or not due) which, either individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. As of the Execution Date, the Company does not know of any basis for the assertion against it or any of its Subsidiaries of any Indebtedness, liability or obligation of any nature whatsoever that is not fully disclosed in the Financial Statements or Schedule 2.11 hereto which, either individually or in the aggregate, has, or could reasonably be expected to have, a Material Adverse Effect. (d) The projections delivered to the Agent on the Execution Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the projections which are based upon or include information known to the Company to be misleading in any material respect or which fail to take into account material information known to the Company regarding the matters reported therein. The Company believes that the projections are reasonable and attainable, it being recognized by the Holder, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the projections may differ from the projected results and that the differences may be material. 2.8. Ranking. The Obligations under this Secured Note and the other Transaction Documents constitute unconditional secured Indebtedness of the Company and the Guarantors, and (with respect to the Company, Aura Ceramics and AuraSound) rank and will rank (i) at least pari passu in priority of payment and in all other respects with all other present and future secured Indebtedness of such Persons subject to the priority rights of holders of (A) Existing Secured Indebtedness as of the Execution Date as set forth on Schedule 2.8(i)(A) hereto, (B) validly created and fully perfected senior secured Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof incurred by the Company after the Execution Date, and (C) obligations of the Company, Aura Ceramics and AuraSound existing on the Execution Date secured by valid and perfected judgment liens against such Persons as set forth in Schedule 2.8(i)(C) hereto; provided, however, that the Company may supplement such Schedule 2.8(i)(C) to reflect judgment liens validly created and fully perfected through the Execution Date which the Company had no knowledge of and were not identified in UCC certificates set forth in Schedule 2.8(i)(C), and senior to all other Indebtedness of such Persons. 2.9. Litigation; Proceedings. There is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory Authority (federal, state, county, local or foreign) which (A) relates to or challenges the legality, validity or enforceability hereof or of any of the Transaction Documents or of any transaction contemplated hereby or thereby, (B) could, individually or in the aggregate, adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents, or (C) has, or could reasonably be expected to have, a Material Adverse Effect from and after the Execution Date (except for the DFS Claims). 2.10. No Default or Violation. On and as of the Execution Date (except as otherwise provided herein, in the Transaction Documents or as disclosed in Schedule 2.10 hereto), neither the Company nor Aura Ceramics: (i) will be in default under or in violation of any indenture, loan or credit agreement or any other agreement evidencing Indebtedness of the Company or any of its Subsidiaries or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (but not including any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes), (ii) will be in violation of any order of any court, arbitrator, governmental body or Authority, or (iii) will be in violation of any statute, rule or regulation of any Authority, except as could not, in any such case, individually or in the aggregate, (A) adversely affect the legality, validity or enforceability of any transaction contemplated hereby or any of the Transaction Documents, or (B) adversely impair such Person's ability to perform fully on a timely basis its obligations under any of the Transaction Documents or (C) has, or could reasonably be expected to have, a Material Adverse Effect. 2.11. Indebtedness. Schedule 2.11 hereto sets forth a true and complete list (subject to variances not to exceed seven and one-half percent (7 1/2%) in the aggregate) of all Indebtedness (excluding Indebtedness under the Secured Notes and the other Transaction Documents) of the Company, Aura Ceramics, and Aura Realty as of the Execution Date and which is to remain outstanding (the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof, accrued interest in respect thereof and the name of any Person which directly or indirectly guaranteed such debt. 2.12. True and Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund (including, without limitation, all information contained in the Transaction Documents) for purposes of or in connection with this Secured Note, any other Transaction Document or any transaction contemplated hereby or thereby is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Company or any of its Subsidiaries in writing to the Agent or any Fund will be true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. There is no fact which the Company has not disclosed to the Agent or the Funds herein and of which the Company, its Subsidiaries, or any of their respective officers, directors or executive employees is aware and which has, or could reasonably be expected to have, a Material Adverse Effect. 2.13. Tax Returns and Payments. Except as disclosed in Schedule 2.13 hereto, each of the Company, Aura Ceramics, AuraSound and Aura Realty (i) has filed all income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on its financial statements in accordance with GAAP, and (ii) has at all times paid, or has provided adequate reserves (in the good faith judgment of the management of such Person) for the payment of, all income taxes applicable for all prior fiscal years and for the current fiscal year to date. Except as disclosed in Schedule 2.13 hereto, there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Company, Aura Ceramics, AuraSound, or Aura Realty, threatened by any Authority regarding any taxes relating to such Person. As of the Execution Date, neither the Company, Aura Ceramics, AuraSound, nor Aura Realty has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of such Person, or is aware of any circumstances that would cause the taxable years or other taxable periods of such Person not to be subject to the normally applicable statute of limitations. 2.14. Compliance with ERISA. (a) Schedule 2.14 hereto sets forth each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been made; neither the Company nor any Subsidiary of the Company nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Company or any Subsidiary of the Company or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Company and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the Execution Date, would not exceed $100,000; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Company, any Subsidiary of the Company, or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Company or any Subsidiary of the Company or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Company and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. (b) Neither the Company nor any of its Subsidiaries has, or has ever had, a Foreign Pension Plan. 2.15. Compliance with Law and Applicable Government Regulations. Each of the Company and its Subsidiaries is presently in compliance with regard to its operations, practices, real property, plants, structures, machinery, equipment and other property, and all other aspects of its business, with all applicable Regulations and Orders, including, but not limited to, all Regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, Taxes, consumer protection, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety, except for such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. There are no Claims pending or, to the Company's knowledge, threatened, nor has the Company received any written notice regarding any violations of any Regulations or Orders enforced by any Authority including any requirement of OSHA or any pollution and environmental control agency (including air and water) which have, or could reasonably be expected to have, a Material Adverse Effect. 2.16. Security Documents. The provisions of each of the Security Documents will, on the Closing Date, create in favor of the Agent, for the benefit of the Funds, as security for the Obligations hereunder and under all other Exchange Documents, a valid security interest in all of the right, title and interest of the relevant assignor or pledgor thereunder in and to the Collateral described therein and, with respect to the Company, Aura Ceramics and AuraSound, superior to all Liens subject to the priority rights of holders of Permitted Liens of the types described in clauses (c) and (i) of Section 4.1 (and any extension, renewal or replacement thereof to the extent permitted by Section 4.1(k)). 2.17. Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the United States Investment Company Act of 1940, as amended. 2.18. Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. 2.19. Labor Relations. Each of the Company and its Subsidiaries is on the Execution Date in compliance with all federal, state and local Regulations or Orders affecting employment and employment practices applicable to each such Person, including terms and conditions of employment and wages and hours, except for certain failure to make salary or other compensation payments to management and such non-compliances which, individually or in the aggregate, would not have, nor could reasonably be expected to have, a Material Adverse Effect. The Company and its Subsidiaries have on the Execution Date no collective bargaining agreements and there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization. Neither the Company nor any of its Subsidiaries is engaged on the Execution Date in any unfair labor practice that has, or could reasonably be expected to have, a Material Adverse Effect. There is as of the Execution Date (A) no unfair labor practice complaint pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, (B) no strike, labor dispute, slowdown or stoppage pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries and (C) to the best knowledge of the Company, no union representation question existing with respect to the employees of the Company or any of its Subsidiaries and, to the best knowledge of the Company, no union organizing activities are taking place, except (with respect to any matter specified in clause (A), (B) or (C) above, either individually or in the aggregate) which does not have, nor could reasonably be expected to have, a Material Adverse Effect. 2.20. Proprietary Rights, Licenses, Franchises and Formulas. Each of the Company and its Subsidiaries owns all Proprietary Rights, licenses, franchises and formulas, or rights with respect to any of the foregoing, and has obtained assignments of all leases and other rights of whatever nature necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, has, or could reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that the Company or any of its Subsidiaries infringes upon the asserted rights of any other Person under any intellectual property, except for claims which could not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. To the best knowledge of the Company, no claim is pending that such intellectual property owned or licensed by the Company or any of its Subsidiaries or which such Person otherwise has the right to use is invalid and unenforceable, except for claims which could not, individually or in the aggregate, have, or reasonably could be expected to have, a Material Adverse Effect. The consummation of the transactions contemplated hereby or by any of the other Transaction Documents will not alter or impair any rights of the Company or any of its Subsidiaries to use any intellectual property in a way that would not, individually or in the aggregate, have, or could not reasonably be expected to have, a Material Adverse Effect. The Company is the legal and beneficial owner of all right, title and interest in, to, and under the Proprietary Rights with respect to AuraGen, and the Company has not entered into any agreement or understanding with any Person concerning any sale, lease, transfer, option, license, assignment or other disposition of such Proprietary Rights. 2.21. Certain Fees. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby or by any of the other Transaction Documents. 2.22. Private Offering. The offer, issuance and sale of this Secured Note are exempt from registration under the Securities Act or any state securities or blue sky law. Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of this Secured Note under the Securities Act) which might subject the offering, issuance or sale of this Secured Note to the registration requirements of the Securities Act. 2.23. SEC Documents. Attached hereto as Schedule 2.23 is a true and complete list of all forms, reports and documents required to be filed by the Company and its Subsidiaries under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the "SEC Documents"), which the Company has failed to file as of the Execution Date. 2.24. Directors and Management Compensation. Schedule 2.24 hereto sets forth a list of all officers, directors and key employees (meaning those earning more than $50,000.00 annually including all bonuses and non-cash consideration) of the Company and its Subsidiaries, together with a description of their respective positions and total compensation and a list of all other outstanding obligations owed by the Company to each of such Persons. On and as of the Execution Date, the Company and its Subsidiaries will not have any liability to any of their employees, officers or directors (except as set forth in Schedule 2.24(i)) other than for the payment of salaries and director fees to be paid in the ordinary course of business. 2.25. Absence of Certain Changes. Since November 30, 1998, except as fully disclosed on Schedule 2.25 hereto or otherwise provided in this Secured Note, there has not been any (a) material adverse change in the business, operations, properties, assets, condition (financial or otherwise), results, plans, strategies or prospects of the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect; (b) damage, destruction or loss, whether covered by insurance or not, which has, or could reasonably be expected to have, a Material Adverse Effect with regard to the Company's or any of its Subsidiaries' property and business; (c) declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the Company's or any of its Subsidiaries' capital stock, or any redemption or other acquisition of such stock by the Company or any of its Subsidiaries; (d) increase in the compensation payable to or to become payable by the Company or any of its Subsidiaries to its officers, Insiders or employees (other than in the ordinary course) or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers, Insiders or employees (other than in the ordinary course) or any Affiliate of the Company or any of its Subsidiaries; (e) entry into any material Contract not in the ordinary course of business, including, without limitation, any borrowing or capital expenditure; (f) change by the Company or any of its Subsidiaries in accounting methods or principles; or (g) consensual Lien placed on any property of the Company or any of its Subsidiaries other than Permitted Liens. 2.26. Year 2000 Compliance. As of the Execution Date, except as set forth on Schedule 2.26 hereto, all Date Data and Date-Sensitive Systems, if any, of the Company and its Subsidiaries are Year 2000 Compliant. The Company and its Subsidiaries have obtained written representations or assurances from each entity that (x) provides Date Data to the Company or any of its Subsidiaries, or (y) processes in any way Date Data for the Company or any of its Subsidiaries or otherwise provides any material product or service to the Company or any of its Subsidiaries that is dependent on Year 2000 Compliant Date Data or a Year 2000 Compliant Date-Sensitive System, that all of such entity's Date Data and Date-Sensitive Systems that are used for, or on behalf of, the Company or any of its Subsidiaries are Year 2000 Compliant. 2.27. Capital Expenditures and Investments. Each Contract of the Company and its Subsidiaries for capital expenditures and investments involving $50,000 or more entered into on or after November 30, 1998 is fully disclosed in Schedule 2.27 hereto. 2.28. Dealings with Affiliates. Schedule 2.28 hereto sets forth a complete and accurate list, including the parties, of all oral or written Contracts to which the Company and its Subsidiaries are, will be or have been a party, at any time from November 30, 1998 to and including the Execution Date, and to which any one or more of their Affiliates is also a party. Except as set forth on Schedule 2.28 hereto, since November 30, 1998, the Company and its Subsidiaries have not made any payments, loaned any funds or property or made any credit arrangement with any Affiliate or employee of the Company or any of its Subsidiaries except for the payment of employee salaries and director compensation in the ordinary course of business. 2.29. Solicitation Materials. The Company did not solicit any offer to buy or sell this Secured Note by means of any form of general solicitation or advertising. 2.30. Aura Ceramics. On and as of the Closing Date, the Company has not entered into any binding agreement for the sale, lease or other disposition of all or substantially all of the assets of Aura Ceramics. 2.31. Aura Tech. Aura Tech, Inc. has no assets and has never owned any assets. SECTION 3. Affirmative Covenants. The Company covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 3.1. Information Covenants. It will furnish to the Agent for distribution to the Holder and each of the Funds: (a) Quarterly Financial Statements. As soon as available and in any event within 45 days after the close of the first three fiscal quarters in each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal quarter and the related consolidated statements of income and retained earnings and statement of cash flows, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be in reasonable detail and certified by the Chief Financial Officer of the Company to the effect that such financial statements have been prepared in accordance with GAAP and that they fairly present the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes and (ii) management's discussion and analysis of the important operational and financial developments during the fiscal quarter and year-to-date periods in the form customarily prepared by management or as otherwise agreed with the Agent. (b) Annual Financial Statements. As soon as available and in any event within 90 days after the close of each fiscal year of the Company following the Execution Date, (i) the consolidated balance sheet of the Company as at the end of such fiscal year and the related consolidated statements of income and retained earnings and statement of cash flows for such fiscal year, in each case setting forth comparative budgeted figures for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year, and certified by a firm of independent certified public accountants of recognized international standing as shall be reasonably acceptable to the Agent, in each case to the effect that such financial statements have been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Company and its Subsidiaries as of the dates indicated and the results of their operations and cash flows, and (ii) management's discussion and analysis of the important operational and financial developments during such fiscal year, in the form customarily prepared by management or as otherwise agreed with the Agent. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 3.1(a) or (b), a certificate of the Chief Financial Officer of the Company to the effect that, to the best of such officer's knowledge, no Event of Default has occurred and is continuing or, if any Event of Default has occurred and is continuing, specifying the nature and extent thereof. (d) Notice of Default, Judgment or Litigation. From and after the Execution Date, promptly upon, and in any event within 10 Business Days after the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the Company or any of its Subsidiaries obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes an Event of Default, (ii) any judgment by or against the Company or any of its Subsidiaries with respect to any material Indebtedness, (iii) any notice of default given to the Company or any of its Subsidiaries in respect of any Existing Secured Indebtedness, and (iv) any litigation or governmental investigation or proceeding commenced (x) against the Company or any of its Subsidiaries which has, or could reasonably be expected to have, a Material Adverse Effect, (y) with respect to any material Indebtedness of the Company or any of its Subsidiaries or (z) with respect to any Transaction Document or any transaction contemplated hereby or thereby. (e) Other Reports and Filings. Promptly after the filing or delivery thereof, copies of all financial information, proxy materials, reports and other material filings, if any, which the Company or any of its Subsidiaries shall publicly file with any Authority (including, without limitation, the Commission) and with any international or national securities exchange (including, without limitation, the Nasdaq Stock Market, Inc.). (f) Year 2000 Compliance. It will promptly notify the Agent in the event that it discovers or determines that any computer application (including, without limitation, those of its suppliers and vendors) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure does not have, nor could reasonably be expected to have, a Material Adverse Effect. (g) Other Information. From time to time, such other information or documents (financial or otherwise) as the Agent, the Holder or any Fund may reasonably request, including, without limitation, the quarterly financial statements of any of the Company or any of its Subsidiaries prepared in accordance with the provisions of Section 3.1(a). 3.2. Books, Records and Inspections. It will, and will cause each of its Subsidiaries to keep proper books of record and accounts in which full, true and correct entries are made (and with respect to the Company, Aura Ceramics and Aura Realty in conformity with GAAP) and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Company will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent, the Holder or any Fund to visit and inspect, under guidance of officers of the Company or such Subsidiary, any of the properties of the Company or such Subsidiary, and to examine the books of account of the Company or such Subsidiary and discuss the affairs, finances and accounts of the Company or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all upon reasonable prior notice and at such reasonable times and intervals and to such reasonable extent as the Agent, the Holder or such Fund may reasonably request. 3.3. Corporate Existence and Franchises. Within sixty (60) days following the Execution Date, it will, and will cause Aura Ceramics and AuraSound to, do or cause to be done all things necessary to effect, preserve and keep in full force and effect its existence and its good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualification. 3.4. Compliance with Statutes, etc. It will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental Authorities, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect. 3.5. Compliance with Environmental Laws. It will comply, and will cause each of its Subsidiaries to comply, in all material respects with all environmental laws applicable to the ownership or use of its real property now or hereafter owned or operated by the Company or any of its Subsidiaries, will promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such real property free and clear of any Liens imposed pursuant to such environmental laws. 3.6. ERISA. As soon as possible and, in any event, within ten (10) days after the Company, any Subsidiary of the Company or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Company will deliver to each of the Funds a certificate of the chief financial officer of the Company setting forth the full details as to such occurrence and the action, if any, that the Company, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given or filed by the Company, such Subsidiary, the Plan administrator or such ERISA Affiliate to or with the PBGC or any other government agency, or a Plan participant and any notices received by the Company, such Subsidiary or ERISA Affiliate from the PBGC or any other government agency, or a Plan participant with respect thereto: that a Reportable Event has occurred (except to the extent that the Company has previously delivered to the Funds a certificate and notices (if any) concerning such event pursuant to the next clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to such Plan within the following 30 days; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan or Foreign Pension Plan has not been timely made; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that the Company, any Subsidiary of the Company or any ERISA Affiliate will or may incur any liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that the Company or any Subsidiary of the Company may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan or any Foreign Pension Plan. The Company will deliver to each of the Funds copies of any records, documents or other information that must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA. The Company will also deliver to each of the Funds a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Funds pursuant to the first sentence hereof, copies of annual reports and any records, documents or other information required to be furnished to the PBGC or any other government agency, and any material notices received by the Company, any Subsidiary of the Company or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be delivered to the Funds no later than ten (10) days after the date such annual report has been filed with the Internal Revenue Service or such records, documents and/or information has been furnished to the PBGC or any other government agency or such notice has been received by the Company, the Subsidiary or the ERISA Affiliate, as applicable. The Company and each of its applicable Subsidiaries shall ensure that all Foreign Pension Plans administered by it or into which it makes payments obtains or retains (as applicable) registered status under and as required by applicable law and is administered in a timely manner in all respects in compliance with all applicable laws except where the failure to do any of the foregoing would not be reasonably likely to result in a material adverse effect upon the business, operations, condition (financial or otherwise) or prospects of the Company or any Subsidiary of the Company. 3.7. End of Fiscal Years; Fiscal Quarters. It will, and will cause each of its Subsidiaries to, provide the Agent prior written notice with respect to the change of their respective fiscal years and fiscal quarters. 3.8. Performance of Obligations. It will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement, loan agreement and each other material agreement, Contract or instrument by which it or any of its properties or assets is bound, except such non-performances which, individually or in the aggregate, do not have, nor could reasonably be expected to have, a Material Adverse Effect. 3.9. Payment of Taxes. It will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 4.1; provided, that neither the Company nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP. 3.10. CNA Restructuring Agreement. No later than the date which is sixty (60) days following the Execution Date, the Company and CNA shall have executed and delivered the CNA Restructuring Agreement and all conditions to the CNA Restructuring Agreement shall have been satisfied and not waived to the satisfaction of the Funds unless otherwise agreed to in writing by the Funds. 3.11. DFS Claims and Isosceles Indebtedness. It will give the Agent prompt written notice (but in no event later than three Business Days) of (i) any settlement, liquidation, arbitral award, judgment or any other resolution of the DFS Claim and any action taken by or for the benefit of DFS to enforce any such award, judgment or other resolution (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets) or (ii) any settlement, liquidation, arbitral award, judgment or any other resolution of the Indebtedness of the Company owed to Isosceles and any action taken by or for the benefit of Isosceles to enforce such Indebtedness (including, without limitation, by way of levy, attachment, garnishment, foreclosure, or possession of the Company's assets). 3.12. Certain Corporate Matters. (a) No later than the date which is 60 days following the Execution Date, the Board of Directors of the Company shall be composed of seven directors, not less than four of whom must be Independent Directors; (b) No later than August 31, 2000, the Board of Directors of the Company shall be composed of nine directors, not less than five of whom must be Independent Directors; and (c) No later than the date which is 30 days following the Execution Date, the Company shall file with the Commission and such other authorities as applicable law may require proxy materials with respect to the matters provided in clauses (a) and (b) above. 3.13. Issuance of Shares. No later than the date which is 90 days following the Execution Date, the Shares shall have been duly authorized for issuance in accordance with the terms of this Secured Note and the other Transaction Documents. 3.14. Registration Statement. No later than the date which is 90 days following the Execution Date, the Company shall have filed with the Commission a Registration Statement with respect to the resale of the Shares. The Company shall use its best efforts to (i) cause such Registration Statement to become effective as soon as possible thereafter and (ii) maintain such Registration Statement's effectiveness. 3.15. Additional Equity. No later than the date which is 180 days following the Execution Date, the Company shall have received, in addition to the New Equity, equity contributions in cash in an amount of not less than $1,600,000 in exchange for new Common Stock. The Company shall be permitted to issue preferred stock ("Preferred Stock") strictly in accordance with the term sheet annexed hereto as Schedule 3.15 as authorized by 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof); provided, however, that the certificate of designation with respect to the Preferred Stock shall not be filed without the prior written consent of the Agent (which shall not be unreasonably withheld) to confirm the provisions in Schedule 3.15. 3.16. Supplemental Information. From time to time, the Company shall promptly supplement or amend information previously delivered to the Funds with respect to any matter hereafter arising which, if existing or occurring at the Execution Date, would have been required to be set forth or disclosed; provided, however, that such supplemental information shall not be deemed to be an amendment to any schedule or exhibit hereto. 3.17 Covenant to Guarantee Obligations and Give Security. In the event that the Company or any of its Subsidiaries shall create or acquire a subsidiary, such Person shall, at its expense: (a) within 10 days after the date of such creation or acquisition, cause each such new Subsidiary to duly execute and deliver to the Agent (i) a Guaranty substantially in the form of Exhibit B hereto, and (ii) such Security Documents as the Agent may request; (b) within 15 days after the date of such creation or acquisition, deliver to the Agent, upon the request of the Agent in its sole discretion, a favorable opinion, addressed to the Agent and each of the Funds, of counsel for such Guarantor acceptable to the Agent, as to such matters as the Agent may reasonably request; and (c) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such actions as the Agent may deem necessary or reasonably desirable in order to obtain the full benefits of such Guaranty and Security Documents. For purposes of this Section 3.17, "subsidiary" shall mean, with respect to the Company or any Subsidiary, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more subsidiaries of such Person, and (ii) any partnership, association, joint venture or other entity in which such Person and/or one of more subsidiaries of such Person has more than a 50% equity interest at the time. 3.18. Further Assurances. The Company will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver, or cause to be made, executed, endorsed, acknowledged, filed and/or delivered, to the Agent from time to time such vouchers, invoices, schedules, conveyances, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral as the Agent may reasonably require in order to provide the Agent with the Liens and rights granted under the Security Documents with respect to the Collateral. 3.19. Guarantors. The Company will supplement Schedule 2.3 hereof within 10 days of the Closing to reflect the authorized, issued and outstanding capital stock of Aura Medical Systems, Inc. and Electrotec Productions, Inc. 3.20. Bank Accounts. The Company will give notice to the Agent subject to and in accordance with Section 2.5 of the Security Agreement regarding the location of all of its bank accounts (including account numbers). 3.21. Non-Recourse Notes. Within forty-five (45) days of the Closing Date, at least fifty percent (50%) of the Indebtedness owing to the holders of the 8% Secured Convertible Non-Recourse Note Due 2008 listed in Schedule 4.1(l) shall have been converted into Common Stock of the Company. 3.22. Guzik Opinion. The legal opinion of Guzik & Associates (Exhibit H to the Exchange Agreement) shall be supplemented to cover the due execution, authorization and delivery of the Transaction Documents by the Guarantors to which they are a party. 3.23. Stock Certificates. The Company shall deliver stock certificates and stock voting powers for the Guarantors to the Agent within 10 days of the Closing Date. SECTION 4. Negative Covenants. The Company hereby covenants and agrees that on and after the Execution Date and until this Secured Note has been paid in full and is no longer outstanding: 4.1. Liens. It will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any of the property or assets (real or personal, tangible or intangible, including, without limitation, Proprietary Rights) of the Company or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to the Company or any of its Subsidiaries), or assign any right to receive income or permit the filing of any notice of Lien under any recording or notice statute; provided that the provisions of this Section 4.1 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Company or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company or any of its Subsidiaries or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; (c) Liens in existence on the Execution Date which are listed, and the property subject thereto described, in Schedule 4.1(c) hereto (the "Existing Liens"), but only to the respective date, if any, set forth in such Schedule 4.1(c) for the removal, replacement and termination of any such Liens; (d) Liens created pursuant to the Security Documents; (e) easements, rights-of-way, restrictions, encroachments and other similar charges or encumbrances, and minor title deficiencies, in each case not securing Indebtedness and not materially interfering with the conduct of the business of the Company or any of its Subsidiaries; (f) statutory and common law landlords' liens under leases to which the Company or any of its Subsidiaries is a party; (g) Liens incurred in the ordinary course of business in connection with workers' compensation claims, unemployment insurance and social security benefits and Liens securing the performance of bids, tenders, leases and contracts in the ordinary course of business, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money), provided that the aggregate outstanding amount of obligations secured by Liens permitted by this clause (g) (and the value of all cash and property encumbered by Liens permitted pursuant to this clause (g)) shall not at any time exceed $100,000; (h) Liens arising after the Execution Date solely by virtue of any statutory provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company or any of its Subsidiaries, and (B) such deposit account is not intended by the Company or any of its Subsidiaries to provide collateral to the depository institution (except to Imperial Bank); (i) Liens in connection with Indebtedness permitted under Sections 4.5(c) and 4.5(d) hereof; (j) Liens subordinate to the Liens created pursuant to the Security Documents; provided that (A) any such consensual Lien shall only be created, assumed or suffered to exist if each Person in favor of whom such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent and (B) any such statutory, judgment or other nonconsensual Lien against the Company and Aura Ceramics (including, without limitation, any judgment liens which are not Permitted Liens pursuant to Section 4.1(c)) shall only be created, assumed, or suffered to exist if the total amount of such Liens in the aggregate (excluding the DFS Claims) shall not at any time exceed $1,066,666.67; and (k) any extension, renewal or replacement of the foregoing Liens; provided, however, that the Liens permitted hereunder shall not cover any additional Indebtedness or property (other than like property substituted for property covered by such Lien) except as otherwise permitted pursuant to Section 4.5(c). In connection with the granting of Liens of the type described in Section 4.1(i) by the Company or any of its Subsidiaries, the Agent is hereby authorized by the Funds and shall take any actions reasonably requested by the Company in writing in connection therewith (including, without limitation, by executing appropriate lien subordination agreements in favor of the holder or holders of such Liens solely with respect to the item or items of equipment or other assets subject to such Liens). Notwithstanding the foregoing, any Permitted Liens (other than Existing Liens or Liens under Sections 4.1(d)) upon or with respect to Proprietary Rights and other general intangibles of the Company and its Subsidiaries shall only be created, assumed or suffered to exist to the extent any such Lien shall be subordinate to the Liens created pursuant to the Security Documents and each Person in favor of which such Lien is created shall, contemporaneously or prior to the creation of such Lien, execute and deliver to the Agent a lien subordination agreement to that effect reasonably satisfactory to the Agent. 4.2. Proprietary Rights. Except with respect to Non-Core Assets in accordance with the terms hereof, the Company will not, and will not permit any of its Subsidiaries to, nor shall any such Person allow any other Person to, sell, assign or transfer any interest in any of the Proprietary Rights of the Company, or file or record any consensual Lien, assignment or other instrument, certificate or document having a similar effect with respect to any of the Proprietary Rights of the Company or any of its Subsidiaries with the U.S. Patent and Trademark Office. Nothing herein shall be deemed or construed as an argument or admission that the Liens upon the Proprietary Rights of the Company and its Subsidiaries created pursuant to the Security Documents are impaired or unperfected. 4.3. Consolidation, Merger, Purchase or Sale of Assets, etc. It will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of their property or assets, or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person (or agree to do any of the foregoing at any future time), except that: (a) the Company, Aura Ceramics and AuraSound, taken as a whole, may lease (as lessee) (i) real property in an amount no greater than $1,200,000 in the aggregate in any 12 month period or (ii) personal property in an amount no greater than $500,000 in the aggregate in any 12 month period, or create a capitalized lease obligation; (b) the Company, Aura Ceramics and AuraSound may make sales of inventory in the ordinary course of business and consistent with past practices; (c) the Company and its Subsidiaries may sell, lease, or otherwise dispose of equipment or materials with a value of no greater than $25,000 in the aggregate which, in the reasonable judgment of such Person, are obsolete, worn-out or otherwise no longer useful in the conduct of such Person's business and the Funds shall take such actions as may reasonably be requested by the Company in writing in connection therewith (including, if necessary, executing an appropriate release of the Liens under the Security Documents solely with respect to such equipment and materials); (d) so long as no Event of Default shall occur and has not been cured in accordance with the terms hereof, the Company and its Subsidiaries may sell, lease, or otherwise dispose of Non-Core Assets, including all of the Company's stock of any of its Subsidiaries, at fair value (as determined by no less than 2/3 of the Board of Directors of the Company composed in the manner set forth in Section 3.12(a) or (b) hereof) in arm's length transactions and the Funds shall take such actions as may be reasonably requested by the Company in writing in connection therewith (including, if necessary, by executing an appropriate release solely with respect to such Non-Core Assets of the Liens under the Security Documents and the Obligations, including indemnification obligations, under the Guaranty); (e) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its property (upon voluntary liquidation or otherwise) to the Company; and (f) any Guarantor may merge with and into the Company. Notwithstanding anything to the contrary contained in this Section 4.3, neither the Company nor any of its Subsidiaries may convey, sell, lease, or otherwise dispose of any property having more than minimal value to any existing or future Subsidiary of the Company without the Agent's prior written consent. Neither the Company nor any of its Subsidiaries shall transfer or deliver any Instrument or Investment Property (as defined in the Security Agreement) to any Person (other than the Agent) except as otherwise expressly permitted by the Security Agreement or this Secured Note. 4.4. Dividends. (a) It will not declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Company now or hereafter outstanding (or any options or warrants issued by the Company with respect to its capital stock). (b) Except as otherwise provided in this Secured Note, it will not permit any of its Subsidiaries to declare or pay any dividends, or return any capital, to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock of such Subsidiary now or hereafter outstanding (or any options or warrants issued by such Subsidiary with respect to its capital stock), except that any Subsidiary may pay cash dividends to the Company, including, without limitation, in respect of any sales of Non-Core Assets in accordance with the terms hereof. 4.5. Indebtedness. It will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Secured Note and the other Transaction Documents; (b) Existing Indebtedness; (c) Working Capital Indebtedness incurred by (i) the Company only in connection with the AuraGen business, or (ii) Aura Ceramics only in connection with its existing business as of the Execution Date; (d) Indebtedness incurred by (i) the Company in connection with capital expenditures related only to the AuraGen business in an aggregate amount not to exceed at any one time outstanding $1,000,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date or (ii) Aura Ceramics in connection with capital expenditures related only to its existing business as of the Execution Date not to exceed at any one time outstanding $500,000 within one year following the Execution Date and such amount as determined by two-thirds (2/3) of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) in arm's length transactions at any time after the first anniversary of the Execution Date; (e) additional unsecured trade Indebtedness incurred by the Company related only to the AuraGen business in the ordinary course in arm's length transactions in an aggregate principal amount not to exceed $2,000,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(e) shall be subordinate to the Secured Notes; and (f) additional unsecured trade Indebtedness incurred by a Subsidiary in the ordinary course in an aggregate principal amount not to exceed $500,000 at any one time outstanding; provided that any Indebtedness permitted under this Section 4.5(f) shall be subordinate to the Secured Notes; provided that the foregoing Indebtedness shall only be incurred if immediately prior to such incurrence and after giving effect thereto, no Event of Default shall have occurred which has not been cured in accordance with the terms of this Secured Note. 4.6. Transactions with Affiliates. It will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, with any Affiliate of any of them, other than in the ordinary course of business and on terms and conditions substantially as favorable to the Company or such Subsidiary as would reasonably be obtained by the Company or such Subsidiary at that time in a comparable arm's length transaction with a Person other than an Affiliate. 4.7. Limitation on Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements. Except as otherwise permitted by this Secured Note, it will not, and will not permit any of its Subsidiaries to, (i) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness (including, without limitation, the Restructured NEC Debt and all Restructured Trade Debts) or of any agreement (including, without limitation, any purchase agreement, indenture, loan agreement or security agreement) relating thereto other than any amendments or modifications to the Existing Indebtedness which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, (ii) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or any prepayment or redemption of, any Indebtedness, except that the Company may make such payments or redemptions in the aggregate amount of $500,000 in any 12 month period so long as no Event of Default shall have occurred (except for the DFS Claims), (iii) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness or any agreement relating thereto, other than amendments or modifications which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents, or (iv) amend, modify or change their certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation) or bylaws (or equivalent organizational documents), or any agreement entered into by any of them, with respect to their capital stock (including any shareholders' agreement), or enter into any new agreement with respect to their capital stock, other than any amendments, modifications or changes to this clause (iv) or any such new agreements pursuant to this clause (iv) which do not in any way materially and adversely affect the ability of the Company or its Subsidiaries to perform their obligations under the Transaction Documents; provided, however, that the Company may (A) enter into a settlement and payment of unsecured Indebtedness of the Company owed to GSS as of the Execution Date in an aggregate amount not to exceed $4,000,000, (B) enter into a settlement and payment of the DFS Claims owed to DFS as of the Execution Date in an aggregate amount not to exceed $5,000,000, and (C) issue capital stock in accordance with Section 4.8 hereof. 4.8. Limitation on Issuance of Capital Stock. (a) The Company will not, and will not permit any of its Subsidiaries to, issue any equity or capital stock which may be redeemed, called or put, or which has any preference or extraordinary rights, other than Preferred Stock as contemplated under and pursuant to this Secured Note. (b) The Company will not, and will not permit any of the Guarantors to, issue or agree to issue any equity or capital stock (including by way of sales of treasury stock, options, warrants to purchase, or securities convertible into, capital stock) unless at a price at or above the then fair value as determined by no less than 2/3 of the Board of Directors of the Company (composed in the manner set forth in Section 3.12(a) hereof) either at the time of issuance or the time of the relevant agreement. SECTION 5. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 5.1 Payments. The Company shall (i) default in the payment when due of any principal hereunder, or (ii) default, and such default shall continue unremedied for three or more Business Days, in the payment when due of any interest hereunder or any fees or any other amounts (other than principal) owing hereunder or under any other Transaction Document; or 5.2. Representations, etc. Any representation, warranty or statement made by the Company or any of its Subsidiaries herein or in any other Transaction Document or in any certificate delivered to the Agent or any Fund pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made and such misrepresentation is material and continues to be material to the business, operations, assets, revenues, properties, liabilities or prospects of the Company or any of its Subsidiaries on earlier of (i) the date notice of an Event of Default is given to the Company or (ii) the date on which the Company or any of its Subsidiaries becomes aware of such default; or 5.3. Covenants. The Company or any of its Subsidiaries shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Sections 3.1(d), 3.3, 3.10, 3.11, 3.12, 3.13, 3.14., 3.15, 3.17, 3.19, 3.20, 3.21, 3.22, 3.23 or Section 4 hereof, or (b) default in the due performance or observance by it of any other term, covenant or agreement contained in this Secured Note (other than those set forth in Section 5.1 or 5.2 or clause (a) of this Section 5.3) or any other Transaction Document and such default shall continue unremedied for a period of 30 days after written notice thereof to the defaulting party by the Agent or any Fund; or 5.4. Default Under Other Agreements. The Company, the Guarantors or any of their Subsidiaries shall (i) default in any payment of any Existing Secured Indebtedness beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Existing Secured Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any Existing Secured Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Existing Secured Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such Existing Secured Indebtedness to become due prior to its stated maturity; or any Existing Secured Indebtedness of the Company, the Guarantor or any of their Subsidiaries shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; provided, however, that (a) such default shall continue unremedied for a period of 30 days after notice of default has been given to the Company by the holder of Existing Secured Indebtedness asserting the default (or shall continue unremedied up to an additional 60 days beyond such initial 30-day cure period if the holder of Existing Secured Indebtedness asserting the default forbears, waives or extends such default in writing for such additional time and the Funds shall have received commensurate therewith cash or other consideration equal to the cash or other consideration given to such holder of Existing Secured Indebtedness on account of, or in connection with, or related to such holder's forbearance, waiver or extension of the default) and (b) this Section 5.4 shall not apply to any default arising under Existing Secured Indebtedness of the Company owed to Imperial Bank as a result of the granting of Liens under the Security Documents in respect of the Secured Notes. 5.5. Bankruptcy. The Company or any of its Subsidiaries shall commence a voluntary case concerning itself under the Bankruptcy Code; or an involuntary case is commenced against the Company and the petition is not controverted within 10 days after service, or is not dismissed within 30 days, after commencement of the case or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the foregoing Persons. The Company or any of its Subsidiaries shall commence any other proceeding under any reorganization, arrangement, assignment for the benefit of creditors, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any of its Subsidiaries. There is commenced against the Company or Aura Ceramics any such proceeding which remains undismissed for a period of 30 days, or any of the Company and Aura Ceramics is adjudicated insolvent or bankrupt, or any order of relief or other order approving any such case or proceeding is entered, or the Company or Aura Ceramics suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 30 days, or the Company or Aura Ceramics shall generally not pay its debts as they become due or there shall be deemed to have occurred a suspension of payments, or the Company or Aura Ceramics shall be substantively consolidated with any other Person, or any judgment or order which has a Material Adverse Effect shall have been entered against the Company or any of its Subsidiaries pursuant to Bankruptcy Code sections 506(c), 542, 543, 544, 545, 547, 548, 549, 550, 551, 552(b) and 553. The Company or any of its Subsidiaries makes a general assignment for the benefit of creditors, or any corporate action is taken by the Company or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 5.6. Security Documents. Any of the Security Documents shall cease to be valid and in full force and effect, or, except as otherwise permitted hereby, shall cease to give the Agent, for the benefit of the Funds, the Lien purported to be created thereby; or 5.7. Guaranty. At any time after the execution and delivery thereof, any Guaranty or any provision thereof shall cease to be in full force or effect as to any Guarantor, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under its Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to its Guaranty; or 5.8. Material Adverse Change. Any event or condition shall occur or exist which, in the reasonable judgment of the Agent, has, or could reasonably be expected to have, a Material Adverse Effect; or 5.9. Denial of Liability. (a) The Company or any of its Subsidiaries shall deny its obligations under this Secured Note or any other Transaction Document; (b) any law, rule or regulation shall purport to render invalid, or preclude enforcement of, any provision of this Secured Note or any other Transaction Document or impair performance of the Company's or any Subsidiary's obligations hereunder or under any other Transaction Document or (c) any dominant authority asserting or exercising de jure or de facto governmental or police powers shall, by moratorium laws or otherwise, cancel, suspend or defer the obligation of the Company or any of its Subsidiaries to pay any amount required to be paid hereunder or under any other Transaction Document; or 5.10. DFS. DFS shall obtain (i) a settlement of the DFS Claims in excess of $5 million, or (ii) an arbitral award, judgment, or other resolution of the DFS Claims in excess of $5,000,000 and DFS obtains property or assets of the Company or any of its Subsidiaries in excess of $50,000 in connection therewith (including, without limitation, by way of levy, attachment, garnishment, foreclosure or possession); or 5.11. Isosceles. Isosceles shall fail to convert its existing Indebtedness owed by the Company into Common Stock of the Company within six months of the Execution Date, or Isosceles at any time obtains a judgment, attaches, garnishes, takes possession or otherwise forecloses on the Company's assets or property in respect of such Indebtedness; then, and in any such event, and at any time thereafter, if any Event of Default shall occur (which has not been cured in accordance with the terms of this Secured Note), the Holder may take any or all of the following actions, without prejudice to the rights of the Holder to enforce its claims against the Company or any of its Subsidiaries (provided that if an Event of Default specified in Section 5.5 above shall occur with respect to the Company or any of its Subsidiaries, the result which would occur upon the giving of written notice by the Holder as specified in clause (i) below shall occur automatically without the giving of any such notice): (i) (x) declare the principal of and any accrued interest in respect of all Obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and each of the Guarantors, or (y) convert all or any portion of the Obligations owing hereunder; and (ii) exercise any other rights available under the Transaction Documents or applicable law; and immediately, with respect to any violation (without any right to cure) of the representation contained in Section 2.30 hereof and/or the covenant contained in Section 4.3(d) or 4.8 hereof, the Conversion Price shall be reduced from $0.60 to $0.30. SECTION 6. Maturity. If this Secured Note is not converted at the option of the Holder in accordance with Section 8 hereof, the principal amount of this Secured Note, together with accrued but unpaid interest, shall be due and payable on demand on the Maturity Date. SECTION 7. Optional Prepayment. Upon giving the Agent at least three Business Days' prior written notice (which shall be irrevocable), the Company shall have the right to prepay amounts of principal under this Secured Note at any time, without premium or penalty, in an aggregate principal amount of at least $1,000,000, together with interest accrued as of the date of such prepayment; provided, however, that, with respect to any such prepayment, so long as no Event of Default shall occur which has not been cured in accordance with the terms of Section 5 hereof, the principal amount hereunder shall be reduced by an amount equal to the sum of the principal so prepaid and the Applicable Discount. Notwithstanding anything to the contrary contained herein, the Applicable Discount shall not apply to any prepayments from proceeds of any issuance of Preferred Stock as set forth in Schedule 3.15 hereof. SECTION 8. Conversion. 8.1. Conversion Events. Upon the occurrence and during the continuation of any Conversion Event, all or any portion of any Obligations due under this Secured Note may be converted into Shares at the option of the Holder following delivery of a notice of conversion to the Company in the manner set forth in Section 11.4 (the "Notice of Conversion") at any time on or prior to the Maturity Date, subject to the terms and conditions set forth in this Section 8. Upon conversion into Shares, any amounts converted hereunder shall be discharged. 8.2. Conversion Price. The number of Shares into which any amount under this Secured Note may be converted shall be determined by dividing the amount subject to conversion as set forth in the Notice of Conversion by $0.60 (the "Conversion Price"). 8.3. Method of Conversion. Before the Holder shall be entitled to receive Shares upon the conversion of any amount under this Secured Note, the Holder shall surrender this Secured Note solely for the purposes of the conversion thereof together with a Notice of Conversion to the office of the Company or its designated agent. The Notice of Conversion shall state therein the amount(s) in which the certificate(s) for Shares are to be issued. The time of conversion (the "Conversion Date") shall be the close of business on the calendar day following the date on which a Notice of Conversion is sent to the Company in accordance with Section 11.4. Interest on the amount under this Secured Note subject to conversion as set forth in the Notice of Conversion shall cease to accrue on and after the Conversion Date. Upon the conversion of any amount under this Secured Note, the Company shall execute and deliver on the Conversion Date, in exchange and substitution for and upon cancellation of this Secured Note, a new secured note in the principal amount equal to the amount of this Secured Note less such amount subject to conversion. 8.4. Issuance of Shares. The Company shall, as soon as practicable after the Conversion Date, but in no event more than three (3) business days thereafter, issue and deliver to the Holder certificates representing the number of Shares to which the Holder shall be entitled as aforesaid; provided, however, that the Company may pay in full in cash all Obligations owing to the Funds hereunder and under the Transaction Documents within three (3) business days after the Conversion Date in lieu of the Company's obligations to issue and deliver the certificates representing the Shares to the Holder under this Section 8.4. 8.5. No Fractional Shares. No fractional Shares shall be issuable upon conversion of any amount under this Secured Note subject to conversion as set forth in the Notice of Conversion. If the conversion of such amount would result in the issuance of a fractional Share, such fractional share shall be rounded up to the nearest whole share and issued to the Holder. 8.6. Adjustment of Conversion Price; Merger. (a) If at any time or from time to time while any amount under this Secured Note is outstanding (i) the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock, or (ii) the Company shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or (iii) the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price in effect immediately before such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. If the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (b) If the Shares issuable upon conversion of any amount under this Secured Note, if any, shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 8.6(a)), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Shares shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of Shares that would have been subject to receipt by the Holder upon conversion of any amount under this Secured Note immediately before that change. (c) In case of any consolidation or merger of the Company permitted by Section 4.3(f) hereof (each such transaction, a "Merger"), the survivor of the Merger shall succeed to the covenants, stipulations, promises and agreements contained in this Secured Note. In the event of a Merger, the Company shall make appropriate provisions so that the Holder shall have the right thereafter to convert any amount under this Secured Note into the kind and amount of securities receivable upon such Merger by a Holder of the number of securities into which any amount under this Secured Note might have been converted immediately prior to a Merger. The above provisions shall similarly apply to successive Mergers. (d) Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 8.6, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a notice setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. 8.7. Reservation of Stock. The Company shall, at all times on and after the date which is 90 days following the Execution Date, reserve and keep available out its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of any amount under this Secured Note into Shares, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of any amount under this Secured Note into Shares; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of any amount under this Secured Note into Shares, then the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its articles of incorporation. 8.8. Failure to Issue and/or Deliver Shares. (a) The Company shall issue and deliver, within five (5) Trading Days after the Holder has fulfilled all conditions and submitted all necessary documents duly executed and in proper form required for conversion (the "Deadline"), to the Holder or any party receiving the Secured Notes by transfer from Holder, at the address of the Holder on the books of the Company, a certificate or certificates for the number of Shares to which the Holder shall be entitled. The Company understands that a delay in the issuance and/or delivery of the Shares beyond the Deadline could result in economic loss to the Holder. As compensation to the Holder for such a loss, and not as penalty, the Company agrees to pay liquidated damages to the Holder for late issuance of Shares upon conversion in accordance with the following schedule (where "No. of Business Days Late" is the number of Business Days from the Deadline until (and including) the Business Day on which the Holder receives the Shares):
Liquidated Damages (per one hundred thousand dollars of principal outstanding hereunder, based on an amount not less than the stated principal amount due on the Maturity Date) No. of Business Days Late 2 $50 3 $100 4 $150 5 $200 6 $250 7 $300 8 $350 9 $400 10 $450 11 $500 >11 $500 plus an additional $100 for each Business Day beyond 11 Business Days.
(b) The Company shall pay the Holder any liquidated damages incurred under this Section 8.8 by wire transfer of immediately available funds to an account designated by Holder upon the earlier to occur of (i) issuance of the Shares to the Holder or (ii) each monthly anniversary of the receipt by the Company of such Holder's Notice of Conversion. Nothing herein shall waive the Company's obligations to deliver Shares upon a total or partial conversion of this Secured Note or limit Holder's rights to pursue actual damages for the Company's failure to issue and deliver Shares to such Holder in accordance with the terms of this Secured Note. (c) The Company agrees that, in addition to any other remedies which may be available to the Holder, including, but not limited, to, remedies available hereunder or under the other Transaction Documents, in the event the Company fails for any reason to effect delivery to Holder of certificates representing Shares within five (5) Trading Days following receipt by the Company of a Notice of Conversion, a Holder will be entitled to revoke the Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. SECTION 9. Other Provisions Relating to Rights of the Holder of this Secured Note. 9.1. Shareholder Rights. This Secured Note shall not entitle the Holder to any of the rights of a shareholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of shareholders or any other proceedings of the Company; provided, however, this Section 9.1 shall not affect the rights of the Holder under the Stock Pledge Agreement or in its capacity as a shareholder of the Company pursuant to any Common Stock held by the Holder, including, without limitation, upon conversion of any amount under this Secured Note pursuant to Section 8 hereof or otherwise. 9.2. Lost, Stolen, Mutilated or Destroyed Note. If this Secured Note shall be mutilated, lost, stolen, or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Secured Note, or in lieu of or in substitution for a lost, stolen, or destroyed Secured Note, a new Secured Note for the principal amount of this Secured Note so mutilated, lost, stolen, or destroyed but only upon receipt of evidence (which may consist of a signed affidavit of the Holder), of such loss, theft, or destruction of this Secured Note. SECTION 10. Other Agreements. 10.1. Transfer Restrictions. (a) If the Holder should decide to dispose of this Secured Note, the Holder understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, or (ii) pursuant to an available exemption from registration under the Securities Act. (b) The Holder agrees to the imprinting, so long as required by the terms of the Securities Act, of the following legend on certificates representing the Shares: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE BY REASON OF THEIR ISSUANCE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. (c) The legend set forth in clause (b) above and in the first paragraph of this Secured Note shall be removed as soon as allowed under the Securities Act or the regulations promulgated thereunder. The Company agrees that it will provide the Holder, upon request, with any required opinion of counsel and a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable, at no charge. 10.2. Filing and Furnishing of Reports and Information. (a) The Company's Common Stock is registered under Section 12(g) of the Securities Act. On and after the date which is 90 days following the Execution Date and for so long as the Holder owns this Secured Note or Shares, the Company shall timely file all reports required to be filed by the Company with the Commission after the Execution Date pursuant to Section 13(a) or 15(d) of the Exchange Act and to furnish to the Holder within 10 days of each such filing true and complete copies of all such filings and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. The Company will take all necessary action to meet the "registrant eligibility" requirements set forth in the general instructions to Form S-3. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to the Holder annual and quarterly financial statements, together with a management discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings would have been required to have been made under the Exchange Act. (b) The Company shall deliver copies to the Holder of any documents or financial statements it delivers to any secured lender concurrently with such delivery to such lender, subject to the confidentiality provisions of Section 6.12 of that certain Exchange Agreement dated February 14, 2000, between the Company and the Funds. 10.3. Blue Sky Laws. The Company shall qualify this Secured Note and the Shares under the securities or "Blue Sky" laws of such jurisdictions as the Holder may request and shall continue such qualification at all times as long as the Holder owns any Shares. 10.4. Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Secured Note or the Shares in a manner that would require the registration under the Securities Act of the sale of this Secured Note or the Shares to the Holder. SECTION 11. Miscellaneous. 11.1. Fees and Expenses. The Company and the Funds shall pay the fees and expenses of their respective advisers, counsel, accountants and other experts, if any, and all other expenses incurred incident to the negotiation, preparation, execution, delivery and performance of this Secured Note and the other Transaction Documents. The Company shall pay all stamp and other taxes (other than income) and duties levied in connection with the issuance of the Secured Notes and Shares pursuant hereto. 11.2. Indemnification. (a) Except with respect to litigation concerning the priority of Permitted Liens or assertions by the Company in accordance with the last sentence of Section 2.1 of the Security Agreement, the Company agrees to indemnify and hold harmless, to the extent permitted by law, the Holder and its respective officers and directors, employees, advisors, attorneys, agents, and representatives against any and all claims, causes of action, losses, liabilities, damages or expenses incurred by any of them as a result of, arising out of, or in any way related to, or by reason of, any breach or default by the Company under any provision of this Secured Note or any other Transaction Document, including, but not limited to, any breach by the Company of its representations and warranties set forth in Section 2.1 hereto. (b) Any person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (c) The indemnification provided for under this Secured Note shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company's indemnification is unavailable for any reason. 11.3. Entire Agreement; Amendments. This Secured Note and the other Transaction Documents, together with the exhibits and schedules hereto and thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 11.4. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 11.4 prior to 4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified below later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: Michael Froch, Esq. Facsimile No.: (310) 643-8719 With copies to: Robinson, Diamant & Brill 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Attn: Lawrence A. Diamant, Esq. Facsimile No.: (310) 277-7584 If to the Holder: Summit Capital Limited Hunkins Waterfront Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attn: Gwen McLaughlin Facsimile No.: (345) 949-0881 With copies to: White & Case LLP 4900 First Union Financial Center 200 South Biscayne Boulevard Miami, Florida 33131 Attn: Thomas E Lauria, Esq. Facsimile No.: (305) 358-5744 and Mr. Stuart J. Chasanoff c/o HW Partners LP 1601 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1667 or such other address as may be designated in writing hereafter, in the same manner, by such person. 11.5. Amendments; Waivers. No provision of this Secured Note may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Holder, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Secured Note shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 11.6. Headings Descriptive. The headings herein are for convenience only, do not constitute a part of this Secured Note and shall not be deemed to limit or affect any of the provisions hereof. 11.7. Benefit of Secured Note; Assignments; Participations. (a) This Secured Note shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its rights or obligations hereunder or under any other Transaction Documents. (b) The Holder may sell, assign, transfer or grant participations in all or a portion of its rights and outstanding Obligations hereunder to any person, each of which assignees shall become a party to this Secured Note as a Holder, provided that the new Secured Note will be issued, at the Company's expense, to such new Holder and to the assigning Holder upon the request of such new Holder or assigning Holder, such new Secured Note to be in conformity with the requirements under the Transaction Documents (with appropriate modifications) to the extent needed to reflect the revised outstanding Obligations. The assigning Holder will notify the Company of any assignment pursuant to this Section 11.7(b); provided, however, that the failure to give any such notice, or any error in such notice, shall not affect any of the obligations of the Company hereunder or under any other Transaction Document. (c) Nothing in this Secured Note shall prevent or prohibit any Holder from pledging its rights hereunder. 11.8. No Third-Party Beneficiaries. This Secured Note is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 11.9. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS SECURED NOTE AND THE OTHER TRANSACTION DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURED NOTE OR ANY SUCH OTHER TRANSACTION DOCUMENT MAY BE BROUGHT IN (i) THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND/OR (ii) THE COURTS OF THE DEFENDANT'S RESPECTIVE CORPORATE DOMICILE, AND, BY THE ISSUANCE AND DELIVERY OF THIS SECURED NOTE, EACH PARTY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS SECURED NOTE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.4 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE HOLDER OF THIS SECURED NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY AND/OR ANY GUARANTOR IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS SECURED NOTE OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURED NOTE, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS SECURED NOTE. 11.10. Publicity. The Company and the Holder shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases, filings or public statements that are required by law or any regulatory body or governmental authority of competent jurisdiction. 11.11. Severability. In case any one or more of the provisions of this Secured Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Secured Note shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and, upon so agreeing, shall incorporate such substitute provision in this Secured Note. 11.12. Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Holder will be entitled to specific performance of the obligations of the Company under this Secured Note. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 11.13. Survival. Each of the representations and warranties of the Company contained in Section 2 and the other agreements and covenants of the parties contained in this Secured Note shall survive issuance of this Secured Note until repayment in full of the Obligations evidenced hereby. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE] IN WITNESS WHEREOF, the Company has caused this Secured Note to be signed in its name by its duly authorized officers this 22nd day of February, 2000. AURA SYSTEMS, INC. By: Name: Gerald Papazian Title: President By: Name: Steven C. Veen Title:Senior Vice President STATE OF ____________ ) )SS: COUNTY OF __________ ) The foregoing instrument was acknowledged before me this day of _________, ___ by _________________________ as ___________________of Aura Systems, Inc. on behalf of the corporation. He personally appeared before me, is personally known to me or produced __________________ as identification, and [did] [did not] take an oath. Notary: [NOTARIAL SEAL] Print Name: Notary Public, State of My commission expires: NOTICE OF CONVERSION The undersigned, being the holder of the attached Secured Note due the Maturity Date (as defined in the Secured Note) of Aura Systems, Inc. (the "Company"), hereby exercises the option to convert $[________] under the Secured Note into Shares (as defined in the Secured Note) of the Company in accordance with the terms of the Secured Note. The amount of principal and accrued but unpaid interest outstanding on the Secured Note as of the date hereof is $____________ and the number of Shares to be issued upon conversion is _____________. The undersigned directs that the Shares be issued in the name of and delivered as soon as practicable and in accordance with the provisions of the Secured Note to: Full address: Date: Name: [HOLDER] EX-10.33 11 0011.txt GENERAL ASSIGNMENT AND BILL OF SALE - CERAMICS GENERAL ASSIGNMENT AND BILL OF SALE FOR VALUABLE CONSIDERATION, and in performance of that certain Asset Purchase Agreement, dated as of February 29, 2000 (the "Purchase Agreement"), by and between Alpha Ceramics, Inc. ("Buyer"), and Aura Ceramics, Inc. ("Seller"), Seller does hereby sell, transfer, assign, convey and deliver forever to Buyer all of Seller's rights, title and interest in and to the following properties, assets and rights of Seller: Any and all tangible and intangible assets and personal property of Seller, other than the Retained Assets, including, without limitation, the Equipment, Intangible Property, Trademarks and Patents, Inventory, Licenses and Permits, Real Estate Leases and Subleases, Contracts, Accounts Receivable, Goodwill and the name of the Business "Aura Ceramics, Inc.", wherever the aforementioned may be located. Seller warrants, represents and covenants that it is the lawful owner of the properties, assets and rights transferred hereby and has the lawful right to sell the same, free and clear of any claim, lien or encumbrance whatsoever, and that Seller will forever warrant and defend title thereto against the claims of any and all persons. Seller further agrees to execute and deliver any and all further assignments and instruments reasonably required by the Buyer in order to effectively assign to and vest in Buyer all of Seller's rights, title and interests in and to the assets, property and rights sold hereunder. This General Assignment and Bill of Sale shall bind the Seller, its successors and assigns, and shall benefit the Buyer and its respective successors and assigns. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Purchase Agreement. IN WITNESS WHEREOF, Aura Ceramics, Inc. has caused this General Assignment and Bill of Sale to be executed as of the 3rd day of May, 2000. AURA CERAMICS, INC. By Its: By Its: EX-10.34 12 0012.txt ASSIGNMENT AND ASSUMPTON OF LIABILITIES - CERAMICS ASSIGNMENT AND ASSUMPTION OF SPECIFIED LIABILITIES THIS ASSIGNMENT AND ASSUMPTION, made as of the 3rd day of May, 2000, by and between AURA CERAMICS, INC., a Delaware corporation ("Seller"), and ALPHA CERAMICS, INC., a Minnesota corporation ("Buyer"). WHEREAS, Buyer, Seller and Aura Systems, Inc., a Delaware corporation, have entered into that certain Asset Purchase Agreement dated as of February 29, 2000 (the "Asset Purchase Agreement"); WHEREAS, the Asset Purchase Agreement provides that Buyer is to acquire all of the assets of Seller, other than the "Retained Assets" (as such term is defined in Section 2.2 of the Asset Purchase Agreement); and WHEREAS, the Asset Purchase Agreement provides that Buyer is to assume certain specified liabilities of Seller as set forth in Section 2.3 of the Asset Purchase Agreement. NOW, THEREFORE, in consideration of the transactions as described in the Asset Purchase Agreement, and other good and valuable consideration, the receipt, sufficiency and mutuality of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. ASSUMPTION. Buyer hereby assumes and agrees to pay according to their terms all of the "Assumed Liabilities", as that term is defined in Section 2.3 of the Asset Purchase Agreement. 2. RETAINED LIABILITIES. Seller shall remain unconditionally liable for all "Retained Liabilities", which term is defined in Section 2.3 of the Asset Purchase Agreement as all obligations, liabilities and commitments of Seller, presently existing or contingent arising out of events or circumstances occurring on or prior to the Closing Date (as that term is defined in the Asset Purchase Agreement). Buyer is not assuming or agreeing to pay or perform the Retained Liabilities or any other liabilities, obligations or commitments of Seller other than the Assumed Liabilities. [Remainder of page intentionally left blank.] SELLER: Date: May ___, 2000 AURA CERAMICS, INC. By: Its: By: Its: BUYER: Date: May ____, 2000 ALPHA CERAMICS, INC. By: James E. Sloane Its: President EX-10.35 13 0013.txt ASSIGNMENT AND ASSUMPTION OF LEASE - CERAMICS ASSIGNMENT AND ASSUMPTION OF LEASE THIS ASSIGNMENT AND ASSUMPTION, made as of the 3rd day of May, 2000, by and between Aura Ceramics, Inc., a Delaware corporation (the "Assignor"), and Alpha Ceramics, Inc., a Minnesota corporation (the "Assignee"). WITNESSETH: WHEREAS, Winnetka Properties, L.L.C. ("Landlord") and Aura Ceramics, Inc., a Minnesota corporation ("Aura"), as tenant, made and entered into that certain Amended and Restated Lease Agreement dated October 1, 1997 (the "Lease") relating to those certain premises located at 5121 Winnetka Avenue North in New Hope, Minnesota, as more particularly described in the Lease (the "Premises"); and WHEREAS, Assignor and Assignee have entered into that certain Asset Purchase Agreement dated as of February 29, 2000 (the "Purchase Agreement") pursuant to which, among other things, Assignor has agreed to transfer to Assignee all of its rights, title and interest under and pursuant to the Lease, and Assignee has agreed to assume and agree to pay and perform all of Assignor's duties and obligations under the Lease. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Effective as of the date hereof, Assignor hereby sells, transfers and assigns to Assignee all of Assignor's right, title and interest in and to the Lease, but specifically excluding any ancillary agreements by and between Landlord and Assignor relating to the Premises or otherwise. 2. Effective as of the date hereof, Assignee hereby assumes and agrees to perform, for the benefit of Assignor, all of the obligations and duties of Assignor under and pursuant to the Lease, but specifically excluding any ancillary agreements by and between the Landlord and the Assignor relating to the Premises or otherwise. 3. Assignor represents and warrants to Assignee that Assignor is not in default under the Lease and that Assignor knows of no existing or uncured defaults by Landlord under the Lease. 4. This instrument may be executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. IN WITNESS WHEREOF, the undersigned have caused this Assignment and Assumption to be executed and delivered as of the day and year first above written. ASSIGNOR: ASSIGNEE: AURA CERAMICS, INC. ALPHA CERAMICS, INC. By:_______________________________ By:________________________________ Its:____________________________ James E. Sloane Its: President By:_______________________________ Its:____________________________ EX-10.36 14 0014.txt REVOLVING CREDIT AND TERM LOAN AGREEMENT -CERAMICS REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT, dated as of May __, 2000, is by and between ALPHA CERAMICS, INC., a Minnesota corporation (the "Borrower"), and EXCEL BANK, a Minnesota state banking corporation (the "Bank"). RECITALS: A. The Borrower has requested that the Bank make available to the Borrower (i) a revolving credit facility in an aggregate amount not to exceed $200,000 (the "Revolving Loan"), and (ii) a term loan in the amount of $1,000,000 (the "Term Loan") (the Revolving Loan and the Term Loan are collectively referred to as the "Loans"). B. The Borrower will use the proceeds of the Revolving Loan and Term Loan to acquire certain assets and for general working capital purposes. C. The Bank has agreed to make available to the Borrower the Loans, all upon the terms and conditions of this Agreement. AGREEMENTS: IN CONSIDERATION of the foregoing premises, and the mutual covenants set forth herein, the parties agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the meanings set out respectively after each (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require): Act of Bankruptcy: With respect to any Person, if (i) the Person shall (1) be or become insolvent, or (2) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or the like of the Person or of all or a substantial part of the Person's property, or (3) commence a voluntary case under any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding under the laws of any jurisdiction, or (4) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts, or (5) admit in writing its inability to pay its debts as they mature, or (6) make an assignment for the benefit of its creditors; or (ii) a proceeding or case shall be commenced, without the application or consent of the Person, and which is not dismissed within 30 days after such commencement, in any court of competent jurisdiction, seeking (1) the liquidation, reorganization, dissolution, winding up or the composition or adjustment of debts of the Person, (2) the appointment of a trustee, receiver, custodian or liquidator or the like of the Person or of all or any substantial part of the Person's property, or (3) similar relief in respect of the Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts. Adverse Event: The occurrence of any event that could reasonably be determined to have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of the Borrower or on the ability of the Borrower or any other party obligated thereunder to perform its obligations under the Loan Documents. Affiliate: Any Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower or any of its Subsidiaries or any Guarantor, or (ii) five percent (5%) or more of the equity interest of which is held beneficially or of record by the Borrower or any of its Subsidiaries or any Guarantor. Control for purposes of this definition means the possession, directly or indirectly, of the power to cause the direction of management and policies of a Person, whether through the ownership of voting securities or otherwise. Agreement: This Revolving Credit and Term Loan Agreement, as it may be amended, modified, supplemented, restated or replaced from time to time. Assignment of Life Insurance: That certain Assignment of Life Insurance Policy to be executed by the Borrower and delivered to the Bank as contemplated by Section 8.15, as it may be amended, modified, supplemented, restated or replaced from time to time. Base Rate: The rate of interest from time to time publicly announced by the Bank as its "base rate." The Bank may lend to its customers at rates that are at, above or below the Base Rate. For purposes of determining any interest rate which is based on the Base Rate, such interest rate shall change on the effective date of any change in the Base Rate. Borrower's Certificate: The borrower's certificate in the form of Exhibit A hereto, or in such other form as the Bank may reasonably require from time to time, to be delivered by the Borrower to the Bank within 30 days after the end of each calendar month. Borrowing Base: At any time and subject to change from time to time in the Bank's discretion, an amount equal to (1) 75% of Eligible Receivables, plus, if the Bank has received an audited opening balance sheet and a current monthly inventory reporting (detailed by raw materials, work in process and finished goods), all in form and substance acceptable to the Bank, (2) 30% of Eligible Inventory. Business Day: Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which state banks are permitted to be open in Minneapolis, Minnesota. Capitalized Lease: Any lease which is or should be capitalized on the books of the lessee in accordance with GAAP. Code: The Internal Revenue Code of 1986, as amended, or any successor statute, together with regulations thereunder. Collateral: The collateral as defined in Section 5.1. Commitment: The obligation of the Bank to make loans to the Borrower pursuant to Section 2.1 and the Revolving Note up to an aggregate principal amount at any one time outstanding equal to the lesser of (a) the Borrowing Base, or (b) $200,000. Credit Party: The Borrower, the Borrower's Subsidiaries, the Guarantors or any Affiliate, or any one or more of them. Debt Service Coverage Ratio: For any period of determination, the ratio of (a) the Borrower's EBITDA for such period, to (b) the sum of (i) scheduled principal payments of all Indebtedness (including without limitation all Subordinated Debt) of the Borrower paid on or before the last day of such period excluding the Revolving Loan principal balance, plus (ii) Interest Expense for such period. Debt to Tangible Capital Base Ratio: As of any date of determination, the ratio of (a) the Borrower's total liabilities (excluding the Subordinated Debt) as of such date, to (b) the Borrower's total net worth less intangible assets as of such date plus the Subordinated Debt as of such date, all determined in accordance with GAAP. Default: Any event which, with the giving of notice to the Borrower or lapse of time, or both, would constitute an Event of Default. EBITDA: For any period of determination, the Borrower's net income for such period, plus deductions for Interest Expense, income taxes, depreciation and amortization for such period, all as determined in accordance with GAAP. Eligible Inventory: The dollar value of all inventory owned solely by the Borrower that is at all times subject to a first priority perfected security interest in favor of the Bank and is not subject to any other Liens except Permitted Liens which the Bank deems to be Eligible Inventory and excludes inventory that is unsaleable or unusable for any reason in the Borrower's operations. The value of Eligible Inventory shall be the lower of the cost or market value of the Eligible Inventory computed on a first-in, first-out basis in accordance with GAAP and shall be determined monthly from the Borrower's Certificate and supporting reports delivered to the Bank pursuant to this Agreement. Eligible Receivables: The dollar value of any account receivable owing to the Borrower for services rendered or to be rendered or goods sold in the ordinary course of business that has been invoiced to its customer by the Borrower, is owned solely by the Borrower and is subject to a first priority perfected security interest in favor of the Bank at the time it comes into existence and continues to meet the same until it is collected in full and is not subject to any other Liens except Permitted Liens which the Bank deems to be an Eligible Receivable. Without limiting the generality of the foregoing, a receivable shall not be an Eligible Receivable if: (a) it has been unpaid more than 90 days past the due date thereof or it is owed by an account debtor which has 10% or more of its receivables unpaid more than 90 days past the due date thereof; (b) it is subject to any Lien, other than the security interest of the Bank or Permitted Liens; (c) it is not a valid, legally enforceable obligation of the account debtor to the full extent of its amount; (d) it is subject to any setoff, counterclaim, credit allowance, retainage, current claim against the warranty or adjustment by the account debtor thereunder, or to any claim by such account debtor denying liability thereunder in whole or in part, or such account debtor has refused to accept or has returned or offered to return any of the goods which are subject to such receivable; (e) the account debtor is also a supplier or creditor of the Borrower, to the extent of any contra account; (f) it did not arise in the ordinary course of the Borrower's business or any notice of the bankruptcy, insolvency or financial impairment of the account debtor thereunder has been received by the Borrower; (g) it arose out of any contract or order which by its terms, forbids or makes void or unenforceable its assignment by the Borrower to the Bank; or (h) it is a receivable owing by (1) the United States government or any department, agency or other subdivision thereof (except to the extent that the Borrower complies with the Federal Assignment of Claims Act of 1940, as amended): (2) a Person located in any jurisdiction outside the United States; or (3) any Affiliate, employee or salesperson of the Borrower . A receivable which is at any time an Eligible Receivable but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be an Eligible Receivable. The amount of Eligible Receivables shall be determined monthly from the Borrower's Certificate and supporting reports delivered to the Bank pursuant to the terms of this Agreement. ERISA: The Employee Retirement Income Security Act of 1974, as amended, and any successor statute, together with regulations thereunder. ERISA Affiliate: Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code. Event of Default: Any event described in Section 10.1. Federal Reserve Board: The Board of Governors of the Federal Reserve System or any successor thereto. Financing Statements: UCC-1 Financing Statements naming the Borrower, or the Guarantor, as the case may be, as debtor and the Bank as secured party and describing the Collateral as the property covered thereby. GAAP: Generally accepted accounting principles, consistently applied. Guarantors: James E. Sloane or any other Person who may execute a Guaranty. Guaranty: That certain Guaranty Agreements dated the date hereof executed by the Guarantor and delivered to the Bank, as it may be amended, modified, supplemented, restated or replaced from time to time. Indebtedness: Without duplication, all obligations, contingent or otherwise, which in accordance with GAAP should be classified upon the obligor's balance sheet as liabilities, but in any event including the following (whether or not they should be classified as liabilities upon such balance sheet): (a) obligations secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the obligation secured thereby shall have been assumed and whether or not the obligation secured is the obligation of the owner or another party; (b) any obligation on account of deposits or advances; (c) any obligation for the deferred purchase price of any property or services, (d) any obligation as lessee under any Capitalized Lease; (e) all guaranties, endorsements and other contingent obligations respecting Indebtedness of others; and (f) undertakings or agreements to reimburse or indemnify issuers of letters of credit. For all purposes of this Agreement (i) the Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner, and (ii) the Indebtedness of any Person shall include the Indebtedness of any joint venture in which such Person is a joint venturer. The term "Indebtedness" shall in no event include Trade Accounts Payable. Interest Expense: For any period of determination, the total scheduled interest expense for such period (including any default rate of interest if then applicable), whether paid or accrued, on all Indebtedness of the Borrower. Investment: The acquisition, purchase, making or holding of any stock or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real or personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase stock or other debt or equity securities of or any interest in another Person or any integral part of any business or the assets comprising such business or part thereof. Lien: Any security interest, mortgage, pledge, lien, hypothecation, judgment lien or similar legal process, charge, encumbrance, title retention agreement or analogous instrument or device (including, without limitation, the interest of the lessors under Capitalized Leases and the interest of a vendor under any conditional sale or other title retention agreement). Loan Documents: This Agreement, the Notes, the Security Agreement, the Pledge Agreement, the Guaranty, the Financing Statements, the Assignment of Life Insurance and each other instrument, document, guaranty, security agreement, mortgage, or other agreement executed and delivered by the Borrower or any party granting security interests in connection with this Agreement, the Loans or any collateral for the Loans. Notes: The Revolving Note and the Term Note, or any one or more of them. Obligations: The obligation of the Borrower: (a) to pay the principal of and interest on the Notes in accordance with the terms hereof and thereof, and to satisfy all of the Borrower's other obligations to the Bank, whether hereunder or otherwise, whether now existing or hereafter incurred, matured or unmatured including without limitation the obligations pursuant to letters of credit, direct or contingent, joint or several, and including without limitation obligations to or credit from others in which the Bank has a direct or indirect interest (including without limitation participations), including any extensions, modifications, renewals thereof and substitutions therefor; (b) to repay to the Bank all amounts advanced by the Bank hereunder or otherwise on behalf of the Borrower, including, but without limitation, advances for principal or interest payments to prior secured parties, mortgagees or lienors, or for taxes, levies, insurance, rent, repairs to or maintenance or storage of any of the Collateral; and (c) to pay all of the Bank's expenses and costs, together with the reasonable fees and expenses of its counsel in connection with the preparation and negotiation of this Agreement and other Loan Documents, and any amendments thereto and the documents required hereunder or thereunder, or any proceedings brought or threatened to enforce payment of any of the Obligations described in clauses (a) or (b) above. PBGC: The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof. Permitted Lien: Any Lien of a kind specified in paragraphs (a)-(d) of Section 9.11. Person: Any natural person, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. Plan: An employee benefit plan or other plan, maintained for employees of the Borrower or of any ERISA Affiliate, and subject to Title IV of ERISA or Section 412 of the Code. Pledge Agreement: That certain Negative Pledge Agreement dated the date hereof executed by James E. Sloane and delivered to the Bank, as it may be amended, modified, supplemented, restated or replaced from time to time. Pre-Tax Profit: For any period of determination, the Borrower's net profit plus income tax expense for such period, as determined in accordance with GAAP. Reportable Event: A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a reportable event regardless of the issuance of any such waivers in accordance with Section 412(d) of the Code. Revolving Credit Expiration Date: The date that first occurs: (i) May 1, 2001, or (ii) the date on which the Commitment is terminated pursuant to Section 10.2. Revolving Interest Rate: The rate of interest equal to the Base Rate plus 0.50%; provided, however, that from and after the occurrence of any Default and continuing thereafter until such Default shall be remedied to the written satisfaction of the Bank, the Revolving Interest Rate shall, at the election of the Bank, be that rate of interest equal to the Base Rate plus 2.50%. The Bank may lend to its customers at rates that are at, above, or below the Revolving Interest Rate. Revolving Note: That certain Revolving Note dated the date hereof executed by the Borrower and made payable to the order of the Bank in the original principal amount of $200,000, as it may be amended, modified, supplemented, restated or replaced from time to time. Security Agreement: That certain Security Agreement dated the date hereof executed by the Borrower and delivered to the Bank, as it may be amended, modified, supplemented, restated or replaced from time to time. Subordinated Debt: Any Indebtedness of the Borrower, now existing or hereafter created, incurred or arising, which is subordinated in right of payment to the payment of the Obligations in a manner and to an extent that the Bank has approved in writing prior to the date hereof or prior to the creation of such Indebtedness. Subsidiary: Any Person of which or in which the Borrower and its other Subsidiaries own directly or indirectly 50% or more of: (a) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (b) the capital interest or profit interest of such Person, if it is a partnership, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated organization. Term Interest Rate: The rate of interest equal to the Base Rate plus 0.50%; provided, however, that from and after the occurrence of any Default and continuing thereafter until such Default shall be remedied to the written satisfaction of the Bank, the Term Interest Rate shall, at the election of the Bank, be that rate of interest equal to the Base Rate plus 2.50%. The Bank may lend to its customers at rates that are at, above, or below the Term Interest Rate. Term Note: That certain Term Note dated the date hereof executed by the Borrower and made payable to the order of the Bank in the original principal amount of $1,000,000, as it may be amended, modified, supplemented, restated or replaced from time to time. Trade Accounts Payable: The trade accounts payable of any Person with a maturity of not greater than 90 days incurred in the ordinary course of such Person's business. Section 1.2 Accounting Terms and Calculations. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder (including, without limitation, determination of compliance with financial ratios and restrictions in Articles 8 and 9 hereof) shall be made in accordance with GAAP consistently applied. Section 1.3 Other Definitional Terms. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and like references are to this Agreement unless otherwise expressly provided. ARTICLE 2 TERMS OF LENDING Section 2.1 Revolving Loan. Subject to and upon the terms and conditions hereof and in reliance upon the representations and warranties of the Borrower herein, the Bank agrees to make loans to the Borrower under this Section 2.1 from time to time from the date hereof until the Revolving Credit Expiration Date, during which period the Borrower may repay and reborrow in accordance with the provisions hereof, provided, that the aggregate unpaid principal amount of all outstanding loans under this Section 2.1 shall not exceed the amount of the Commitment at any time. If, at any time, or for any reason, the amount outstanding under the Revolving Loan exceeds the Commitment, the Borrower shall immediately pay to the Bank, in cash, the amount of such excess. Section 2.2 Term Loan. Subject to and upon the terms and conditions hereof and in reliance upon the representations and warranties of the Borrower herein, the Bank agrees to make the Term Loan to the Borrower under this Section 2.2 on the date hereof. Section 2.3 Borrowing Procedures. Each time the Borrower desires to obtain a loan advance under the Revolving Loan pursuant to Section 2.1, such request shall be in writing (which may be by telecopy) or by telephone promptly confirmed in writing, and must be given so as to be received by the Bank not later than 11:00 a.m., Minneapolis time, on the date of the requested advance. Each request for an advance shall specify (i) the borrowing date (which shall be a Business Day), and (ii) the amount of such advance. Unless the Bank determines that any applicable condition specified in Article 6 has not been satisfied, the Bank will make the amount of the requested advance available to the Borrower at the Bank's principal office in Edina, Minnesota, in immediately available funds not later than 5:00 p.m., Minneapolis time, on the date requested. The Borrower shall be obligated to repay all advances the Bank reasonably determines were requested on behalf of the Borrower notwithstanding the fact that the person requesting the same was not in fact authorized to do so. Section 2.4 The Notes. (a) Revolving Note. The obligation of the Borrower to repay any and all loans made under Section 2.1 shall be evidenced by the Revolving Note of the Borrower, in form and substance acceptable to the Bank, in the amount of $200,000 and dated as of the date of this Agreement. The Bank shall enter in its records the amount of each advance and the payments made on the Revolving Loan, and such records shall be deemed conclusive evidence of the subject matter thereof, absent manifest error. (b) Term Note. The obligation of the Borrower to repay the Term Loan made under Section 2.2 shall be evidenced by the Term Note of the Borrower, in form and substance acceptable to the Bank, in the amount of $1,000,000 and dated as of the date of this Agreement. The Bank shall enter in its records the payments made on the Term Loan, and such records shall be deemed conclusive evidence of the subject matter thereof, absent manifest error. ARTICLE 3 INTEREST AND COSTS Section 3.1 Interest on Revolving Loan. The unpaid principal amount of the Revolving Loan shall bear interest at a rate per annum equal to the Revolving Interest Rate. Section 3.2 Interest on Term Loan. The unpaid principal amount of the Term Loan shall bear interest at a rate per annum equal to the Term Interest Rate. Section 3.3 Computation. Interest on each Note shall be computed on the basis of actual days elapsed and a year of 360 days. Section 3.4 Payment Dates. Interest accruing on each Note shall be due and payable as specified in such Note. Section 3.5 Increased Costs. If, as a result of any generally applicable law, rule, regulation, treaty or directive, or any generally applicable change therein or in the interpretation or administration thereof, or compliance by the Bank with any generally applicable request or directive (whether or not having the force of law) from any court, central bank, governmental authority, agency or instrumentality, or comparable agency: (a) any tax, duty or other charge with respect to any Loan, any Note or the Commitment is imposed, modified or deemed applicable, or the basis of taxation of payments to the Bank of interest or principal of the Loans (other than taxes imposed on the overall net income of the Bank by the jurisdiction in which the Bank has its principal office) is changed; (b) any reserve, special deposit, special assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank is imposed, modified or deemed applicable; (c) any increase in the amount of capital required or expected to be maintained by the Bank or any Person controlling the Bank is imposed, modified or deemed applicable; or (d) any other condition affecting this Agreement, the Loans or the Commitment is imposed on the Bank or the relevant funding markets; and the Bank reasonably and in good faith determines that, by reason thereof, the cost to the Bank of making or maintaining the Loans or the Commitment is increased, or the amount of any sum receivable by the Bank hereunder or under any Note in respect of any Loan is reduced; then, the Borrower shall pay to the Bank upon demand (which demand shall include sufficient evidence thereof) such additional amount or amounts as will compensate the Bank (or the controlling Person in the instance of (c) above) for such additional costs or reduction. Determinations by the Bank for purposes of this Section 3.5 of the additional amounts required to compensate the Bank shall be presumptive evidence thereof. In determining such amounts, the Bank may use any reasonable averaging, attribution and allocation methods. Section 3.6 Closing Fee. The Borrower shall pay the Bank a closing fee in the amount of $7,500, which will be due and payable upon the execution of this Agreement. ARTICLE 4 PAYMENTS AND PREPAYMENTS Section 4.1 Repayment. Principal of each Note shall be due and payable as specified in such Note. Section 4.2 Optional Prepayments. The Borrower may prepay the Loans, in whole or in part, at any time without premium or penalty. Section 4.3 Accelerated Payments. Upon the occurrence of an Event of Default and the acceleration of any one or more of the Notes, pursuant to and as permitted by Section 10.2, all of the Notes and all other Obligations, shall be immediately due and payable as provided in Section 10.2 and in the Notes. Section 4.4 Payments. Payments and prepayments of principal of, and interest on, the Notes and all fees, expenses and other obligations under the Loan Documents shall be made without set-off or counterclaim in immediately available funds not later than 2:00 p.m., Minneapolis time, on the dates due at the main office of the Bank in Edina, Minnesota. Funds received on any day after such time shall be deemed to have been received on the next Business Day. Whenever any payment to be made hereunder or on any Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of any interest or fees. Section 4.5 Debits; Advances. The Bank shall have the right to pay accrued interest and principal on the Notes, and any and all other amounts due and payable under the Loan Documents, by debiting any account of the Borrower at the Bank or by making one or more advances under the Revolving Loan, all without further authorization of the Borrower. Section 4.6 Application of the Payments. Any voluntary prepayment shall be applied to such Note as the Borrower may direct, and any prepayment shall be applied first to the payment of accrued interest and then to the reduction of principal of such Note in inverse order of maturity. Any prepayment resulting from an acceleration of the Notes shall be applied to any and all of the Notes in such order and such amounts as the Bank may from time to time determine and direct, notwithstanding any contrary instructions or directions of the Borrower. ARTICLE 5 COLLATERAL SECURITY Section 5.1 Composition of the Collateral. The property in which a security interest is, or is intended to be, granted pursuant to this Agreement, the Security Agreement, the Assignment of Life Insurance , the Pledge Agreement, or any other Loan Document and the provisions of Section 5.2 is herein collectively called the "Collateral." The Collateral, together with all the Borrower's other property of any kind held by the Bank, shall stand as one general, continuing collateral security for all of the Obligations, and may be retained by the Bank until all Obligations have been satisfied in full, and the Commitment has terminated. Section 5.2 Rights in Property Held by the Bank. As security for the prompt satisfaction of all Obligations, the Borrower hereby assigns, transfers and sets over to the Bank all of its right, title and interest in and to, and grants to the Bank a lien on and a security interest in, any amounts which may be owing from time to time by the Bank to the Borrower in any capacity, including, but without limitation, any balance or share belonging to the Borrower of any deposit or other account with the Bank, which lien and security interest shall be independent of any right of setoff which the Bank may have. Section 5.3 Priority of Liens. The liens as provided for under this Agreement, the Security Agreement, the Assignment of Life Insurance, the Pledge Agreement, and the other Loan Documents shall be first and prior liens, subject only to Permitted Liens. Section 5.4 Financing Statements. The Borrower will authorize, execute and deliver such security agreements, assignments, and UCC-1 financing statements (including amendments thereto and continuation statements thereof) in form satisfactory to the Bank as the Bank may specify and will pay or reimburse the Bank for all costs of filing or recording the same in such public offices as the Bank may designate, and take such other steps as the Bank shall direct, including the noting of the Bank's lien on the chattel paper, in order to perfect the Bank's interest in the Collateral. ARTICLE 6 CONDITIONS PRECEDENT Section 6.1 Conditions of Initial Loan. The obligation of the Bank to make the initial Loan hereunder shall be subject to the satisfaction of the conditions precedent, in addition to the applicable conditions precedent set forth in Section 6.2 below, that the Bank shall have received all of the following, in form and substance satisfactory to the Bank, each duly executed and certified or dated the date hereof or such other date as is satisfactory to the Bank: (a) The Revolving Note and the Term Note, duly executed by the Borrower. (b) The Security Agreement, duly executed by the Borrower. (c) The Financing Statements, duly executed by the Borrower. (d) The Guaranty, duly executed by the Guarantor. (e) The Pledge Agreement, duly executed by the Guarantor. (f) An assignment separate from certificate and a financing statement, duly executed by the Guarantor. (g) A Secretary's Certificate certifying (1) a copy of the Bylaws of the Borrower with all amendments thereto, (2) a copy of the corporate resolutions of the Borrower authorizing the execution, delivery and performance of the Loan Documents, and (3) the names, titles, and signatures of the officers of the Borrower authorized to execute the Loan Documents and to request advances hereunder. (h) A copy of the Articles of Incorporation of the Borrower with all amendments thereto, certified by the state of its incorporation. (i) Certificates of Good Standing for the Borrower, certified by the state where the Borrower is incorporated and/or doing business. (j) Copies of the policies of insurance or other evidence acceptable to the Bank in its absolute discretion showing that the insurance required by the Security Agreement and the other Loan Documents is in full force and effect. (k) Such collateral audits and equipment appraisals as the Bank may request, each in form and substance, and conducted by auditors/appraisers, acceptable to the Bank in its sole discretion. (l) An officer's solvency certificate in form and substance acceptable to the Bank. (m) Such other documents or instruments as the Bank may request to consummate the transaction contemplated hereby. Section 6.2 Conditions Precedent to all Loans. The obligation of the Bank to make any Loan hereunder (including the initial Loan) shall be subject to the satisfaction of the following conditions precedent (and any request for a Loan shall be deemed a written certification that such conditions precedent have been satisfied): (a) Before and after giving effect to such Loan, the representations and warranties contained in Article 7 shall be true and correct, as though made on the date of such Loan; and (b) Before and after giving effect to such Loan, no Default or Event of Default shall have occurred and be continuing. ARTICLE 7 REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, to grant the Commitment and to make Loans hereunder, the Borrower represents and warrants to the Bank: Section 7.1 Organization, Standing, Etc. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Minnesota, and has all requisite corporate power and authority to carry on its businesses as now conducted, to enter into the Loan Documents and to perform its Obligations under the Loan Documents. The Borrower is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary, and where the failure to so qualify could result in an Adverse Event. Section 7.2 Authorization and Validity. The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action by the Borrower, and the Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and subject to limitations on the availability of equitable remedies. Section 7.3 No Conflict; No Default. The execution, delivery and performance by the Borrower of the Loan Documents will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Borrower, (b) violate or contravene any provisions of the Articles of Incorporation or Bylaws of the Borrower, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or any of its properties may be bound or result in the creation of any Lien on any asset of the Borrower, other than Liens in favor of the Bank. The Borrower is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could constitute an Adverse Event. Section 7.4 Government Consent. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents, other than the filing of UCC-1 financing statements. Section 7.5 Financial Projections. The Borrower's financial projections as heretofore furnished to the Bank, have been prepared based upon reasonable assumptions and fairly present the most probable anticipated financial condition and operating results of the Borrower. Section 7.6 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to the Borrower, could constitute an Adverse Event. Section 7.7 Contingent Payments or Liabilities. The Borrower does not have any contingent payments or liabilities which are material to the Borrower. Section 7.8 Compliance. The Borrower is in compliance with all statutes and governmental rules and regulations applicable to it. Section 7.9 Environmental, Health and Safety Laws. There does not exist any violation by the Borrower of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which will or threatens to impose a material liability on the Borrower or which would require a material expenditure by the Borrower to cure. The Borrower has not received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, the consequences of which non-compliance or remedial action could constitute an Adverse Event. Section 7.10 ERISA. Each Plan complies with all material applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event, other than a Reportable Event for which the reporting requirements have been waived by regulations of the PBGC, has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would permit the institution of proceedings to terminate any Plan under Section 4042 of ERISA. The current value of the Plans' benefits guaranteed under Title IV of ERISA does not exceed the current value of the Plans' assets allocable to such benefits. Section 7.11 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Federal Reserve Board) and no part of the proceeds of any Loan will be used to purchase or carry margin stock or for any other purpose which would violate any of the margin requirements of the Federal Reserve Board. Section 7.12 Ownership of Property; Liens. The Borrower has good and marketable title to its real properties and good and sufficient title to its other properties, including all properties and assets referred to as owned by it in the financial projections referred to in Section 7.5. None of the properties, revenues or assets of the Borrower is subject to a Lien, except for Permitted Liens. Section 7.13 Taxes. The Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Borrower in respect of taxes and other governmental charges are adequate. Section 7.14 Licenses and Infringement. The Borrower possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted. There does not exist and to the Borrower's knowledge there is no reason to anticipate that there may exist, any liability to the Borrower with respect to any claim of infringement regarding any franchise, patent, copyright, trademark or trade name possessed or used by the Borrower. Section 7.15 Investment Company Act. The Borrower is not an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. Section 7.16 Public Utility Holding Company Act. The Borrower is not a "holding company" or a "subsidiary company" of a holding company or an "affiliate" of a holding company or of a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.17 Subsidiaries. The Borrower does not have any Subsidiaries. Section 7.18 Partnerships and Joint Ventures. The Borrower is not a partner (limited or general) in any partnerships and the Borrower is not a joint venturer in any joint ventures. Section 7.19 Completeness of Disclosures. No representation or warranty by the Borrower contained herein or in any other Loan Document, or in any certificate or other document furnished heretofore or concurrently with the signing of this Agreement or any other Loan Document by the Borrower to the Bank in connection with the transactions contemplated hereunder or under any other Loan Document, contains any untrue statement of a material fact or omits to state a material fact which would prevent or materially inhibit the Borrower or any Subsidiary from performing its respective obligations under this Agreement or any other Loan Document according to its terms. Section 7.20 Survival of Representations. All of the representations and warranties set forth in the immediately preceding subsections shall survive until all the Obligations shall have been satisfied in full, and the Commitment has been terminated. Each of the foregoing warranties and representations shall be deemed to be repeated and reaffirmed on and as of the date any Loan is made hereunder by the Bank to the Borrower pursuant to Article 2. ARTICLE 8 AFFIRMATIVE COVENANTS From the date of this Agreement and thereafter until the Commitment is terminated or expires and the Obligations have been paid in full, unless the Bank shall otherwise expressly consent in writing, the Borrower agrees that the Borrower will do all of the following: Section 8.1 Financial Statements and Reports. Furnish to the Bank: (a) As soon as available and in any event within 90 days after the end of each calendar year, the annual reviewed financial statements of the Borrower prepared in conformity with GAAP, consisting of at least statements of income, cash flow and stockholders' equity for such year, and a balance sheet as at the end of such year, all in reasonable detail and reviewed by independent certified public accountants of recognized standing selected by the Borrower and acceptable to the Bank. (b) As soon as available and in any event within 45 days after the end of each quarter, a copy of the compiled financial statements of the Borrower prepared in the same manner as the financial statements referred to in Section 8.1(a), compiled by independent certified public accountants of recognized standing selected by the Borrower, consisting of at least statements of income, cash flow, stockholders' equity for such quarter, and a balance sheet as at the end of such quarter. (c) As soon as available and in any event within 30 days after the end of each month, a Borrower's Certificate (along with an aging of the Borrower's accounts receivable, listing of the sale/disposal of any equipment and, if requested by the Bank, a perpetual inventory listing), signed by an officer of the Borrower. (d) Immediately upon becoming aware of the occurrence, with respect to any Plan, of any Reportable Event (other than a Reportable Event for which the reporting requirements have been waived by PBGC regulations) or any "prohibited transaction" (as defined in Section 4975 of the Code), a notice specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan. (e) Immediately upon becoming aware of the occurrence thereof, notice of any violation as to any environmental matter by the Borrower and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (i) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Borrower which are material to the operations of the Borrower, or (ii) which will or threatens to impose a material liability on the Borrower to any Person or which will require a material expenditure by the Borrower to cure any alleged problem or violation. (f) On or before April 30 of each year, the Guarantor's personal financial statements for the preceding calendar year (including a year-end balance sheet and an annual statement of income). (g) From time to time, such other information regarding the business, operation and financial condition of the Borrower as the Bank may reasonably request. Section 8.2 Financial Covenants. (a) Maintain its Debt to Tangible Capital Base Ratio at all times not greater than 1.25 to 1.0. (b) Obtain a Pre-Tax Profit equal to or greater than $110,000 for the year ended February 28, 2001, and each year thereafter. (c) Maintain its Debt Service Coverage Ratio (determined at the end of each fiscal year) equal to or greater than 1.4 to 1.0. Section 8.3 Corporate Existence. Maintain its corporate existence in good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary. Section 8.4 Insurance. Maintain with financially sound and reputable insurance companies such insurance in such amounts and against such risks as is reasonably requested by the Bank or as may be required by law or as may be customary in the case of reputable Persons engaged in the same or similar business and similarly situated, including, without limitation, property, hazard, fire, wind, hail, theft, collapse, comprehensive general public liability, and business interruption insurance, and worker's compensation or similar insurance. The Borrower shall furnish to the Bank full information and written evidence as to the insurance maintained by the Borrower and its Subsidiaries. All policies shall contain the insurer's promise not to cancel the policy without 30 days prior written notice to the Bank at its address set forth below. All policies shall name the Bank as an additional insured or loss payee, as appropriate, as its interests may appear. Section 8.5 Payment of Taxes and Claims. File all tax returns and reports which are required by law to be filed by it and pay before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including, without limitation, those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as the Borrower's title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on the Borrower's books in accordance with GAAP. In addition, and without limitation, promptly pay all Trade Accounts Payable. Section 8.6 Inspection. Permit any Person designated by the Bank to visit and inspect any of its properties, corporate books and financial records, to examine and to make copies of its books of accounts and other financial records, and to discuss the affairs, finances and accounts of the Borrower with, and to be advised as to the same by, its officers at such reasonable times and intervals as the Bank may designate. The expenses of the Bank for such visits, inspections and examinations shall be at the reasonable expense of the Borrower. Section 8.7 Maintenance of Properties. Maintain its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 8.8 Books and Records. Keep adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. Section 8.9 Compliance. Comply in all material respects with the requirements of all applicable state and federal laws, and of all rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. Section 8.10 ERISA. Maintain each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and of the Code. Section 8.11 Environmental Matters. Observe and comply with all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise constitute an Adverse Event. Section 8.12 Notice of Litigation. Promptly provide written notice to the Bank of all litigation, arbitration or mediation proceedings, and of all proceedings by or before any court or governmental or regulatory agency affecting the Borrower which alone or together with other claims seeks $50,000 or more in the aggregate, describing the nature thereof and the steps being taken with respect to such proceeding(s). Section 8.13 Accounts. Maintain the Borrower's primary operating and depository account(s) at the Bank. Section 8.14 Notice of Default. Promptly provide written notice to the Bank of any Default or Event of Default, describing the nature thereof and what action the Borrower proposes to take with respect thereto. Section 8.15 Assignment of Life Insurance. Obtain by July 31, 2000, and maintain thereafter, an insurance policy on the life of James E. Sloane in an amount equal to or greater than $1,000,000, and execute and deliver to the Bank the Assignment of Life Insurance on or before July 31, 2000. ARTICLE 9 NEGATIVE COVENANTS From the date of this Agreement and thereafter until the Commitment is terminated or expires and the Obligations have been paid in full, unless the Bank shall otherwise expressly consent in writing, the Borrower agrees that the Borrower will not do any of the following: Section 9.1 Merger. Merge or consolidate or enter into any analogous reorganization or transaction with any Person. Section 9.2 Sale of Assets. Sell, transfer, assign, lease or otherwise convey all or any substantial part of its assets (whether in one transaction or in a series of transactions) to any Person other than in the ordinary course of business. Section 9.3 Purchase of Assets. Purchase or lease or otherwise acquire any right, title or interest in or to, any real or personal property not directly related to or necessary in connection with its present operations. Section 9.4 Plans. Permit any condition to exist in connection with any Plan which might constitute grounds for the PBGC to institute proceedings to have such Plan terminated or a trustee appointed to administer such Plan, permit any Plan to terminate under any circumstances which would cause the lien provided for in Section 4068 of ERISA to attach to any property, revenue or asset of the Borrower or any Subsidiary or permit the underfunded amount of Plan benefits guaranteed under Title IV of ERISA to exceed $50,000. Section 9.5 Change in Nature of Business. Make any material change in the nature of its business as carried on at the date hereof. Section 9.6 Subsidiaries, Partnerships, Joint Ventures. Do any of the following: (a) form or acquire any corporation which would thereby become a Subsidiary; or (b) form or enter into any partnership as a limited or general partner or into any joint venture. Section 9.7 Other Agreements. Enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Bank which would: (a) prohibit the Borrower from granting, or otherwise limit the ability of the Borrower to grant, to the Bank any Lien on any assets or properties of the Borrower; or (b) be violated or breached by the Borrower's performance of its obligations under the Loan Documents. Section 9.8 Restricted Payments. Either: (a) purchase or redeem or otherwise acquire for value any shares of the Borrower's stock, declare or pay any dividends thereon (other than stock dividends), make any distribution on, or payment on account of the purchase, redemption, defeasance or other acquisition or retirement for value of, any shares of the Borrower's stock or set aside any funds for any such purpose; or (b) directly or indirectly make any payment on, or redeem, repurchase, defease, or make any sinking fund payment on account of, or any other provision for, or otherwise pay, acquire or retire for value, any Indebtedness of the Borrower that is subordinated in right of payment to the Loans (whether pursuant to its terms or by operation of law), except for regularly-scheduled payments of interest and principal (which shall not include payments contingently required upon occurrence of a change of control or other event) that are not otherwise prohibited hereunder or under the document or agreement stating the terms of such subordination. Section 9.9 Investments. Acquire for value, make, have or hold any Investments, except: (a) Investments outstanding on the date hereof and listed on Schedule 9.9; (b) direct obligations of the United States of America; (c) travel advances to officers and employees in the ordinary course of business; (d) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale of goods and services in the ordinary course of business; and (e) commercial paper issued by U.S. corporations rated "A-1" by Standard & Poor Corporation or "P-1" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation). Section 9.10 Indebtedness. Create, incur, issue, assume or suffer to exist any Indebtedness, except: (a) the Obligations; (b) any Subordinated Debt; (c) Indebtedness outstanding on the date hereof and listed on Schedule 9.10. Section 9.11 Liens. Create, incur, assume or suffer to exist any Lien with respect to any property, revenues or assets now owned or hereafter arising or acquired, except Liens in favor of the Bank and except: (a) Liens existing on the date hereof and disclosed on Schedule 9.11; (b) Deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of its business; (c) Liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payments therefor shall not at the time be required to be made in accordance with the provisions of Section 8.5; and (d) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 8.5. Section 9.12 Contingent Payments or Liabilities. Either: (i) endorse, guarantee, contingently agree to purchase or to provide funds for the payment of, or otherwise become contingently liable upon, any obligation of any other Person, except by the endorsement of negotiable instruments for deposit or collection (or similar transactions) in the ordinary course of business, or (ii) agree to maintain the net worth or working capital of, or provide funds to satisfy any other financial test applicable to, any other Person. Section 9.13 Unconditional Purchase Obligations. Enter into or be a party to any contract for the purchase or lease of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services. Section 9.14 Transactions with Affiliates. Enter into or be a party to any transaction or arrangement, including, without limitation, the purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. Section 9.15 Use of Proceeds. Permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying any margin stock" within the meaning of Regulation U of the Federal Reserve Board, as amended from time to time, and furnish to the Bank, upon its request, a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U. ARTICLE 10 EVENTS OF DEFAULT AND REMEDIES Section 10.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of, or interest on, any one or more of the Notes or any fee or other amount required to be made to the Bank pursuant to the Loan Documents and such failure shall continue for a period of ten (10) days after notice thereof; or (b) Any representation or warranty made or deemed to have been made by or on behalf of the Borrower in the Loan Documents or on behalf of the Borrower in any certificate, statement, report or other writing furnished by or on behalf of the Borrower to the Bank pursuant to the Loan Documents or any other instrument, document or agreement shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified or deemed to have been stated or certified; or (c) The Borrower shall fail to comply with Section 8.2 hereof or any Section of Article 9 hereof; or (d) The Borrower or any other Credit Party shall fail to comply with any agreement, covenant, condition, provision or term contained in this Agreement or in any other Loan Document and such failure shall continue for a period of twenty (20) days after notice thereof (and such failure shall not constitute an Event of Default under any of the other provisions of this Section 10.1); or (e) An Act of Bankruptcy shall occur with respect to the Borrower or any other Credit Party; or (f) A judgment or judgments for the payment of money in excess of the sum of $50,000 in the aggregate shall be rendered against the Borrower or any other Credit Party and the Borrower or such Credit Party shall not pay or discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof, prior to any execution on such judgments by such judgment creditor, within 30 days from the date of entry thereof, and within said period of 30 days, or such longer period during which execution of such judgment shall be stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (g) Any property of the Borrower or any other Credit Party (including, without limitation, the Collateral) shall be garnished or attached in any proceeding and such garnishment or attachment shall remain undischarged for a period of 30 days during which execution is not effectively stayed; or (h) The institution by the Borrower or any ERISA Affiliate of steps to terminate any Plan if in order to effectuate such termination, the Borrower or any ERISA Affiliate would be required to make a contribution to such Plan, or would incur a liability or obligation to such Plan, in excess of $50,000, or the institution by the PBGC of steps to terminate any Plan; or (i) The maturity of any Indebtedness (other than Indebtedness under this Agreement and whether owed to the Bank or to others) of the Borrower or any other Credit Party shall be accelerated, or the Borrower or such Credit Party shall fail to pay any such Indebtedness when due or, in the case of such Indebtedness payable on demand, when demanded, or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing or permitting (any required notice having been given and grace period having expired) the holder of any such Indebtedness in such aggregate amount or any trustee or other Person acting on behalf of such holder to cause, such Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor; or (j) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due or notice of any state or federal tax lien shall be filed or issued; or (k) Any Guarantor dies or purports to revoke such Guarantor's Guaranty; or (l) Any Guarantor purports to revoke his Pledge Agreement; or (m) Any Event of Default shall occur under the Pledge Agreement; or (n) James E. Sloane shall fail to own and hold of record at least 51% of the outstanding voting stock of the Borrower. Section 10.2 Remedies. If (a) any Event of Default described in Section 10.1(e) shall occur, the Commitment shall automatically terminate and the outstanding unpaid principal balance of the Notes, the accrued interest thereon and all other obligations of the Borrower to the Bank under the Loan Documents shall automatically become immediately due and payable; or (b) any other Event of Default shall occur and be continuing, then the Bank may take any or all of the following actions: (i) declare the Commitment to be terminated, whereupon the Commitment shall terminate, and (ii) declare that the outstanding unpaid principal balance of one or more of the Notes, the accrued and unpaid interest thereon and all other obligations of the Borrower to the Bank under the Loan Documents to be forthwith due and payable, whereupon such Notes, all accrued and unpaid interest thereon and all such obligations shall immediately become due and payable, in each case without further demand or notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding. In addition, upon any Event of Default and so long as such Event of Default continues, the Bank may exercise all rights and remedies under any other instrument, document or agreement between the Borrower and the Bank, and enforce all rights and remedies under any applicable law, including without limitation the rights and remedies available upon default to a secured party under the Uniform Commercial Code as adopted in the State of Minnesota, including, without limitation, the right to take possession of the Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Bank at a place to be designated by the Bank which is reasonably convenient to both parties. Section 10.3 Offset. In addition to the remedies set forth in Section 10.2, upon the occurrence of any Event of Default or at any time thereafter while such Event of Default continues, the Bank or any other holder of the Notes may offset any and all balances, credits, deposits (general or special, time or demand, provisional or final), accounts or monies of the Borrower then or thereafter with the Bank or such other holder, or any obligations of the Bank or such other holder of the Notes, against the Indebtedness then owed by the Borrower to the Bank. Nothing in this Agreement shall be deemed a waiver or prohibition of the Bank's rights of banker's lien, offset, or counterclaim, which right the Borrower hereby grants to the Bank. ARTICLE 11 MISCELLANEOUS Section 11.1 Waiver and Amendment. No failure on the part of the Bank or the holder of the Notes to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in any other instrument, document or agreement delivered or to be delivered to the Bank hereunder or in connection herewith are cumulative and not exclusive of any remedies provided by law. No notice to or demand on the Borrower not required hereunder or under the Notes shall in any event entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Bank or the holder of the Notes to any other or further action in any circumstances without notice or demand. No amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall be effective unless the same shall be in writing and signed by the Bank, and then such amendment, modifications, waiver or consent shall be effective only in the specific instances and for the specific purpose for which given. Section 11.2 Expenses and Indemnities. Whether or not any Loan is made hereunder, the Borrower agrees to reimburse the Bank upon demand for all reasonable expenses paid or incurred by the Bank (including collateral audit expenses, filing and recording costs and fees and expenses of legal counsel) in connection with the preparation, review, execution, delivery, amendment, modification, interpretation, collection and enforcement of the Loan Documents. The Borrower agrees to pay, and save the Bank harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Loan Documents. The Borrower agrees to indemnify and hold the Bank harmless from any loss or expense which may arise or be created by the acceptance of instructions for making Loans or disbursing the proceeds thereof. The obligations of the Borrower under this Section 11.2 shall survive any termination or expiration of the Commitment and payment in full of the Obligations. Section 11.3 Notices. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from a first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Bank under Article 2 hereof shall be deemed to have been given only when received by the Bank. If notice to the Borrower of any intended disposition of the Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least ten calendar days prior to the date of intended disposition or other action. Section 11.4 Successors. This Agreement shall be binding on the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank, and the successors and assigns of the Bank. The Borrower shall not assign its rights or duties hereunder without the written consent of the Bank. Section 11.5 Participations and Information. The Bank may sell participation interests in any or all of the Loans and in all or any portion of the Commitment to any Person. The Bank may furnish any information concerning the Borrower in the possession the Bank from time to time to participants and prospective participants and may furnish information in response to credit inquiries consistent with general banking practice. Section 11.6 Severability. Any provision of the Agreement which is prohibited or unenforceable in any jurisdiction shall, in such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 11.7 Captions. The captions or headings herein are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. Section 11.8 Entire Agreement. This Agreement and the Notes, and the other Loan Documents, embody the entire agreement and understanding between the Borrower and the Bank with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Section 11.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. Section 11.10 Governing Law. The validity, construction and enforceability of this Agreement and the Notes shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of laws principles thereof. (The signature page follows.) THE PARTIES HERETO have caused this Revolving Credit and Term Loan Agreement to be executed as of the date first above written. ALPHA CERAMICS, INC. By: Its: 5121 Winnetka Avenue North, Suite 100 Minneapolis, MN 55428-4256 Attention: Jim Sloane Telephone: (763) 535-9660 Fax: (763) 535-9655 BANK By: Its: 5050 France Avenue South Edina, MN 55410 Attention: Mr. Wes Beedon Telephone: (612) 836-3162 Fax: (612) 836-3170 2371858-2 List of Schedules 9.9 Existing Investments 9.10 Existing Indebtedness 9.11 Existing Liens EX-10.37 15 0015.txt ASSET PURCHASE AGREEMENT - CERAMICS ------------------------------- ASSET PURCHASE AGREEMENT BY AND AMONG AURA CERAMICS, INC., AURA SYSTEMS, INC. AND ALPHA CERAMICS, INC. February 29, 2000 ------------------------------- THE OBLIGATION OF THE BUYER TO PAY, AND THE RIGHTS OF THE SELLER AND THE STOCKHOLDER TO RECEIVE, THE DEFERRED PURCHASE PRICE AND THE INSTALLMENT PAYMENTS WITH RESPECT THERETO PURSUANT TO ARTICLE 2.4 HEREOF ARE EXPRESSLY SUBJECT TO THE PROVISIONS OF (1) THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF _______________, 2000, BY AND BETWEEN BUYER, SELLER, STOCKHOLDER AND EXCEL BANK, AND (2) THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF ______________, 2000, BY AND AMONG BUYER, SELLER, STOCKHOLDER AND LANDLORD. i Schedules Schedules 2.3 Assumed Liabilities 2.5 Allocation of Purchase Price 3.1 Seller's Disclosure Schedule 3.5 Seller's Financial Statements 8 ASSET PURCHASE AGREEMENT Asset Purchase Agreement (the "Agreement"), dated as of February 29, 2000, by and among Alpha Ceramics, Inc., a Minnesota corporation (the "Buyer"), having its principal place of business at 5121 Winnetka Avenue, New Hope, Minnesota 55428; Aura Ceramics, Inc., a Delaware corporation (the "Seller"), having its principal place of business at 5121 Winnetka Avenue, New Hope, Minnesota 55428; and, Aura Systems, Inc., a Delaware corporation, having its principal place of business at 2335 Alaska Avenue, El Segundo, California 90245 (the "Stockholder"). This Agreement sets forth the terms and conditions upon which the Buyer will purchase from the Seller, and the Seller will sell to the Buyer, substantially all the assets of the Seller (other than the Retained Assets, as hereinafter defined) and the business and goodwill constituting the manufacturing business of the Seller as a going concern, for the consideration provided herein. In consideration of the foregoing, the mutual representations, warranties and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: ARTICLE I DEFINITIONS Definitions. For the purposes of this Agreement, all capitalized terms used in this Agreement (including the Schedules and Exhibits annexed hereto) shall have the meanings specified in Exhibit 1.1. ARTICLE II PURCHASE AND SALE OF ASSETS Purchase of Assets. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, the Seller shall sell, assign, transfer and convey to the Buyer, and the Buyer shall purchase, acquire and accept from the Seller, the business of the Seller as a going concern (the "Business"), including all of the Seller's assets of every kind and description (the "Purchased Assets") including, without limitation, the following assets and properties: (a) all tangible personal property owned by the Seller including, without limitation, all inventories wherever located, raw materials, goods consigned to vendors or subcontractors, work in process, finished goods and goods in transit, all machinery, equipment, fixtures and furniture; (b) All of Seller's cash, bank accounts, prepayments and deposits as of the Closing Date; (c) all rights and interests of the Seller in and to any contracts, including, without limitation, contracts for the purchase of materials, supplies and services and the sale of products and services, equipment leases; (d) all of the Seller's books, records and other data; (e) all of the Seller's goodwill, dealer and customer lists and all other sales and marketing information, and all patents, trademarks, copyrights and other intellectual property, know-how, technology, drawings, engineering specifications, bills of materials, software and other intangible assets of the Seller; (f) all right, title and interest in and to the name "Aura Ceramics, Inc." and all variants thereof as applicable solely to the ceramics business; (g) all permits, licenses, orders, ratings and approvals of all federal, state, local or foreign governmental or regulatory authorities or industrial bodies which are held by the Seller, to the extent the same are transferable; (h) all notes receivable, prepaid expenses, accounts receivable and other similar current assets; (i) all investment securities held by Seller including, without limitation, all proceeds thereof and all rights to cash or non-cash dividends and voting rights associated therewith; (j) all rights with respect to leasehold interests and subleases and rights thereunder relating to real property; (k) all rights of the Seller to causes of action, lawsuits, judgments, claims and demands of any nature; and (l) all other items of property, real or personal, tangible or intangible, including without limitation all securities, corporate names, restrictive and negative covenant agreements with employees and others, and computer programs owned, used by or accruing to the benefit of the Seller. 2.2 Retained Assets. The Seller will retain ownership only of the following assets (collectively, the "Retained Assets"): (a) the Seller's rights under this Agreement; (b) all of the Seller's Plans. 2.3 Liabilities. The Buyer is not assuming or agreeing, nor shall it be deemed to have assumed or agreed, to pay, perform or discharge any of the obligations of the Seller other than those expressly set forth on Schedule 2.3 attached hereto (collectively the "Assumed Liabilities"). Seller shall remain unconditionally liable for all obligations, liabilities and commitments of Seller, presently existing or contingent arising out of events or circumstances occurring on or prior to the Closing Date of the Seller, other than the Assumed Liabilities (collectively, the "Retained Liabilities"). 2.4 Purchase Price. (a) The purchase price (the "Purchase Price") to be paid by the Buyer to the Seller or its assignee (including, without limitation, the Stockholder) for the Purchased Assets shall be $3,500,000, plus assumption by Buyer of the Assumed Liabilities as set forth in Schedule 2.3 attached hereto. The Purchase Price shall be payable as follows: (i) On the Closing Date the Buyer shall pay to the Seller or its assignee (including, without limitation, the Stockholder) an amount equal to $800,000 (the "Closing Cash Payment"); and (ii) The principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000), together with interest on the unpaid balance accruing thereon as of and from the date hereof at a rate equal to eight percent (8%) per annum (calculated on the basis of actual days elapsed in a year of 365 days), shall be due and payable in (A) forty-seven (47) equal consecutive monthly payments of principal and interest in the amount of $31,000 each, commencing on the first (1st) day of the calendar month following the Closing Date (as defined in Article 2.6 below) and continuing ----------- on the same day of each calendar month thereafter until and including September 1, 2007; and (B) one (1) final installment due on September 30, 2007, equal to the then outstanding principal balance of such $2,500,000 plus accrued but unpaid interest thereon. (iii) The principal amount of $200,000 shall be due and payable, without interest, on September 30, 2007. (The principal amounts due pursuant to subsections (ii) and (iii) are referred to herein as the "Deferred Purchase Price".) (b) The payment of the Deferred Purchase Price shall be and hereby is expressly subordinated to the payment of (A) the $1,000,000 term loan and the $200,000 revolving line of credit obtained on or prior to the date hereof by the Buyer from Excel Bank to acquire the assets from Seller pursuant to this agreement and provide Buyer with working capital; (B) any and all other indebtedness of the Buyer for money borrowed from any banks, financial institutions or other institutional lenders to (i) purchase equipment in the future, and (ii) provide for any additional capital needs of the Buyer; (C) any and all loans and lines of credit obtained by the Buyer to refinance all or any part of the indebtedness referred to in (A), (B) above; and (D) the amounts due and payable to the Landlord by the Buyer under and pursuant to the Lease (as those terms are defined in Section 4.4 hereof); provided, however, that the Seller shall only be required to subordinate payment of the Deferred Purchase Price to the payment of indebtedness under (A), (B) and (C) above up to an aggregate principal amount outstanding at any one time of $2,000,000. The Seller shall execute and deliver subordination agreements in favor of such lenders and the Landlord at the request of the Buyer. (c) If an Event of Default, as defined below, has occurred and is continuing, the outstanding principal balance of the Deferred Purchase Price and interest accrued thereon shall become immediately due and payable, upon ten (10) days written notice and demand given by the Seller to the Buyer. An Event of Default shall mean the occurrence of any one or more of the following: (i) Buyer shall fail to pay, when due, any installment of the Deferred Purchase Price and such failure shall continue for sixty (60) days after written notice given by the Seller to the Buyer; or (ii) Buyer shall file or have filed against it a petition in bankruptcy or for an arrangement pursuant to any present or future state or federal bankruptcy act or under a similar federal or state law, or shall be adjudicated a bankrupt or insolvent, or shall make a general assignment for the benefit of creditors, or shall be unable to pay its debts generally as they become due, or any property of the Buyer shall be levied upon or attached in any proceeding; or (iii) Buyer shall be or become insolvent (whether in the equity or bankruptcy sense); or (iv) the dissolution of the Buyer; (d) Payment of the Deferred Purchase Price and the installment payments with respect thereto are specifically subject to the terms and conditions of Buyer's "Right of Set Off" as set forth in Article 8.5 herein. Such right of set off shall continue to be effective and available to Buyer notwithstanding the assignment by Seller to Stockholder of Seller's right and entitlements pursuant to Article 2.4(e) hereof or the liquidation of the Seller. (e) Seller hereby sells, transfers, conveys and assigns to Stockholder any and all rights and entitlements of Seller under, pursuant to and by virtue and arising out of this Agreement the payment of any and all monies to be paid to Seller. Buyer is hereby directed therefore to pay to Stockholder the portion of the Purchase Price payable pursuant to subsection (a) above. Buyer hereby agrees that Stockholder shall have the same rights hereunder as the Seller by virtue of such assignment notwithstanding the subsequent liquidation of Seller. 2.5 Allocation of Purchase Price. The Purchase Price shall be allocated among the Purchased Assets for purposes of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), as set forth in Schedule 2.5 attached hereto. The Seller and the Buyer agree to be bound by such allocations and to complete and attach Internal Revenue Form 8594 to their respective federal income tax returns to reflect such allocations. 2.6 Time and Place of Closing. The closing of the transactions described herein (the "Closing") shall take place simultaneously with the execution of this Agreement. The date and time at which the Closing actually occurs is hereinafter referred to as the "Closing Date." 2.7 Execution and Delivery of Documents of Title by the Seller. At the Closing, the Seller shall execute and deliver to the Buyer a bill of sale in form and substance acceptable to Buyer, (the "Bill of Sale") and such deeds, conveyances, certificates of title, assignments, assurances and other instruments and documents as the Buyer may reasonably request in order to effect the sale, conveyance, and transfer of the Purchased Assets from the Seller to the Buyer. Such instruments and documents shall be sufficient to convey to the Buyer good and marketable title in all of the Purchased Assets. The Seller will, from time to time after the Closing Date, take such additional actions and execute and deliver such further documents as the Buyer may reasonably request in order to more effectively sell, transfer and convey the Purchased Assets to the Buyer and to place the Buyer in position to operate and control all of the Purchased Assets. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE STOCKHOLDER The Seller and the Stockholder hereby jointly and severally represent and warrant to the Buyer that the following statements are true and correct, except as disclosed on Schedule 3.1 attached hereto. (a) Organization and Qualification. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. The Seller has full corporate power and authority to own, use and lease its properties and to conduct its business as such properties are currently owned, used or leased and as such business is currently conducted. The Seller is qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business would require such qualification. (b) Authority; No Violation. The Seller has all requisite corporate power and authority to enter into this Agreement and each of the Purchase Documents to which it is a party and to carry out the transactions contemplated hereby or thereby. The execution, delivery and performance by the Seller of this Agreement and each of the Purchase Documents to which it is a party have been duly and validly authorized and approved by all necessary corporate action. This Agreement and each of the Purchase Documents to which it is a party constitute the legal and binding obligation of the Seller and the Stockholder, enforceable against each in accordance with its terms. Assuming the accuracy of the representations and warranties of the Buyer hereunder, the entering into of this Agreement by the Seller and the Stockholder does not, and the consummation by the Seller and the Stockholder of the transactions contemplated hereby, including specifically the transfer of the Purchased Assets to the Buyer by the Seller, will not violate the provisions of (i) any applicable laws of the United States or any other state or jurisdiction in which the Seller does business, or (ii) the Seller's or the Stockholder's Charter or bylaws. 3.2 The Seller and the Stockholder hereby jointly and severally represent and warrant that neither of them has any actual knowledge that any of the following statements are not true or correct in all material respects, except as set forth on Schedule 3.1 attached hereto. For purposes of this Section 3.2, the term "actual knowledge" shall not include the actual knowledge possessed by any of the Aura Ceramics Employees. Furthermore, if one or more Aura Ceramics Employees possesses actual knowledge of any facts or circumstance which would cause any such statement to be untrue or incorrect, then the Seller and the Shareholder shall not be deemed to have made any misrepresentation or breach of warranty with respect to such specific statement. (a) No Violation. The execution, delivery and performance of this Agreement and each of the Purchase Documents, and the consummation of the transactions contemplated thereby, will not conflict with any provision of, or result in a default or acceleration of any obligation under, result in any change in the rights or obligations of the Seller under or require any consent under, any Lien, contract agreement, license, lease, instrument, indenture, order, arbitration award, judgment, or decree to which the Seller is a party or by which it is bound, or to which any property of the Seller is subject and which now has a Material Adverse Effect on the Seller. (b) Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or other foreign governmental authority, instrumentality, agency or commission ("Governmental Entity") or any third party, including a party to any agreement with the Seller, is required by or with respect to the Seller or the Stockholder in connection with the execution and delivery of this Agreement and any Related Agreements to which the Seller or the Stockholder is a party or the consummation of the transactions contemplated hereby and thereby, except for such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable securities laws. (c) Subsidiaries. The Seller has never had and, as of the date hereof, has no Subsidiaries. (d) Financial Statements. The financial statements of Seller heretofore delivered by Seller or Stockholder to Buyer hereto attached as Schedule 3.5 (the "Financial Statements"), have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly in all material respects the financial condition of the Seller as of such dates and the results of operations of the Seller for such periods, are correct and complete, and are consistent with the books and records of the Seller. (e) Title to the Purchased Assets. Seller has good and marketable title to, or a valid leasehold or license interest in, all of the Purchased Assets, free and clear of all Liens, and free of any material infractions or non-compliance with zoning and building laws (collectively, the "Defects"); and (ii) the sale and delivery of the Purchased Assets to the Buyer pursuant hereto shall vest in the Buyer good and valid title thereto or a valid leasehold or license interest therein, free and clear of any and all Liens or Defects; and (iii) the Seller owns, leases or licenses all real, personal, tangible and intangible property and assets necessary for the conduct of its business as such business is presently conducted, and all such property and assets are included in the Purchased Assets. The Stockholder does not own, lease or license any real, personal, tangible or intangible property which is used by Seller in the conduct of its business. (f) Leases. Each lease and sublease to which Seller is a party is legal, valid, binding, enforceable, and in full force and effect and will continue to be so on identical terms following the consummation of the transactions contemplated hereby, and Seller is not in material breach or default thereunder. (g) Intellectual Property. (i) The Buyer shall have no obligations in respect of any royalties, fees or other obligations in connection with the Intellectual Property Rights used by the Seller prior to the Closing. (ii) Each item of Seller Intellectual Property is free and clear of any Liens or other encumbrances and the Seller is the exclusive owner of all Seller Intellectual Property (other than Seller Intellectual Property which is Intellectual Property exclusively licensed to the Seller). (iii) To the extent that any Intellectual Property has been developed or created independently or jointly by any person other than the Seller for which the Seller has, directly or indirectly, paid, the Seller has a written agreement with such person with respect thereto, and the Seller thereby has obtained ownership of, and is the exclusive owner of, all such Intellectual Property and associated Intellectual Property Rights by operation of law or by valid assignment. (iv) The Seller has not transferred ownership of or granted any license of or right to use or authorized the retention of any rights to use any Intellectual Property or Intellectual Property Rights that is or was Seller Intellectual Property, to any other person. (v) The Seller Intellectual Property constitutes all the Intellectual Property and Intellectual Property Rights used in and/or necessary to the conduct of the business of the Seller as it currently is conducted, planned or is reasonably contemplated to be conducted, including, without limitation, the design, development, manufacture, use, import and sale of products, technology and services (including products, technology or services currently under development). (vi) There are no contracts, licenses or other agreements, other than those executed by an Aura Ceramics Employee, to which the Seller is a party with respect to any Intellectual Property and Intellectual Property Rights and no person who has licensed Intellectual Property or Intellectual Property Rights to the Seller has ownership rights or license rights to improvements made by the Seller in such Intellectual Property which has been licensed to the Seller. (vii) There are no contracts, licenses or agreements, other than those executed by an Aura Ceramics Employee, between the Seller and any other person wherein or hereby the Seller has agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume or incur any obligation or liability or provide a right of rescission with respect to the infringement or misappropriation by the Seller or such other person of the Intellectual Property Rights of any person other than the Seller. (viii) The operation of the business of the Seller as it currently is conducted or is reasonably contemplated to be conducted, including but not limited to the design, development, use, import, manufacture and sale of the products, technology or services (including products, technology or services currently under development) of the Seller does not infringe or misappropriate the Intellectual Property Rights of any person, violate the rights of any person (including rights to privacy or publicity), or constitute unfair competition or trade practices under the laws of any jurisdiction, and the Seller has not received notice from any person claiming that such operation or any act, product, technology or service (including products, technology or services currently under development) of the Seller infringes or misappropriates the Intellectual Property Rights of any person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor is the Seller or the Stockholder aware of any basis therefor). (ix) Each item of Seller Registered Intellectual Property is valid and subsisting, and all necessary registration, maintenance and renewal fees in connection with such Seller Registered Intellectual Property have been paid and all necessary documents and certificates in connection with such Seller Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Registered Intellectual Property. There are no actions that must be taken by the Seller within sixty (60) days of the Closing date, including the payment of any registration, maintenance or renewal fees or the filing of any documents, applications or certificates for the purposes of maintaining, perfecting or preserving or renewing any Registered Intellectual Property. For each product, technology or service of the Seller that constitutes or includes a copyrightable work, the Seller has registered the copyright in the latest version of such work with the U.S. Copyright Office. In each case in which the Seller has acquired any Intellectual Property rights from any person, the Seller has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such Intellectual Property and the associated Intellectual Property Rights (including the right to seek past and future damages with respect thereto) to the Seller and, to the maximum extent provided for by, and in accordance with, applicable laws and regulations, the Seller has recorded each such assignment with the relevant governmental authorities, including the PTO, the U.S. Copyright Office, or their respective equivalents in any relevant foreign jurisdiction, as the case may be. (x) There are no contracts, licenses or agreements between the Seller and any other person with respect to Seller Intellectual property under which there is any dispute known to the Seller or the Stockholder regarding the scope of such agreement, or performance under such agreement including with respect to any payments to be made or received by the Seller thereunder. (xi) To the knowledge of the Seller and the Stockholder no person is infringing or misappropriating any Seller Intellectual Property. (xii) The Seller has taken all reasonable steps that are required to protect the Seller's rights in confidential information and trade secrets of the Seller or provided by any other person to the Seller. Without limiting the foregoing, the Seller has, and enforces, a policy requiring each employee, consultant and contractor to execute proprietary information, confidentiality and assignment agreements substantially in the Seller's standard forms, and all current and former employees, consultants and contractors of the Seller have executed such an agreement. (xiii) No Seller Intellectual Property, Intellectual Property Rights or service of the Seller is subject to any proceeding or outstanding decree, order, judgment, agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by the Seller or may affect the validity, use or enforceability of such Seller Intellectual Property. (xiv) No (A) product, technology, service or publication of the Seller, (B) material published or distributed by the Seller, or (C) conduct or statement of Seller, constitutes obscene material, a defamatory statement or material, false advertising or otherwise violates any law or regulation. (h) Contracts. The Seller is not a party to or subject to any contract or agreement other than those executed by an Aura Ceramics Employee. (i) Compliance with Laws. Seller is not now charged with or under investigation with respect to any possible material violation of any applicable law, statute, ordinance, regulation, rule, order or requirement. (j) Taxes. Seller has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all respects. All Taxes shown to be due and payable on such Tax Returns by the Seller have been paid. The Seller has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. The Seller is not the beneficiary of any extension of time within which to file any Tax Return. No Claim has ever been made by an authority in a jurisdiction where the Seller does not file Tax Returns alleging that it is or may be subject to the imposition of any Tax by that jurisdiction. The Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, consultant, independent contractor, creditor, stockholder, or other third party. Neither the Seller nor the Stockholder is aware of any dispute or Claim concerning any liability for Taxes of the Seller. The Seller has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. The unpaid Taxes of the Seller (i) did not, as of the Last Balance Sheet Date, exceed the reserve for Tax liabilities set forth on the face of the Last Balance Sheet (rather than in any notes thereto) and (ii) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Seller in filing its Tax Returns. (k) Plan. The Aura Ceramics Employees are not covered by any Plan other than the 401(k) Plan of Seller. (l) Environmental Matters. The Seller has not received written notice from any Person, (i) that it has been identified by the EPA or similar state authority as a potentially responsible party under CERCLA with respect to a site listed on the "National Priorities List," as in effect as of the Closing Date, of hazardous waste sites or any similar state list; (ii) that any Hazardous Materials which the Seller has generated, transported, or disposed of has been found at any site at which a person has conducted or has ordered that the Seller conduct a remedial investigation, removal, or other response action pursuant to any Environmental Law; or (iii) that the Seller is or shall be a named party to any Environmental Action arising out of any person's incurrence of costs, expenses, losses, or damages of any kind whatsoever in connection with the release of Hazardous Materials. There are no underground fuel or other storage tanks located at any of the facilities of the Seller. There have been no unpermitted Releases of Hazardous Materials by the Seller on, upon, into, or from the real estate or other assets of the Seller or any other property; there have been no unpermitted Releases of Hazardous Materials on, upon, into or from the real estate or other assets of the Seller by any other persons; there have been no Releases on, upon, from, or into any neighboring real property which, through the soil, groundwater, or surface water, can reasonably be expected to come to be located on, upon, or under the real estate or other assets of the Seller. (m) Employees. Seller is in compliance in all material respects with applicable federal, state and local laws affecting labor, employment and employment practices, including terms and conditions of employment and wages and hours, and, there are, and have been during the past five (5) years, no complaints against the Seller pending or, to the knowledge of the Seller and the Stockholder, threatened before the National Labor Relations Board or any similar state or local agency. Upon termination of the employment of any employee of the Seller, to the knowledge of the Seller and the Stockholder, neither the Buyer nor the Purchased Assets will be subject to any claim by any such employee for "severance payment" or any other payment by reason of anything done by the Seller prior to or after the Closing. (n) Litigation. There are no claims pending or threatened (or any facts which could lead to such a Claim) by, or against the Seller or to which the Seller or the Stockholder or their respective businesses, properties or assets, at law or in equity, before any federal, state, local or foreign court or any other governmental or administrative agency or tribunal or any arbitrator or arbitration panel, and (b) there are no judgments, orders, rulings, charges, decrees, injunctions, notices of violation or other mandates against the Seller to which the Seller or the Stockholder is a party with respect to the businesses, properties or assets of the Seller. (o) Brokers. Neither the Seller nor the Stockholder nor anyone acting on their behalf has engaged, retained, nor incurred any liability to any broker, investment banker, finder or agent or has agreed to pay any brokerage fees, commissions, finder's fees or other fees with respect to this Agreement or the transactions contemplated hereby. (p) Disclosure of Material Information. There is no fact or circumstance known to the Seller or the Stockholder which now or hereafter has a Material Adverse Effect on the Seller and which has not been set forth in this Agreement or in any other document delivered in connection herewith. Without limiting the generality of the foregoing, the Stockholder has not heretofore taken any actions, nor is there any existing fact or circumstance relating to Stockholder, which now or hereafter has a Material Adverse Effect on Buyer after the consummation of the purchase and sale of the Purchased Assets contemplated hereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer hereby represents and warrants to the Seller as follows: 4.1 Organization and Qualification. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota, with full corporate power and authority to own, use or lease its properties and to conduct its business as such properties are owned, used or leased and as such business is conducted. 4.2 Authority. The Buyer has the requisite corporate power and authority to enter into this Agreement and each of the Purchase Documents and to carry out the transactions contemplated hereby or thereby. The execution, delivery and performance of this Agreement and each of the Purchase Documents by the Buyer has been duly and validly authorized and approved by all necessary corporate action. This Agreement and each of the Purchase Documents constitute the legal and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms, except that the enforceability hereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. 4.3 Brokers. The Buyer has not engaged, retained, or incurred any liability to any broker, investment banker, finder or agent or has agreed to pay any brokerage fees, commissions, finder's fees or other fees with respect to this Agreement or the transactions contemplated hereby. 4.4 Lease. The Buyer shall assume at the closing any and all obligations of Seller and Stockholder under and pursuant to that certain amended and restated lease agreement dated as of October 1, 1997, by and between Winnetka Properties, L.L.C. (the "Landlord") and the Seller (the "Lease") relating to that portion of the building located at 5121 Winnetka Avenue, New Hope, Minnesota 55428 known as Winnetka Properties which is currently being leased by Seller (the "Leased Premises"), including but not limited to any and all environmental cleanup obligations with respect to the Leased Premises and the $200,000 collateral requirements which are set forth and contained in the Lease; provided, however, that the Seller or Stockholder shall pay to the Landlord the $100,000 fee required to be paid to the Landlord for its consent to the assignment of the Lease by Seller to Buyer, the release of Seller from any further obligations under the Lease, and the release of Stockholder from its guaranty of the Lease; provided further, however, that the Buyer shall have no obligation to the Seller, the Stockholder or the Landlord, to pay or reimburse Seller or Stockholder for such fee. 4.5 Sole Representations and Warranties. The representations and warranties contained in this Article IV are the only representations and warranties made by the Buyer in connection with the transactions contemplated by this Agreement and supersede any and all previous written or oral statements made by the Buyer to the Seller or the Stockholder. ARTICLE V COVENANTS Covenants of the Seller. The Seller and the Stockholders each shall keep, perform and fully discharge the following covenants and agreements: (a) Transfer of Necessary Permits. From and after the Closing Date, the Seller will use its best efforts to assist the Buyer in obtaining all of the Necessary Permits and all other permits, licenses, and leases which are associated with the Business as presently conducted on or after the Closing Date, to the extent the same are by their terms and by law transferable. (b) Retained Liabilities. From and after the Closing Date , the Seller agrees to pay, perform and fully discharge all of the Retained Liabilities as they come due. (c) Non-Disclosure of Proprietary Information. The Seller agrees to hold Proprietary Information in confidence and not disclose it, except to its employees or representative to whom disclosure is necessary to effect the purposes of this Agreement and who are similarly bound to hold such information in confidence. In addition, the Seller shall use its best efforts to prevent inadvertent or unauthorized disclosure, publication, or other dissemination of any Proprietary Information. For the purposes of this Agreement, "Proprietary Information" means information or material included in the Purchased Assets and proprietary to the Buyer or is designated as Proprietary Information by the Buyer or is not generally known by personnel outside of the employment of the Buyer including, without limitation, financial information, applications, technical and business data, know-how, formulae, processes, models, designs, plans, drawings, specifications, schematics, samples, reports, data charts, customer lists, vendor lists, studies, price lists, findings, inventions, trade secrets, circuitry, software, programs, source code listings or other documentation or designs of such party. (d) Tax Matters. The Seller and Stockholder shall be responsible for and shall cause to be prepared and duly filed all Tax Returns relating to Taxes of the Seller. (e) Waiver of Compliance with the Bulk Sales Act. In connection with the transactions contemplated hereby, the parties shall waive compliance with the provisions of Article 6 of the Uniform Commercial Code Bulk Transfers and the Bulk Sales Act, to the extent applicable, and any other applicable United States, state or provincial bulk sales act or statute ("Bulk Sales Acts"). (f) WARN; COBRA. The Seller shall terminate the employment of all of its employees simultaneously with the Closing and shall be responsible for any notice required under or liability associated with the Worker Adjustment and Retraining Notification Act (29 U.S.C. ss.ss.2101 to 2109), COBRA group health plan continuation coverage (29 U.S.C. ss.ss. 601608 and 26 U.S.C. ss.4980B) and any applicable State or local plant closing, mass layoff, relocation, or severance, or continuation coverage laws associated with the employees which takes place or arises on or before the Closing Date. (g) The Seller shall remove all Liens and Defects other than the Assumed Liabilities. 5.2 Covenants of Buyer. The Buyer shall keep, perform and fully discharge the following covenants and agreements: (a) The Buyer shall abide by and assume, perform, pay or discharge, any and all obligations under and pursuant to the Lease relating to the Leased Premises, including but not limited to any and all environmental cleanup obligations with respect to the Leased Premises which are set forth and contained in the Lease; provided, however, that the Seller or the Stockholder shall satisfy the collateral requirement set forth in the Lease and any agreements and documents related thereto, to the satisfaction of the Landlord; provided further, however, that the Buyer shall have no obligation to the Seller, the Stockholder or the Landlord, to satisfy such collateral requirement. (b) On and after the closing, Buyer shall comply with all environmental laws relating to the Leased Premises, obtain any required environmental permits with respect to Buyer's operations, and be responsible for any required cleanup of the Leased Premises resulting from any environmental action taken with respect to the Leased Premises if such action arises. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER Conditions Precedent to Obligations of Buyer. The obligations of the Buyer to proceed on the Closing Date shall be subject (as its discretion) to the satisfaction, on or prior to the Closing, of all of the following conditions: (a) The representations and warranties of the Seller and Stockholder herein are true in all material respects on the date hereof and as of the Closing Date, with the same effect as though made at such time. (b) Seller and Stockholder have complied with each and all of the covenants and agreements required to be performed or complied with by either of them on or prior to the Closing Date. (c) Title to the Purchased Assets shall have been sold, transferred, assigned, and conveyed to Buyer free and clear of any and all mortgages, security interests, liens, and encumbrances whatsoever. (d) Buyer shall have closed on the following financing transaction with Excel Bank: (i) a One Million and 00/100 Dollars ($1,000,000) five (5) year term loan, and (ii) a Two Hundred Thousand and 00/100 Dollars ($200,000) working capital line of credit. (e) The Landlord shall have consented in writing to the Assignment of the Lease by Seller to Buyer; such consent shall contain the acknowledgement and agreement of the Landlord that Buyer shall not be responsible for satisfying the collateral obligation described in Section 4.4 hereof; and which consent shall otherwise be acceptable in form and substance to the Buyer and Excel Bank. (f) The Landlord shall have executed and delivered to Buyer an estoppel certificate in customary form, which is acceptable, in form and substance, to the Buyer and Excel Bank. The foregoing condition are for the sole benefit of the Buyer and, therefore, any or all of such conditions may be waived by the Buyer in its sole discretion. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER 7.1 Conditions Precedent to Obligations of Seller. The obligations of the Seller to proceed on the Closing Date shall be subject (in its discretion) to the satisfaction, on or prior to the Closing, of all of the following conditions: (a) The representations and warranties of the Buyer herein are true in all material respects on the date hereof and as of the Closing date with the same effect as though made at such time. (b) Buyer has complied with each and all of the covenants and agreements required to be performed or complied with on or prior to the Closing Date. The foregoing conditions are for the sole benefit of the Seller and, therefore, any or all of such conditions may be waived by the Seller in its sole discretion. Seller and Stockholder acknowledge and agree that Buyer shall have no obligation to obtain from the Landlord a release of Seller and Stockholder of their respective obligations under the Lease and the agreements and documents related thereto. ARTICLE VIII INDEMNIFICATION Survival of Representations and Warranties. Each and every representation and warranty set forth in this Agreement shall survive the Closing without limitation. 8.2 Indemnification. (a) The Seller and the Stockholder shall, jointly and severally, indemnify, defend and hold the Buyer, and their respective officers, directors, consultants, employees, owners, agents and Affiliates, harmless from and against any and all damages, losses, obligations, deficiencies, liabilities, claims, encumbrances, penalties, costs, and expenses, including reasonable attorneys' fees and costs ("Losses"), in connection with any Loss which the Buyer may suffer or incur, resulting from, related to or arising out of any of the following: (i) any breach of a representation or warranty (which survives pursuant to Section 5.1 above and only for so long as such survival), (ii) non-fulfillment of any of the covenants of the Seller or the Stockholder in this Agreement; (iii) any of the Retained Liabilities or the Retained Assets; (iv) fraud, intentional misrepresentation (which survives pursuant to Section 5.1 above and only for so long as such survival) on the part of each of the Seller or Stockholder; (v) any Taxes required to be paid by the Seller or the Stockholder or with respect to the Purchased Assets or the Business for any period ending on or before the Closing Date; (vi) any and all actions, suits, investigations, proceedings and claims relating to the conduct of the Business by the Seller on or prior to the Closing Date and any and all actions, suits, investigations, proceedings, demands, assessments, audits, judgments and claims arising out of any of the foregoing. (b) The Buyer shall indemnify, defend and hold the Seller and its officers, directors, consultants, employees, owners, agents and Affiliates, harmless from and against any and all Losses, in connection with any Loss which such indemnitee may suffer or incur, resulting from, related to or arising out of any of the following: (i) any breach of a representation or warranty (which survives pursuant to Section 5.1 above and only for so long as such survival), (ii) nonfulfillment of any of the covenants of the Buyer in this Agreement; (iii) fraud, intentional misrepresentation (which survives pursuant to Section 5.1 above and only for so long as such survival) on the part of the Buyer; (iv) any and all actions, suits, investigations, proceedings, and claims relating to the conduct of the Business by the Buyer after the Closing Date, (v) the Assumed Liabilities, or (vi) any and all liabilities, actions, suits, investigations, proceedings, demands, assessments, audits, Liens, judgments and claims arising out of any of the foregoing or out of the conduct of the Business by the Buyer after the Closing. (c) For purposes of this Article V, Losses for breach of any representation, warranty or covenant contained in this Agreement shall be determined without giving effect to "material," "materiality" or "Material Adverse Effect." (d) Buyer hereby acknowledges and agrees that the indemnification set forth in subsection (b) above shall inure to the benefit of the Stockholder, as the assignee of Seller pursuant to Article 2.4(e) hereof, notwithstanding the subsequent liquidation of Seller. 8.3 Notice and Opportunity to Defend. If there occurs an event for which an indemnitee asserts an indemnifiable event pursuant to Section 5.2, the indemnitee shall promptly notify the indemnitors. If such event involves (a) any Claim or (b) the commencement of any action, suit or proceeding by a third person, the indemnitee will give the indemnitors prompt written notice of such Claim or the commencement of such action, suit or proceeding, provided, however, that the failure to provide prompt notice as provided herein will relieve the indemnitors of their obligations hereunder only to the extent that such failure prejudices the indemnitors hereunder. In case any such action, suit or proceeding shall be brought against an indemnitee and it shall notify the indemnitors of the commencement thereof, the indemnitors shall be entitled to participate therein and, to the extent that they desire to do so, to assume the defense thereof, with counsel reasonably satisfactory to the indemnitees and, after notice from the indemnitors to the indemnitees of such election so to assume the defense thereof, the indemnitors shall not be liable to the indemnitees hereunder for any attorneys' fees or any other expenses, in each case subsequently incurred by the indemnitees, in connection with the defense of such action, suit or proceeding. The indemnitees each agree to cooperate fully with the indemnitors and their counsel in the defense against any such action, suit or proceeding. In any event, the each indemnitee shall have the right to participate at its own expense in the defense of such action, suit or proceeding. In no event shall the indemnitors be liable for any settlement or compromise effected without their prior consent. If, however, an indemnitee refuses to consent to a bona fide offer of settlement which the indemnitors wish to accept, such indemnitee may continue to pursue such matter, free of any participation by the indemnitors, at the sole expense of such indemnitee. In such event, the obligation of the indemnitors to such indemnitee shall be equal to the lesser of (i) the amount of the offer or settlement which the indemnitors wish to accept (which must include the unconditional release of such indemnitee from all liability with respect to the Claim at issue), which such indemnitee refused to accept plus the costs and expenses of such indemnitee prior to the date the indemnitors notified the indemnitees of the offer of settlement and (ii) the actual out-of-pocket amount such indemnitee is obligated to pay as a result of its continuing to pursue such matter. 8.4 Adjustment for Insurance and Taxes. The amount which an indemnitor is required to pay to, for or on behalf of an indemnitee pursuant to this Article V shall be adjusted (including, without limitation, retroactively) (i) by any insurance proceeds actually recovered by or on behalf of such indemnitee in reduction of the related indemnifiable loss (the "Indemnifiable Loss") and (ii) to take account of any Tax benefit realized as a result of any Indemnifiable Loss. Amounts required to be paid, as so reduced, are hereafter sometimes called an "Indemnity Payment." If an indemnitee shall have received or shall have had paid on its behalf an Indemnity Payment in respect of an Indemnifiable Loss and shall subsequently receive insurance proceeds in respect of such Indemnifiable Loss, or realize any Tax benefit as a result of such Indemnifiable Loss, then the indemnitee shall pay to the indemnitor the amount of such insurance proceeds or Tax benefit or, if lesser, the amount of the Indemnity Payment. 8.5 Right of Set Off. Buyer may set off and deduct any and all amounts now or hereafter due and payable by Buyer to Seller or Stockholder (including, without limitation the Deferred Purchase Price and the installments with respect thereto) against any and all payment obligations now or hereafter due or to become due by either the Seller or the Stockholder to the Buyer under this Agreement and any and all other amounts now or hereafter due or to become due by either Seller or Stockholder to Buyer. Such right of set off shall continue to be effective and available to Buyer notwithstanding the assignment by Seller to Stockholder of Seller's rights and entitlements pursuant to Article 2.4(e) hereof or the liquidation of Seller. 8.6 Limited Recourse. Notwithstanding anything to the contrary contained herein, after the Closing Date the provisions of this Article shall be the sole recourse of the parties hereto, other than any claims made by any party for specific performance, and such recourse is explicitly limited to the dollar amounts and time limits set forth in this Agreement. ARTICLE IX MISCELLANEOUS Fees and Expenses. Each of the parties hereto will pay and discharge its own expenses and fees in connection with the negotiation of and entry into this Agreement and the consummation of the transactions contemplated hereby. 9.2 Notices. All notices, requests, demands, consents and communications necessary or required under this Agreement or any other Purchase Document to which the Seller is a party shall be made in the manner specified, or, if not specified, shall be delivered by hand or sent by registered or certified mail, return receipt requested, or by telecopy (receipt confirmed) to: if to the Buyer: Alpha Ceramics, Inc. 5121 Winnetka Avenue N. Minneapolis, MN 55428 Attention: James E. Sloane Facsimile Transmission Number: (612) 535-9655 With copy to: Roger Gordon, Esq. Winthrop & Weinstine, P.A. 3000 Dain Rauscher Plaza 60 South 6th Street Minneapolis, MN 55402 Facsimile Transmission Number: (612) 347-0600 if to the Seller or Stockholder: Aura Systems, Inc. Aura Ceramics, Inc. Michael I. Froch Office of the General Counsel 2335 Alaska Avenue El Segundo, California 90245 Facsimile Transmission Number: (310) 643-8719 All such notices, requests, demands, consents and other communications shall be deemed to have been duly given or sent two (2) days following the date on which mailed, or on the date on which delivered by hand or by facsimile transmission (receipt confirmed), as the case may be, and addressed as aforesaid. 9.3 Successors and Assigns. All covenants and agreements set forth in this Agreement and made by or on behalf of any of the parties hereto shall bind and inure to the benefit of the successors and assigns of such party, whether or not so expressed, except that neither party may assign or transfer any of their respective rights or obligations under this Agreement without the consent in writing of the other, except in connection with a merger of such party with a third party or a sale of all or substantially all the assets or stock of such party to a third party. 9.4 Counterparts; Descriptive Headings; Variations in Pronouns. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. The headings of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the identity of the Person or Persons may require. 9.5 Severability; Entire Agreement. If any provision contained herein is held unenforceable, the enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected. This Agreement, including the Schedules and Exhibits referred to herein, is complete, and all promises, representations, understandings, warranties and agreements with reference to the subject matter hereof, and all inducements to the making of this Agreement relied upon by any of the parties hereto, have been expressed herein or in said Schedules or Exhibits. This Agreement may not be amended except by an instrument in writing signed on behalf of the Seller and the Buyer. 9.6 Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement or the other Purchase Documents to which the Buyer, on the one hand, and Seller and/or Stockholder, on the other hand, is a party, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 9.7 Course of Dealing. No course of dealing and no delay on the part of any party hereto in exercising any right, power, or remedy conferred by this Agreement shall operate as a waiver thereof or otherwise prejudice such party's rights, powers and remedies. The failure of any of the parties to this Agreement to require the performance of a term or obligation under this Agreement or the waiver by any of the parties to this Agreement of any breach hereunder shall not prevent subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach hereunder. No single or partial exercise of any rights, powers or remedies conferred by this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 9.8 GOVERNING LAW. THIS AGREEMENT, INCLUDING THE VALIDITY HEREOF AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 9.9 WAIVER OF JURY TRIAL. EACH OF THE BUYER, THE SELLER AND THE STOCKHOLDER HEREBY EXPRESSLY WAIVES ITS OR HIS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OTHER PURCHASE DOCUMENT TO WHICH THE SELLER IS A PARTY OR THE PURCHASED ASSETS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. [Remainder of Page Intentionally Left Blank] THE OBLIGATION OF THE BUYER TO PAY, AND THE RIGHTS OF THE SELLER AND THE STOCKHOLDER TO RECEIVE, THE DEFERRED PURCHASE PRICE AND THE INSTALLMENT PAYMENTS WITH RESPECT THERETO PURSUANT TO ARTICLE 2.4 HEREOF ARE EXPRESSLY SUBJECT TO THE PROVISIONS OF (1) THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF _______________, 2000, BY AND BETWEEN BUYER, SELLER, STOCKHOLDER AND EXCEL BANK, AND (2) THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF ______________, 2000, BY AND AMONG BUYER, SELLER, STOCKHOLDER AND LANDLORD. IN WITNESS WHEREOF the parties hereto have executed this Agreement under seal as of the date first set forth above. ATTEST: ALPHA CERAMICS, INC. ______________________________ By: ------------------------------------- Name: James E. Sloane Title: President ATTEST: AURA CERAMICS, INC. ______________________________ By: ------------------------------------- Name: ______________________________ Title: ______________________________ ATTEST: AURA SYSTEMS, INC. ______________________________ By: --------------------------------------- Name: Gerald S. Papazian Title: President and Chief Operating Officer MPL1: 328666-9 Schedule 1.1 Definitions "Affiliate" means when used with respect to any Person, (a) if such Person is a corporation, any officer or director thereof and any Person which is, directly or indirectly, the beneficial owner (by itself or as part of any group) of more than five percent (5%) of any class of any equity security thereof, and, if such beneficial owner is a partnership, any general or limited partner thereof, or if such beneficial owner is a corporation, any Person controlling, controlled by or under common control with such beneficial owner, or any officer or director of such beneficial owner or of any corporation occupying any such control relationship, (b) if such Person is a partnership, any general or limited partner thereof and (c) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. For purposes of this definition, (i) "control" (including the correlative terms "controlling," "controlled by" and "under common control with"), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise; and (ii) all employees, stockholders, consultants and agents of a party and any stockholder of such party shall be considered an Affiliate of such party. "Assignment of Lease" means the Assignment of Lease by and between the Seller, the Buyer and Winnetka Properties, L.L.C. with respect to the real property located at 5121 Winnetka Avenue North, Suite 100, New Hope, Minnesota, 55428, in form and substance acceptable to both Buyer and Seller. "Aura Ceramics Employees" means, individually or collectively, as the context requires, (i) David Benson, Larry Johnson, Mikhail Komarov, Lester Meissner, Leonard Oberant, Brian Ziegler, James Bealka, Anthony Erickson, Neal Simoneau, Francis Wallenhorst, Diane Przymus, James Sloane and Madeline Sloane, and (ii) any previous employee of Seller who was not been an officer, director or employee of Stockholder. "Bill of Sale" means the Bill of Sale of even date herewith given by the Seller to the Buyer in form and substance acceptable to Buyer. "Business Day" means any day, excluding Saturday, Sunday and any other day on which federally chartered national banks are required by law to close. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and the regulations thereunder, and court decisions in respect thereof, all as the same shall be in effect at the time. "Charter" means the Certificate of Incorporation, Articles of Incorporation or Organization or other organizational document of a corporation, as amended and restated through the date hereof. "Claim" means an action, suit, proceeding, hearing, investigation, litigation, charge, complaint, claim or demand. "Closing" and "Closing Date" shall have the meanings ascribed to such terms in Section 2.5. "Code" means the Internal Revenue Code of 1986, and the regulations thereunder, published Internal Revenue Service rulings, and court decisions in respect thereof, all as the same shall be in effect at the time. "Defects" shall have the meaning ascribed to such term in Section 3.8. "Environmental Action" means any administrative, regulatory or judicial action, suit, demand, demand letter, claim, notice of noncompliance or violation, investigation, request for information, proceeding, consent order or consent agreement relating in any way to any Environmental Law or any Environmental Permit, including, without limitation, (a) any claim by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any Environmental Law and (b) any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials, damage to the environment or alleged injury or threat of injury to human health or safety from pollution or other environmental degradation. "Environmental Law" means any applicable federal, state or local law, statute, rule, regulation, or ordinance relating to the environment, human health or safety from pollution or other environmental degradation or Hazardous Materials, including, without limitation, CERCLA, the Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act, the Clean Water Act, the Toxic Substances Control Act, the Clean Air Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Occupational Safety and Health Act, and any similar state and local laws or bylaws, the rules, regulations and interpretations thereunder, all as the same shall be in effect from time to time. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, and any similar or successor federal statute, and the rules, regulations and interpretations thereunder, all as the same shall be in effect at the time. "ERISA Affiliate" means, for purposes of Title IV of ERISA, any trade or business, whether or not incorporated, that together with the Seller or any Subsidiary of the Seller, would be deemed to be a "single employer" within the meaning of Section 4001 of ERISA, and, for purposes of the Code, any member of any group that, together with the Seller, is treated as a "single employer" for purposes of Section 414 of the Code. "Hazardous Materials" means (a) petroleum or petroleum products, natural or synthetic gas, asbestos, urea formaldehyde foam insulation and radon gas, (b) any substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar import, under any Environmental Law and (c) any other substance exposure to which is regulated under any Environmental Law. "Intellectual Property" means any or all of the following (i) works of authorship including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, records, data and mask works, (ii) inventions (whether or not patentable), improvements, and technology, (iii) proprietary and confidential information, trade secrets and know how, (iv) databases, data compilations and collections and technical data, (v) logos, trade names, trade dress, trademarks and service marks, (vi) domain names, web addresses and sites, (vii) tools, methods and processes, and (viii) all embodiments of the foregoing in any form and instantiated in any media. "Intellectual Property Rights" means worldwide common law and statutory rights associated with (i) patents and patent applications, (ii) copyrights, copyright registrations and copyright applications and "moral" rights, (iii) the protection of trade and industrial secrets and confidential information, (iv) other proprietary rights relating to intangible intellectual property, (v) trademarks, trade names and service marks, (vi) analogous rights to those set forth above, and (vii) divisions, continuations, renewals, reissuances and extensions of the foregoing (as applicable) now existing or hereafter filed, issued or acquired. "Last Balance Sheet Date" means February 28, 2000. "Lien" means, with respect to any asset, any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien, charge, restriction, adverse claim by a third party or title defect or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any assignment or other conveyance of any right to receive income and any assignment of receivables with recourse against assignor), any filing of any financing statement as debtor under the Uniform Commercial Code or comparable law of any jurisdiction and any agreement to give or make any of the foregoing. "Material Adverse Effect" means, with respect to any Person, an actual material adverse impact (other than arising in connection with any impact on the applicable industry or market generally) on the business, operations, assets, liabilities, or condition (financial or otherwise) of such Person. "Person" means any individual, firm, partnership, association, trust, corporation, limited liability company, governmental body or other entity. "PBGC" means the Pension Benefit Guaranty Corporation, and any successor thereto. "Plans" means any: (i) "Employee Pension Benefit Plan" (as such term is defined in Section 3(2) of ERISA) which is not a Multiemployer Plan; (ii) "Employee Welfare Benefit Plan" (as such term is defined in Section 3(3) of ERISA); and (iii) Stock purchase, option, or bonus plan, deferred compensation, severance pay, incentive, merit or performance bonus, vacation, sick pay or leave, fringe benefit plan, policy, or arrangement, or payroll practice, which is maintained or contributed to by the Seller or any ERISA Affiliate, or under which the Seller or any ERISA Affiliate has any liability or contingent liability. "Proprietary Information" shall have the meaning ascribed to it in Section 4.1(d) herein. "Purchase Documents" means this Agreement, the Bill of Sale, the Assignment of Lease, and any other certificate, document, instrument, stock power, or agreement executed in connection therewith. "Release" means any release, issuance, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Hazardous Materials through or in the air, soil, surface water, ground water, or property other than in compliance with all Environmental Laws and Permits. "Seller Intellectual Property" means any Intellectual Property and Intellectual Property Rights that are owned by or exclusively licensed to the Seller. "Seller Registered Intellectual Property" shall have the meaning ascribed to it in Section 3.11 herein. "Subsidiary" means, with respect to any Person (a) any corporation, association or other entity of which at least a majority in interest of the outstanding capital stock or other Equity Securities having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors, managers or trustees thereof, irrespective of whether or not at the time capital stock or other Equity Securities of any other class or classes of such corporation, association or other entity shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by such Person, or (b) any entity (other than a corporation) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly at the date of determination thereof, has at least majority ownership interest. "Tax" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. Schedule 2.3 Trade Accounts Payable of the Seller as of the date of closing as derived from the books and records of Seller Schedule 2.5 Purchase Price Allocation for purposes of IRS Section 1060 Schedule 3.1 (Seller's disclosure schedule) Schedule 3.5 Seller's Financial Statements EX-10.38 16 0016.txt SUBORDINATION AGREEMENT - CERAMICS SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT, dated as of May __, 2000, is made and given by AURA CERAMICS, INC., a Delaware corporation and AURA SYSTEMS, INC., a Delaware corporation (jointly and severally, the "Junior Creditor") in favor of EXCEL BANK, a Minnesota state banking corporation (the "Senior Creditor"). RECITALS: A. Alpha Ceramics, Inc., a Minnesota corporation (the "Borrower") is or may hereafter become indebted to the Junior Creditor pursuant to Section 2.4 of that certain Asset Purchase Agreement, dated as of February 29, 2000, between the Junior Creditor and the Borrower (the "Asset Purchase Agreement") and/or pursuant to other documents or instruments executed in connection therewith and/or by reason of loans or other extensions of credit or other financial accommodations now or hereafter made or to be made by the Junior Creditor to the Borrower (collectively, the "Subordinated Agreements"). B. The Borrower is now, or may hereafter be, indebted to the Senior Creditor as a result of the advance of monies and other extensions of credit by the Senior Creditor to the Borrower under a Revolving Credit and Term Loan Agreement dated as of May ___, 2000 (as the same may be amended, restated or otherwise modified from time to time hereafter, the "Credit Agreement") between the Borrower and the Senior Creditor and under other agreements or arrangements for the extension of financial accommodations now, heretofore or hereafter in effect. C. The Junior Creditor acknowledges that the loan or advance of monies or other extensions of any financial accommodation or credit to the Borrower by the Senior Creditor is of value to the Junior Creditor. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged by the Junior Creditor, and in order to induce the Senior Creditor to make loans or extend credit or any other financial accommodation to or for the benefit of the Borrower, or to grant such renewals or extension thereof as the Senior Creditor may deem advisable, and to better secure the Senior Creditor in respect of the foregoing, the Junior Creditor hereby agrees as follows: Section 1. Definitions, Rules of Constructions. (a) For purpose of this Agreement, the following terms shall have the following meanings: "Asset Purchase Agreement" shall have the meaning given to that term in Recital A above, and shall include any amendments, modifications or restatements thereto or thereof (but nothing in this definition shall be deemed to waive the provisions of Section 11 below requiring the Senior Creditor's prior written consent to any change in the Asset Purchase Agreement). "Bankruptcy Code" shall mean 11 U.S.C. ss. 101 et seq., as amended from time to time. "Borrower" shall mean Alpha Ceramics, Inc. and any successor (including a debtor-in-possession under the Bankruptcy Code), assignee, receiver, trustee or estate thereof. "Credit Agreement" shall have the meaning given to that term in Recital B above, and shall include any amendments, modifications or restatements thereto or thereof and any credit agreement hereafter entered into in replacement thereof. "Default" shall mean any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Event of Default" shall mean (i) any Event of Default (as therein defined) under the Credit Agreement, (ii) any failure of the Borrower to pay when due (whether at the date scheduled therefor or earlier upon acceleration), or when demanded (with respect to any obligation payable on demand), any item constituting Senior Debt, or (iii) any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the Senior Creditor or any subsequent holder of Senior Debt to cause, any item of Senior Debt to become due prior to its stated maturity or to realize upon any collateral given as security therefor. "Junior Creditor" shall mean each of Aura Ceramics, Inc. and Aura Systems, Inc., and any successor thereto (including a debtor-in-possession under the Bankruptcy Code), assignee, receiver, trustee or estate thereof, jointly and severally. "Permitted Payments" shall have the meaning given in Section 3 below. "Person" shall mean an individual, corporation, association, partnership, limited partnership, trust, organization, individual or government or any governmental agency or any political subdivision thereof. "Senior Creditor" shall mean Excel Bank, and its successors and its assignees with respect to any of the Senior Debt. "Senior Debt" shall mean all liabilities and obligations of the Borrower to the Senior Creditor howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising or incurred, including, without limitation, all of the Borrower's obligations to the Senior Creditor under the Credit Agreement and any note or notes executed by the Borrower thereunder, and all other obligations under any other agreement between the Borrower and the Senior Creditor now or hereafter in effect, and also including, without limitation, any and all interest accruing on any of the Senior Debt after the commencement of any proceedings referred to in Section 5 below, notwithstanding any provision or rule of law which might restrict the rights of the Senior Creditor, as against the Borrower or anyone else, to collect such interest. "Subordinated Debt" shall mean all obligations, liabilities and indebtedness of the Borrower to the Junior Creditor, howsoever arising or evidenced, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising or incurred, under any written or unwritten agreement, including, without limitation, the Subordinated Agreements. "Subordinated Agreements" shall have the meaning given to such term in Recital A above, and shall include any amendments, modifications, substitutions or restatements thereto or thereof and any note or agreement hereafter entered into in replacement thereof (but nothing in this definition shall be deemed to waive the provisions of Section 11 below requiring the Senior Creditor's prior written consent to any change in any instrument or agreement evidencing Subordinated Debt). (b) In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word "from" means "from and including" and the word "to" or "until" each means "to but excluding." (c) Other terms may be defined in other parts of this Agreement. All references to agreements and other contractual instruments shall be deemed to include all subsequent amendments thereto or changes therein entered into in accordance with their respective terms, and all references to Persons shall be deemed to include their permitted successors and assigns. Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." All incorporations by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and include all necessary information and related provisions from such other agreements, and all such covenants, terms, definitions or other provisions from other agreements incorporated into this Agreement by reference shall survive any termination of such other agreements until the Senior Debt has been paid in full and all financing arrangements between the Borrower and the Senior Creditor shall have been terminated. Section 2. Standby; Subordination. The payment and performance of the Subordinated Debt is hereby subordinated to the payment and performance in full of the Senior Debt, and, except as set forth in Section 3 below, the Junior Creditor will not ask, demand, sue for, take or receive from the Borrower or any other Person liable for all or any part of the Senior Debt, by setoff or in any other manner, the whole or any part of the Subordinated Debt, or any monies which may now or hereafter be owing in respect of the Subordinated Debt (whether such amounts represent principal or interest, or obligations which are due or not due, direct or indirect, absolute or contingent), including, without limitation, taking any security for any of the foregoing, or the taking of any negotiable instrument therefor, unless and until all of the Senior Debt shall have been fully paid and satisfied and all financing arrangements between the Borrower and Senior Creditor have been terminated. The Junior Creditor warrants and represents that the Subordinated Debt is unsecured and agrees that (a) the Junior Creditor hereafter will not accept any security therefor from the Borrower, or from any third Person for the benefit of the Borrower; and (b) in the event the Junior Creditor does obtain any security for the Subordinated Debt, (i) all liens and security interests of the Junior Creditor in any assets of the Borrower or any assets securing the Senior Debt shall be and hereby are subordinated to the rights and interests of the Senior Creditor, if any, in those assets, (ii) the Junior Creditor shall have no right to possession of any such assets or to foreclose upon any such assets, whether by judicial action or otherwise, unless and until all the Senior Debt shall have been fully paid and satisfied and all financing arrangements between the Borrower and Senior Creditor have been terminated, and (iii) at the request of the Senior Creditor, the Junior Creditor shall execute and deliver to the Senior Creditor such termination statements and releases as the Senior Creditor shall reasonably request to release the Junior Creditor's security interest in or lien against such property. The Junior Creditor, prior to the payment in full and discharge of the Senior Debt and the termination of all financing arrangements between the Borrower and the Senior Creditor, shall have no right to enforce any claim with respect to the Subordinated Debt, or to take any action against the Borrower or the property of the Borrower or of any other Person liable for all or any part of the Senior Debt for the benefit of the Borrower. The Junior Creditor acknowledges and agrees that, to the extent the terms and provisions of this Agreement are inconsistent with any agreement or understanding between the Junior Creditor and the Borrower, such agreement or understanding shall be subject to this Agreement. Section 3. Permitted Payments. Notwithstanding the provisions of Section 2 above, until the Senior Creditor gives the Junior Creditor written notice (in the manner set forth below) of the occurrence of an Event of Default or a Default, and provided that: (i) there shall not then exist any breach of this Agreement by the Junior Creditor which has not been waived, in writing, by the Senior Creditor, (ii) at the time of the payment described below no Event of Default exists and is continuing, (iii) the payment described below, if made, would not give rise to the occurrence of any Event of Default, and (iv) none of the events described in Section 5 has occurred, the Borrower may pay to the Junior Creditor, and the Junior Creditor may accept from the Borrower, interest and principal payments when due (without acceleration) as provided in Section 2.4 of the Asset Purchase Agreement (the "Permitted Payments"). Section 4. Subordinated Debt Owed Only to the Junior Creditor. The Junior Creditor warrants and represents that the Junior Creditor has not previously assigned any interest in the Subordinated Debt, that no other Person owns an interest in the Subordinated Debt (whether as joint holders of Subordinated Debt, participants or otherwise) and that the entire Subordinated Debt is owing only to the Junior Creditor. The Junior Creditor further covenants that the entire Subordinated Debt shall continue to be owing only to the Junior Creditor unless it is assigned with the prior written consent of the Senior Creditor to a Person who agrees with the Senior Creditor to be bound by the subordination provisions set forth herein. Section 5. Priority. In the event of (a) any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of the Borrower or the proceeds thereof to the creditors of the Borrower or to their claims against the Borrower, or (b) any readjustment of the debt or obligations of the Borrower, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding involving the readjustment of all or any part of the Senior Debt or Subordinated Debt, or the application of the assets of the Borrower to the payment or liquidation thereof, or (c) the dissolution or other winding up of the business of the Borrower, or (d) the sale of all or substantially all of the assets of the Borrower, then, and in any such event, the Senior Creditor shall be entitled to receive payment in full of all of the Senior Debt prior to the payment of all or any part of the Subordinated Debt. Section 6. Grant of Authority to Senior Creditor. In order to enable the Senior Creditor to enforce its rights hereunder in any of the actions or proceedings described in Section 5, the Senior Creditor is hereby irrevocably authorized and empowered, in its discretion, to file and present for and on behalf of the Junior Creditor such proofs of claims or other motions or pleadings as the Senior Creditor may deem expedient or proper to establish the Senior Creditor's entitlement of payment from, or on behalf of, the Junior Creditor with respect to the Subordinated Debt and to vote such proofs of claims in any such proceeding and to demand, sue for, receive and collect any and all dividends or other payments or disbursements made thereon in whatever form the same may be paid or issued and to apply the same on account of any of the Senior Debt. The Junior Creditor irrevocably authorizes and empowers the Senior Creditor to demand, sue for, collect and receive each of the payments and distributions described in Section 5 above and give acquittance therefor and to file claims and take such other actions, in the Senior Creditor's own name or in the name of the Junior Creditor or otherwise, as the Senior Creditor may deem necessary or advisable for the enforcement of this Agreement. To the extent that payments of distributions are made in property other than cash, the Junior Creditor authorizes the Senior Creditor to sell such property to such buyers and on such terms as the Senior Creditor, in its sole discretion, shall determine. The Junior Creditor will execute and deliver to the Senior Creditor such powers of attorney, assignments and other instruments or documents, including debentures (together with such assignments or endorsements as the Senior Creditor shall deem necessary), as may be reasonably requested by the Senior Creditor in order to enable the Senior Creditor to enforce any and all claims upon or with respect to any or all of the Subordinated Debt and to collect and receive any and all payments and distributions which may be payable or deliverable at any time upon or with respect to the Subordinated Debt, all for the Senior Creditor's own benefit. Section 7. Payments Received by the Junior Creditor. Except for Permitted Payments, if the Junior Creditor receives any payment or distribution or security or instrument or proceeds thereof upon or with respect to the Subordinated Debt prior to the payment in full of the Senior Debt and termination of all financing arrangements between the Borrower and the Senior Creditor, the Junior Creditor shall receive and hold the same in trust, as trustee, for the benefit of the Senior Creditor and shall forthwith deliver the same to the Senior Creditor in precisely the form received (except for the endorsement or assignment by the Junior Creditor where necessary), for application on any of the Senior Debt, due or not due and, until so delivered, the same shall be held in trust by the Junior Creditor as the property of the Senior Creditor. In the event of the failure of the Junior Creditor to make any such endorsement or assignment to the Senior Creditor, the Senior Creditor, or any of its officers or employees, is hereby irrevocably authorized to make the same. Section 8. Continuing Nature of Subordination. This Agreement shall be effective and may not be terminated or otherwise revoked by the Junior Creditor until the Senior Debt shall have been fully paid and discharged and all financing arrangements between the Borrower and the Senior Creditor have been terminated. This is a continuing agreement of subordination and the Senior Creditor may continue, at any time and without notice to the Junior Creditor, to extend credit or other financial accommodations and loan monies to or for the benefit of the Borrower in reliance hereon. No obligation of the Junior Creditor hereunder shall be affected by the dissolution, liquidation, death or incapacity of, or written revocation by, the Junior Creditor or any other subordinated party, pledgor, endorser, or guarantor, if any. Section 9. Additional Agreements Between Senior Creditor and Borrower. The Senior Creditor, at any time and from time to time, may enter into such agreement or agreements with the Borrower as the Senior Creditor may deem proper, increasing the amount of, extending the time of payment of or renewing or otherwise altering the terms of all or any of the Senior Debt or affecting any security underlying any or all of the Senior Debt, and may exchange, sell, release, surrender or otherwise deal with any such security, without in any way thereby impairing or affecting this Agreement. Section 10. Bankruptcy Issues. If the Borrower becomes the subject of proceedings under the Bankruptcy Code and if the Senior Creditor desires to permit the use of cash collateral or to provide financing to the Borrower under either Section 363 or Section 364 of the Bankruptcy Code, the Junior Creditor agrees that adequate notice of such financing to the Junior Creditor, if required under applicable law, shall have been provided if the Junior Creditor receives notice two (2) business days prior to entry of any order approving such cash collateral usage or financing. Notice of a proposed financing or use of cash collateral shall be deemed given upon the sending of such notice to the Junior Creditor in the manner specified in Section 16, below. All allocations of payments between the Senior Creditor and the Junior Creditor shall continue to be made after the filing of a petition under the Bankruptcy Code on the basis provided in this Agreement. In the event that the Junior Creditor at any time acquires any security for the Subordinated Debt, the Junior Creditor agrees not to assert any right the Junior Creditor may have to "adequate protection" of the Junior Creditor's interest in such security in any Bankruptcy proceeding, or to seek to have the Junior Creditor's claims in such Bankruptcy proceeding treated as "secured claims" under Section 506(a) of the Bankruptcy Code, without the prior written consent of the Senior Creditor. The Junior Creditor waives any claim the Junior Creditor may now or hereafter have against the Senior Creditor arising out of the Senior Creditor's election, in any proceeding instituted under Chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by the Borrower, as debtor in possession, or by a trustee. To the extent that the Senior Creditor receives payments on, or proceeds of any collateral for, the Senior Debt which are subsequently avoided, invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any Bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Senior Debt, or part thereof, intended to be satisfied shall be revived and continue in full force and effect as if such payments or proceeds had not been received by the Senior Creditor. Section 11. Instrument Legend; No Amendments to Subordinated Instruments. Any agreement or instrument evidencing the Subordinated Debt, or any portion thereof, which has been or is hereafter executed by the Borrower will, on the date hereof or the date of execution, be inscribed with a legend conspicuously indicating that payment thereof is subordinated to the claims of the Senior Creditor pursuant to the terms of this Agreement. The original of any such agreement or instrument will be delivered to the Senior Creditor within five (5) Business Days after the date hereof or the date of its execution. The Junior Creditor will not agree to any amendment, restatement or other modification of any such instrument or agreement or any other agreement or document evidencing the Subordinated Debt, including, without limitation, the Asset Purchase Agreement and the other Subordinated Agreements, without the prior written consent of the Senior Creditor. Section 12. Waivers. The Senior Debt shall be deemed to have been made or incurred in reliance upon this Agreement. The Junior Creditor expressly waives all notice of the acceptance by the Senior Creditor of the subordination and other provisions of this Agreement and all other notices not specifically required pursuant to the terms of this Agreement whatsoever, and the Junior Creditor expressly waives reliance by the Senior Creditor upon the subordination and other agreements as herein provided. The Junior Creditor agrees that the Senior Creditor has made no warranties or representations with respect to the due execution, legality, validity, completeness or enforceability of the Credit Agreement, or the collectability of the Senior Debt, and that the Senior Creditor shall be entitled to manage and supervise its loans and other financial accommodations to the Borrower without regard to the existence of any rights that the Junior Creditor may now or hereafter have in or to any of the assets of the Borrower. The Junior Creditor agrees that the Senior Creditor shall have no liability to the Junior Creditor for, and waives any claim which the Junior Creditor may now or hereafter have against, the Senior Creditor arising out of any and all actions which the Senior Creditor in good faith takes or omits to take (including, without limitation, actions with respect to any security for the Senior Debt, actions with respect to the occurrence of an Event of Default, actions with respect to the foreclosure upon, sale, release, or depreciation of, or failure to realize upon, any security for the Senior Debt and actions with respect to the collection of any claim for all or any part of the Senior Debt from any guarantor or other party) with respect to or any other agreement related to any Senior Debt or to the collection of the Senior Debt or the valuation, use, protection or release of any security for the Senior Debt. Section 13. Senior Creditor's Waivers. No waiver shall be deemed to be made by the Senior Creditor of any of its rights hereunder unless the same shall be in writing signed on behalf of the Senior Creditor, and each waiver, if any, shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the Senior Creditor or the obligations of the Junior Creditor to the Senior Creditor in any other respect at any other time. Section 14. Financial Condition of Borrower; Other Actions by the Senior Creditor. The Junior Creditor hereby assumes responsibility for keeping informed of the financial condition of the Borrower, any and all endorsers and any and all guarantors of the Subordinated Debt and of all other circumstances bearing upon the risk of nonpayment of the Senior Debt and/or the Subordinated Debt that diligent inquiry would reveal. The Junior Creditor hereby agrees that the Senior Creditor shall have no duty to advise the Junior Creditor of information known to the Senior Creditor regarding such condition or any such circumstances. In the event the Senior Creditor, in its sole discretion, undertakes, at any time or from time to time, to provide any such information to the Junior Creditor, the Senior Creditor shall be under no obligation (i) to provide any such information to the Junior Creditor on any subsequent occasion, (ii) to undertake any investigation not a part of its regular business routine, or (iii) to disclose any information which, pursuant to its usual practices, the Senior Creditor wishes to maintain confidential. The Junior Creditor hereby agrees that all payments received by the Senior Creditor may be applied, in whole or in part, to any of the Senior Debt, as the Senior Creditor, in its sole discretion, deems appropriate and assents to any extension or postponement of the time of payment of the Senior Debt or to any other indulgence with respect thereto, to any substitution, exchange or release of collateral which may at any time secure the Senior Debt and to the addition or release of any other Person primarily or secondarily liable therefor. Section 15. Subrogation. When the Senior Debt shall have been fully paid and discharged and all financing arrangements between the Borrower and the Senior Creditor have been terminated, the Junior Creditor shall be subrogated to the rights of the Senior Creditor to receive payments or distribution of assets of the Borrower made on such Senior Debt until the principal of and premium, if any, and interest on (and any other amounts due with respect to) the Subordinated Debt shall be paid in full. For the purposes of such subrogation, no payments or distributions to the Senior Creditor of any cash, property or securities to which the Junior Creditor would be entitled except for these provisions shall, as between the Borrower, its creditors other than the Senior Creditor, and the Junior Creditor, be deemed to be a payment by the Borrower to or on account of Senior Debt, it being understood that these provisions in this Section are used, and are intended, solely for the purpose of defining the relative rights of the Junior Creditor, on the one hand, and the Senior Creditor, on the other hand. Section 16. Notices. All communications and notices provided under this Agreement to any party shall be given in writing by manual delivery, facsimile transmission, overnight courier or United States first class mail to such party's address shown on the signature page hereof, or to any party at such other address as may be designated by such party in a notice to the other parties. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending if sent by facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Section 17. Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. Section 18. Consent to Jurisdiction. AT THE OPTION OF THE SENIOR CREDITOR, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE JUNIOR CREDITOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE JUNIOR CREDITOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SENIOR CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 19. Waiver of Jury Trial. THE JUNIOR CREDITOR, AND THE SENIOR CREDITOR BY ITS ACCEPTANCE HEREOF, IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY CREDIT RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Section 20. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Section 21. Miscellaneous. (a) This Agreement and the terms, covenants and conditions hereof shall inure to the benefit of the Senior Creditor and its successors and assigns. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any Person other than the parties hereto and thereto any rights, remedies, obligations or liabilities hereunder or thereunder. (b) This Agreement sets forth the entire understanding of the parties hereto relating to the subject matter hereof, and all prior understandings and negotiations, written or oral, are merged into and superseded by this Agreement. Any modification, amendment or waiver of this Agreement or any provision herein shall be binding upon the Senior Creditor only if contained in a writing signed by or on behalf of the Senior Creditor. No failure on the part of the Senior Creditor to exercise and no delay in exercising any power or right hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. (c) The Junior Creditor hereby acknowledges that (i) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, (ii) the Senior Creditor has no fiduciary relationship to the Junior Creditor, and (iii) no joint venture exists between the Junior Creditor and the Senior Creditor. (d) The section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. (e) All covenants, agreements, representations and warranties made in this Agreement and in any certificates or other papers delivered by or on behalf of the Junior Creditor pursuant hereto shall be deemed to have been relied upon by the Senior Creditor and shall survive the execution and delivery of this Agreement, and shall continue in full force and effect so long as any Senior Debt remains outstanding and unpaid or any financing arrangement between the Borrower and the Senior Creditor remains in effect. All statements of fact relating to the Junior Creditor contained in any certificate or other paper delivered to the Senior Creditor at any time after the date hereof by or on behalf of the Junior Creditor pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the undersigned hereunder. (f) This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. (The signature page follows.) IN WITNESS WHEREOF, this Subordination Agreement has been signed as of the date first set forth above. AURA CERAMICS, INC. By_________________________________ Its:_____________________________ AURA SYSTEMS, INC. By_________________________________ Its:_____________________________ Address for Notice: Aura Systems, Inc. Aura Ceramics, Inc. Michael I. Froch Office of the General Counsel 2335 Alaska Avenue El Segundo, California 90245 Fax: (310) 643-8719 EXCEL BANK By_________________________________ Its:_____________________________ Address for Notice: Excel Bank 5050 France Avenue South Edina, Minnesota 55410 Attention: Wes Beedon Fax: (612) 836-3160 ACCEPTANCE AND ACKNOWLEDGMENT The Borrower named above hereby accepts, and acknowledges receipt of a copy of, the foregoing Subordination Agreement and agrees that it will not pay any of the "Subordinated Debt" (as defined in the foregoing Agreement) or grant any security therefor, except as the foregoing Agreement provides. ALPHA CERAMICS, INC. By_________________________________ Its:_____________________________ EX-10.39 17 0017.txt EXCROW AGREEMENT - ISOSCELES Exhibit "A" ESCROW AGREEMENT This ESCROW AGREEMENT (the "Agreement") is made as of the 6th day of March, 2000, by and among Aura Systems, Inc. (the "Company"), Guzik & Associates (the "Escrow Agent"), located at 1800 Century Park East, Fifth Floor, Los Angeles, CA 90067-1501 and The Isosceles Fund Limited ("ISOSCELES"), located at Bahamas Financial Center, 3rd Floor, Shirley & Charlotte Streets, Nassau, Bahamas with reference to the following facts: W I T N E S S E T H: WHEREAS, the Company has previously issued to ISOSCELES a Convertible Note dated October 27, 1998, in the original principal amount of $1,000,000 (the "Convertible Note") pursuant to a certain Securities Purchase Agreement between ISOSCELES and the Company dated as of October 27, 1998, (the "Purchase Agreement"), which Convertible Note is presently owned by ISOSCELES; and WHEREAS, the obligations of the Company under the Note are secured by a certain Security Agreement dated as of October 27, 1998; and WHEREAS, ISOCELES and the Company have entered into a Settlement Agreement and Release of Claims dated as of March 6, 2000, as supplemented by a certain Addendum to Settlement Agreement and Release of Claims dated as of March 6, 2000 (the Settlement Agreement, as supplemented, is referred to herein as the "Settlement Agreement"), in order to provide for (1) the issuance to ISOSCELES of Three Million (3,000,000) shares of the Company's Common Stock (the "Conversion Shares") pursuant to the Convertible Note, (iii) the issuance by the Company to ISOSCELES of a warrant entitling ISOSCELES from time to time to purchase Thousand (50,000) shares of the Company's Common Stock at an exercise price of $0.375 per share (the "Settlement Warrants"), (iv) the surrender and cancellation of the Convertible Note, (iv) the release by ISOSCELES and the Company of claims against each other, including all rights under the 400,000 Warrants issued by the Company in October 1998 (the "Note Warrants"); and WHEREAS, pursuant to the Settlement Agreement and a certain Subscription Agreements ISOSCELES has agreed to purchase an aggregate of 150,000 restricted shares of the Company's Common Stock (the "Restricted Shares") for the aggregate consideration of $300,000; and WHEREAS, in order to implement the terms of the Settlement Agreement and the Subscription Agreement the parties are entering into this Escrow Agreement (the "Escrow Agreement") with Guzik & Associates, as escrow agent ("Escrow Agent") to facilitate the consummation of the transactions contemplated by this Agreement and the Subscription 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: NOW, THEREFORE, the parties hereto hereby agree as follows: 1. The Company and ISOSCELES hereby severally appoint the Escrow Agent as escrow agent, and the Escrow Agent hereby accepts such appointment for the purpose and on the terms and conditions set forth in this Escrow Agreement. 2. The Escrow Agent will accept from ISOSCELES the Escrow Funds representing the subscription amount for the Restricted Shares, and will accept the documents and certificates enumerated in Section 3(i)-(vi) below. 3. The Company and ISOSCELES hereby instruct the Escrow Agent as follows: On the Closing Date the Escrow Agent shall: (i) release payment of the $300,000 of Subscription proceeds to the Company or as otherwise directed by the Company; (ii) deliver to ISOSCELES a certificate evidencing 150,000 Restricted Shares, respectively; (iii) deliver to ISOSCELES a certificate evidencing the 3,000,000 Conversion Shares, (iv) deliver to ISOSCELES a legal opinion from the Company's counsel in the form of Exhibit B attached hereto; (v) deliver to ISOSCELES certificates evidencing 50,000 Settlement Warrants, respectively; (vi) deliver to the Company a letter from ISOSCELES stating that the Convertible Note and the Note Warrants were never delivered to ISOSCELES, (vii) deliver to the Company executed UCC-2 Termination Statements to be furnished by ISOSCELES to Escrow Agent. The Closing Date shall be deemed to occur upon satisfaction of the following conditions: (a) Escrow Agent shall have received duly executed counterparts of this Agreement from the Company and ISOSCELES and shall have received duly executed counterparts of the Subscription Agreement, (b) Escrow Agent shall have received each of the items enumerated in Paragraph 3(i)-(vii) inclusive. If the Closing Date shall not have occurred for any reason by March 17, 2000, the Escrow Agent shall return Subscriptions proceeds, certificates and documents to the person furnishing such items to Escrow Agent. 4. It is understood and agreed by the parties to this Agreement as follows: (a) The Escrow Agent is not and shall not be deemed to be a trustee for any party for any purpose and is merely acting as a depository and in a ministerial capacity hereunder with the limited duties herein prescribed. (b) The Escrow Agent does not have and shall not be deemed to have any responsibility in respect of any instruction, certificate or notice delivered to it other than faithfully to carry out the obligations undertaken in this Agreement and to follow the directions in such instruction or notice provided in accordance with the terms hereof. (c) The Escrow Agent is not and shall not be deemed to be liable for any action taken or omitted by it in good faith and any rely upon, and act in accordance with, the advice of its counsel without liability on its part for any action taken or omitted in accordance with such advice. In any event, its liability hereunder shall be limited to liability for gross negligence, willful misconduct or bad faith on its part. (d) The Escrow Agent may conclusively rely upon and act in accordance with any certificate, instruction notice, letter, telegram, cablegram, fax transmission or other written instrument believed by it to be genuine and signed by the Company and ISOSCELES. (e) The Company and ISOSCELES agree to save harmless, indemnify and defend the Escrow Agent for, from and against any loss, damage, liability, judgment, cost and expense whatsoever, including attorney's fees, suffered or incurred by it by reason of, or on account of, any misrepresentation made to it or as to its status for activities as Escrow Agent under this Agreement except for any loss, damage, liability, judgment, cost or expense resulting from gross negligence, willful misconduct or bad faith on the part of the Escrow Agent. (f) The Escrow Agent shall not be required to defend any legal proceeding which may be instituted against it in respect of the subject matter of this Agreement. If any such legal proceeding is instituted against it, the Escrow Agent agrees promptly to give notice of such proceeding to the Company and ISOSCELES. The Escrow Agent shall not be required to institute legal proceedings of any kind. Any legal proceedings arising out of or relating to the subject matter of this Agreement shall be brought in a court of competent jurisdiction in Los Angeles County, California, U.S.A. (g) The Escrow Agent shall not, by act, delay, omission or otherwise, be deemed to have waived any right or remedy it may have either under this Agreement or generally, unless such waiver be in writing, and no waiver shall be valid unless it is in writing, signed by the Escrow Agent, and only to the extent expressly therein set forth. A waiver by the Escrow Agent under the terms of this Agreement shall not be construed as a bar to, or waiver of, the same or any other such right or remedy which it would otherwise have on any other occasion. (h) The Escrow Agent may refrain from taking any action other than keeping all property held by it in Escrow if it is uncertain concerning its duties or rights under this Escrow Agreement or receives claims or demands from any person or entity or receives a final judgment by a court of competent jurisdiction if it deems that necessary or advisable. (i) The parties acknowledge and agree that Escrow Agent is acting as legal counsel to the Company in this transaction and expects to continue to act as legal counsel for the Company in the future. ISOSCELES acknowledges that the Escrow Agent shall have no duty or obligation to disclose any information to any party, it being understood that Escrow Agent's duties are ministerial in nature only. 5. Communication to and from the Escrow Agent shall be delivered by messenger or forwarded by facsimile transmission, regular, or certified mail, and shall be effective when received. 6. The Escrow Agent's obligations under this Escrow Agreement shall terminate on the date it shall no longer hold any of the funds, documents or instruments delivered in escrow pursuant to the terms of this Agreement. 7. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of California. 8. This Escrow Agreement may be executed in several counterparts by facsimile signature, each of which shall be original, and such counterparts shall together constitute but on and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. AURA SYSTEMS, INC. By: Title: Escrow Agent: Guzik & Associates By: Samuel S. Guzik THE ISOSCELES FUND LIMITED By___________________________________ Title:_________________________________ EXHIBIT "B" The Isosceles Fund Limited Bahamas Financial Centre 3rd Floor, Shirley & Charlotte Streets Nassau, Bahamas March [__] 2000 Ladies and Gentlemen, We have acted as Counsel to Aura Systems Inc., a Delaware Corporation (the "Company"), in connection with the issuance of 3,000,000 shares of the Company's Common Stock under a certain Convertible Note dated October 27, 1998. In so acting we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents, and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such enquiries of such officers and representatives of the Company as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certifies or photo static and the authenticity of the originals of such latter documents. As to questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The Conversion Shares have been duly authorized and have been validly issued, and are fully paid and non-assessable. 2. For purposes of determining the holding period of the Conversion Shares under Rule 144(d) under the Securities Act of 1933, the holding period of the Conversion Shares commenced on the date of issuance of the Convertible Note on October 27,1998 3. The Company currently meets the current public information requirements under Rule 144 (c) under the Securities Act of 1933. The opinions expressed herein are limited to U.S. law and the corporate laws of the State of Delaware and we express no opinion as to the effect on the matters covered by this letter of the law of any other jurisdiction Very truly yours, EX-10.40 18 0018.txt SUBSCRIIPTION AGREEMENT - ISOSCELES AURA SYSTEMS, INC. a Delaware corporation SUBSCRIPTION AGREEMENT THE SECURITIES WHICH ARE BEING SUBSCRIBED FOR HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), IN RELIANCE UPON CERTAIN EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND THE RULES AND REGULATIONS THERETO, NOR HAVE SUCH SECURITIES BEEN REGISTERED OR QUALIFIED UNDER ANY STATE'S SECURITIES LAWS. ACCORDINGLY, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF SUCH SECURITIES UNLESS (1) SUCH SECURITIES ARE SUBSEQUENTLY REGISTERED OR QUALIFIED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR EXEMPTIONS THEREFROM ARE AVAILABLE, AND (2) THE PROPOSED SALE OR TRANSFER WILL NOT CONSTITUTE A VIOLATION OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. This Subscription Agreement by the undersigned ("Subscriber") is for shares ("Shares") of Common Stock of Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation. 1. Purchase and Sale of Shares. Subject to the terms and conditions set forth in this Agreement, the Company covenants and agrees to sell to Subscriber on the Closing Date (as hereinafter defined) the Shares, and Subscriber agrees to purchase from the Company, on the Closing Date, the number of Shares set forth below, for the purchase price of Two Dollars ($2.00) per Share. Subscriber shall pay the full subscription price upon execution of this Agreement by delivering good funds by wire transfer in United States Dollars an escrow account for the Offering proceeds (the "Escrow Account") maintained by the Law Offices of Guzik & Associates ("Escrow Agent"), 1800 Century Park East, Fifth Floor, Los Angeles, California 90067-1501, or by check payable to "Guzik & Associates - Escrow Account." The subscription price shall be wired by Subscriber to the Escrow Account at Wells Fargo Bank, N.A., San Francisco, California, U.S.A., ABA No. 121 000 248, Account No. 0765-053426. 2. Closing Instructions to Escrow Agent. The closing of the purchase and sale of the Shares pursuant to Section 1 hereof shall take place at Wells Fargo Bank, N.A., San Francisco, California, U.S.A., ABA No. 121 000 248, Account No. 0765-053426 on the date (the "Closing" or the "Closing Date") the following conditions are fulfilled: (a) Conditions to Subscriber's Obligation to Close. The obligation of the Subscriber to purchase the Shares offered by the Company are conditioned on the fulfillment or waiver by Subscriber of the following on or prior to the Closing Date: (i) the execution and delivery by the Company of this Agreement and the Escrow Agreement in the form attached hereto as Exhibit A; (ii) the Company shall have received and accepted proceeds from Subscribers in this Offering of $300,000. (iii) The Company shall have closed the transactions contemplated by the Settlement Agreement and Release of Claims dated March 6, 2000, as amended or supplemented from time to time, by and between the Company and The Isosceles Fund Limited. (b) Conditions to the Company's Obligation to Close. The obligation of the Company to sell the Shares offered hereunder is conditioned on the fulfillment or waiver by the Company of the following on or prior to the Closing Date: (i) the execution and delivery by the Subscriber of this Agreement and the Escrow Agreement in the form attached hereto as Exhibit A; (ii) the Company shall have received and accepted proceeds from Subscribers in this Offering of $300,000. (iii) The Company shall have closed the transactions contemplated by the Settlement Agreement and Release of Claims dated March 6, 2000, as amended or supplemented from time to time, by and between the Company and The Isosceles Fund Limited. (c) Instructions to Escrow Agent. The Company and the Subscriber hereby instruct the Escrow Agent as follows: On the Closing Date the Escrow Agent shall release payment of the Subscription proceeds to the Company and the Company shall cause the Escrow Agent to deliver the Shares to Subscriber at the address set forth in this Agreement. If the Closing Date shall not have occurred for any reason by March 17, 2000, the Company shall cause the Escrow Agent to return Subscriptions proceeds plus accrued interest to Subscriber promptly upon termination of the Offering. 3. [Intentionally Omitted] 4. Warranties of the Subscriber. The Subscriber represents and warrants as follows (for persons subscribing jointly, the representations and warranties set forth below are true as to all such persons. For revocable trusts, the representations and warranties set forth below are also true as to each grantor of the trust. For corporations, partnerships, trusts and other entities formed specifically to invest in Aura (including any entity in which any one of the beneficial owners may elect not to participate in the investment) the representations and warranties set forth below are also true as to every person having a beneficial interest in such corporation, partnership, trust or other entity): (a) The Subscriber is acquiring the Shares for his own account (or if the Subscriber is a trustee, an agent subscribing for a corporation or other entity, or a partner subscribing for a partnership, for the account of the entity which is represented) for investment and not with a view to resale or distribution. He has not offered or sold any portion of his Shares and has no present intention of dividing his Shares with others or of reselling or otherwise disposing of any portion thereof either currently or after the passage of a fixed or determinable period of time or upon the occurrence of nonoccurrence of any predetermined event or circumstance. (b) The Subscriber is aware that the Shares are speculative and that he may lose his entire investment and he can afford to bear the risks of an investment in Aura, including the risk of losing his entire investment. (c) The Subscriber or his purchaser representative both: (1) Have been provided an opportunity to obtain information concerning Aura and any other relevant matters as Subscriber has requested; and (2) Have been given the opportunity to ask questions of and receive answers from Aura concerning the terms and conditions of the offering of the Shares. (d) Subscriber has advised the Company that he is an "accredited investor" within the meaning of Regulation D of the Securities Act of 1933 and the Company is relying on this representation. (e) The Subscriber is aware that he must bear the economic risk of his investment in Aura for an indefinite period of time because: (1) the Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), or qualified under the California Corporate Securities Law of 1968 or any other state securities laws, and therefore cannot be sold, assigned or otherwise disposed of unless appropriate exemptions from such registration or qualification requirements are available; and (2) Aura will place a legend on the certificates evidencing the Shares stating that the Securities have not been registered under the Act or any state securities laws and setting forth the limitations on resale contained above and Aura will also require that its registrar and transfer agent make a notation of such restrictions in its appropriate records. He further understands and agrees that Aura will not honor any attempt by him to sell, transfer of otherwise dispose of the Shares in the absence of either an effective Registration Statement and qualification under applicable Blue Sky laws or exemptions therefrom. (f) The Subscriber acknowledges that a legend will be placed on any certificates or instruments evidencing the Shares substantially as set forth on the first page of this Subscription Agreement for as long as necessary to comply with the Act and applicable state securities laws. (g) The Subscriber is over the age of twenty-one years (if an individual), and is knowledgeable and experienced with respect to investment matters such as a proposed purchase of Shares. He has such knowledge and experience in business and financial matters as to be capable of evaluating the merits and risks of this investment and has the capacity to protect his own interests in connection with this investment. (h) The Subscriber agrees to indemnify and hold harmless Aura and its directors, officers, affiliates and agents from and against any and all losses, damages and liabilities (including, but not limited to, court costs and reasonable attorneys' fees) arising or resulting from, or attributable to, any breach of the representations and warranties set forth in this Paragraph or the fact that any of the representations, acknowledgements or understandings set forth in this Paragraph are untrue or without adequate factual basis to be considered true and not misleading. (i) The Securities offered hereby were not offered to the Subscriber by way of general solicitation or general advertising. (j) The Subscriber has adequate means of providing for his current needs and possible personal contingencies, and he has no need now, and anticipates no need in the foreseeable future, to sell this investment, and consequently, without limiting the generality of the foregoing, he is able to hold his securities for an indefinite period of time and has a sufficient net worth to sustain a loss of his entire investment in Aura in the event such loss should occur. (k) The Subscriber has decided to subscribe to purchase the securities on the basis of his own independent investigation and has relied on no oral statements, representations or warranties as to the quality of the investment other than from his purchaser representative. 5. Warranties of the Company. The Company represents and warrants to, and agrees with, Subscriber that the Shares, when issued (i) will be free and clear of any security interests, liens, claims or other encumbrances other than restrictions upon transfer under applicable securities laws, (ii) will have been duly and validly authorized and delivered 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, and (iv) will not subject the Subscriber to personal liability by reason of being a shareholder. 6. Registration Rights. The Company agrees that within 120 days following the Closing Date the Company shall file a Registration Statement with the SEC covering the resale of the Common Stock purchased by Subscriber and shall use its best efforts to cause such Registration Statement to become and remain effective until such Shares may be sold without registration.. 7. Applicable Law. This Subscription Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware. 8 Survival. All representations, warranties and covenants contained in this Subscription Agreement shall survive the acceptance of the subscription and the issuance of the Securities. 9. Number of Shares. Subject to acceptance by Aura, the undersigned hereby irrevocably subscribes for Shares in accordance with the terms and conditions of this Subscription Agreement, as follows: 150,000 Shares at $2.00 per Share for an aggregate subscription price of $300,000. One Hundred Percent (100%) of the subscription price must accompany this Subscription Agreement. 10. Items to be Delivered by Subscriber. The following items must be delivered herewith: A. Completed and executed Subscription Agreement. B. Completed and executed Escrow Agreement. C. Check payable to "Guzik & Associates. - Escrow Account" or wire transfer to the Escrow Account designated in Paragraph 1 of this Agreement. SECURITIES ARE TO BE REGISTERED AS FOLLOWS: (check one) [ ] INDIVIDUAL OWNERSHIP [ ] TRUST (One signature required (Authorized Trustee(s) below) must sign) [ ] TENANTS IN COMMON [ ] COMMUNITY PROPERTY (All tenants must (Both spouses must sign below) sign below) [ ] JOINT TENANTS WITH RIGHT [ ] PARTNERSHIP OF SURVIVORSHIP (Authorized Partner(s) (All tenants must sign) sign below) [X] CORPORATION OR OTHER ENTITY (Authorized officer(s) or agent(s) must sign) AURA SYSTEMS, INC. a Delaware corporation SIGNATURE PAGE FOR PARTNERSHIPS, CORPORATIONS AND OTHER ENTITIES THE ISOSCELES FUND LIMITED Name of partnership, corporation or other entity (please print or type) By___________________________________________________ Signature of general partner, authorized officer or authorized agent Principal Office Bahamas Financial Centre Address: 3rd Floor, Shirley & Charlotte Streets Nassau, Bahamas Attention: Mr Andrew Dipkin Tel: (242) 356 5928 Fax: (242) 356 0221 SUBSCRIPTION AMOUNT: 150,000 Shares at $2.00 per Share for an aggregate subscription price of $300,000 Executed at Nassau, Bahamas this 16 day of March, 2000 ********************************************************** The foregoing subscription for 150,000 Shares is accepted this _ day of March, 2000. Aura Systems, Inc. By_______________________________ Signature of authorized officer EX-10.41 19 0019.txt STOCK PURCHASE WARRANT OF AURA SYSTEMS - ISOSCELES 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 50,000 Shares of Common Stock, par value $0.005 per share STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, THE ISOSCELES FUND LIMITED ("Holder") 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, FIFTY Thousand (50,000) 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 March 17, 2000 (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; or (iii) upon the exercise of the Warrants. (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 March 17, 2000 1-PH/1156764.1 FORM OF EXERCISE AGREEMENT 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. 1-PH/1156764.1 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 herein below, 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: ________ __, 200_ 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-10.42 20 0020.txt SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS SETTLEMENT AGGREEMENT AND RELEASE OF CLAIMS This Settlement Agreement and Release of Claims ("Agreement") dated as of March 6, 2000, is made and entered into by The Isosceles Fund Limited, a Bahamian company ("ISOSCELES"), and AURA SYSTEMS, INC., a Delaware company (the "Company"). W I T H N E S S E T H: WHEREAS, the Company has previously issued to ISOSCELES a Convertible Debenture dated October 27, 1998, in the original principal amount of $1,000,000 (the "Convertible Debenture") pursuant to a certain Securities Purchase Agreement between ISOSCELES and the Company dated as of October 27, 1998, (the "Purchase Agreement"), which Convertible Debenture is presently owned by ISOSCELES; and WHEREAS, the obligations of the Company under the Debenture are secured by a certain Security Agreement dated as of October 27, 1998; and WHEREAS, the parties desire to enter into this Agreement in order to provide for (i) the issuance to ISOSCELES of Three Million (3,000,000) shares of the Company's Common Stock (the "Shares") pursuant to the Convertible Debenture, (ii) the issuance by the Company to ISOSCELES of a warrant, in the form attached hereto, entitling ISOSCELES from time to time to purchase Fifty Thousand (50,000) shares of Company's Common Stock at an exercise price of $0.375 per share (the "Settlement Warrant"), and (iii) the surrender and cancellation of the Convertible Debenture; and WHEREAS, contemporaneously with the execution of this Agreement the parties are entering into an Escrow Agreement (the "Escrow Agreement") with Guzik & Associates, 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. The Company shall notify ISOSCELES and the Escrow Agent within two (2) business days of the date that the Company shall comply with the current public information requirements of Rule 144(c) of the Securities Act of 1933 (the "Securities Act"). Within five business days of the date that the Company shall comply with the current public information requirements of Rule 144(c) of the Securities Act of 1933 (the "Securities Act"), the parties shall deliver to the Escrow Agent, 1800 Century Park East, Fifth Floor, Los Angeles, California, 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 ISOSCELES, together with a legal opinion of Escrow Agent 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 that the holding period for the Shares under such Rule commenced on the date the Debenture was issued, (ii) the Settlement Warrant, registered in the name of ISOSCELES, and (iii) two executed originals of this Agreement; and (B) ISOSCELES shall deliver (i) the Convertible Debenture, 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 ISOSCELES 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, and one executed original of this Agreement and (B) to or as directed by ISOSCELES: 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"). If Escrow Agent shall not have received all of the Closing Items in satisfactory form on or before March15, 2000, this Agreement may be terminated by either party as if it never existed and Escrow Agent's sole duties and obligations shall be to return the items deposited with it as set forth in the escrow agreement. 3. Warranties of ISOSCELES. ISOSCELES represents and warrants to the Company as follows: (a) Authorization; Enforcement. ISOSCELES 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 ISOSCELES. This Agreement has been duly executed by ISOSCELES and upon full delivery of the Closing Items will constitute the valid and binding obligation of ISOSCELES enforceable against it in accordance with its terms. (b) Information; Acknowledgment of Risk. The Company has furnished ISOSCELES and its advisors, if any, with all materials relating to the business, finances and operations of the Company which have been requested by ISOSCELES and its advisors. ISOSCELES 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. ISOSCELES is aware that the Shares are speculative, that an investment in the Company involves a high degree of risk, that it may lose its entire investment and ISOSCELES can afford to bear the risks of an investment in the Company. ISOSCELES is a sophisticated investor with considerable experience in investments of this nature. ISOSCELES acknowledges that the Company makes no representations or warranties with respect to the Company, the Shares other than those representations or warranties set forth in this Agreement, and ISOSCELES has in no way relied upon any other statement made or information provided by the Company. (c) Accredited Investor. ISOSCELES is an "accredited investor" within the meaning of Regulation D of the Securities Act of 1933 (the "Securities Act"). (d) Non-Affiliate Status. ISOSCELES 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 ISOSCELES as follows: (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 ISOSCELES 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, full 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 ISOSCELES to personal liability by reason of being a shareholder, and (v) will be eligible for sale under Rule 144 of the Securities Act. (c) No Conflicts. The execution, delivered 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 and 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 or 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 government 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, deliver and performance by the Company of this Agreement other than filings required to be made by it under the Securities Exchange Act of 1934. 5. Release by ISOSCELES. Effective as of the Closing Date ISOSCELES, 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 ISOSCELES 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 of nature know 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. 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 wave 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 the 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 feminine and neutral 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. IN WITNESS THEREOF, the parties have executed this Agreement effective as of the date first written above. AURA SYSTEMS, INC. By: ____________________________ Zvi Kurtzman, CEO ISOSCELES By:_____________________________ Name; Title: GENERAL POWER OF ATTORNEY I, the undersigned Carl M. O'Connell, of the Western District of the Island of New Providence, one of the Islands of the Commonwealth of the Bahamas, in my capacity as Sole Director of International Business Companies organized under and in accordance with the International Business Companies Act of 1989 as amended, of the Commonwealth of The Bahamas, and whose Registered Office and Registered Agent is situated at Citco Bank and Trust Company (Bahamas) Limited, Bahamas Financial Centre, 3rd Floor, Charlotte & Shirley Streets, P.O. Box CB-13136, Nassau, Bahamas, do hereby nominate, constitute and appoint: Tarez Curry, Businesswoman, of Nassau, The Bahamas And Andrew Dipkin, Businessman, of Nassau, The Bahamas as my true and lawful attorneys-in-fact, acting singly or jointly, with full power to represent me in any and all dealings related to achieving the objectives of any Company of which I am Sole Director, and to conduct business on behalf of that Company as the said attorneys-in-fact my deem necessary or desirable. This Power-of-Attorney shall remain in effect for the period start of business on March 6, 2000 through the close of business on March 7, 2000. IN WITNESS WHEREOF, I, the said Carl M. O'Connell have hereunto set my hand and seal at Nassau, New Providence in the Commonwealth of The Bahamas, on this 3rd day of March, 2000. ---------------------------------- Carl M. O'Connell EX-21.1 21 0021.txt SUBSIDIARIES OF AURA SYSTEMS, INC. Exhibit 21.1 Aura Ceramics, Inc. (Delaware) Aura realty, Inc. (Delaware) EX-27 22 0022.txt FINANCIAL DATA SCHEDULE
5 12-MOS FEB-29-2000 MAR-01-1999 FEB-29-2000 260,437 0 2,459,200 0 11,189,227 17,826,048 42,219,417 (15,184,362) 56,122,478 16,999,835 0 243,328,866 0 0 0 56,122,538 5,788,221 5,788,221 13,424,304 10,873,840 6,293,449 0 4,476,690 (24,803,371) 0 (24,803,371) (4,131,501) 19,068,916 0 (9,865,956) (.08) (.08)
-----END PRIVACY-ENHANCED MESSAGE-----