FORM 8-K. AURA SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter)

Transcription

1 SECURITIES AND EXCHANGE COMMISSION Washington D.C FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): December 26, 2001 AURA SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation or Organization) File Number) Identification No.) 2335 Alaska Avenue El Segundo, California (Address of Principal Executive Offices) (Zip Code) (310) (Registrant s Telephone Number, Including Area Code) (Former Name or Former Address, if Changed Since Last Report.)

2 ITEM 5. Other Events. On December 26, 2001, Aura Systems, Inc. (the Company ) entered into agreements with Zvi Harry Kurtzman, the Chairman of the Board and Chief Executive Officer of the Company, and five other members of senior management, to terminate their existing employment contracts and restructure their current severance benefits. Pursuant to the new agreements, Mr. Kurtzman and the others have become at will employees and are expected to continue in their current positions until February 28, The original separation proposal was first described in the Company s proxy statement filed with the Securities and Exchange Commission ( SEC ) on December 15, The terms of the separation agreements were subsequently described in the Company s Form 10-K for the year ended February 28, 2001 and the Company s proxy statement filed with the SEC on August 27, This separation process will provide the Company with the opportunity to make an orderly transition to a new management team. The other members of the current management team who will be entering into new agreements and leaving the Company with Mr. Kurtzman are Gerald Papazian, President and COO, Arthur Schwartz, Executive Vice President, Cipora Kurtzman-Lavut, Senior Vice President, Corporate Communications, Neal Kaufman, Senior Vice President, Management Information Systems and Steven Veen, Senior Vice President, Chief Financial Officer. Under the terms of the new agreements, the departing officers will relinquish their right to any multi-year cash severance benefits in exchange for a one time grant of stock options (or warrants to the extent no additional shares are available for grant of options under any shareholder approved Company option plan), which will be exercisable at a price of $.55 per share and will vest over a period of eighteen months from the termination of employment. The number of stock options for each person will be determined based on the underlying total compensation due to the employee upon termination under each person s existing employment agreement, multiplied by two and divided by $0.32 per share. The terms of the existing employment agreements were described in the Company s Form 10-Q filed with the SEC on July 15, Each of the officers has agreed to continue as a consultant to the Company for a period of one year at 85% of their current compensation. In addition, each executive will receive continued medical benefits for three years following termination of employment. A form of the Agreement Regarding Termination of Employment Contract is filed as an exhibit to this filing. Mr. Kurtzman co-founded Aura in 1987 and has served as its Chief Executive Officer since then. He also served as the Company s President from 1987 to In his remarks at the Company s annual shareholders meeting held on October 2, 2001, he stated that [Aura] is at a point ready to move up to the next stage. This new stage is in charted territory, building AuraGens, improving AuraGens, adding applications, developing sales channels and sales techniques, controlling costs and generating profits for the Company and its shareholders. These challenges are different from the ones we faced in the past and require different types of thinking and abilities. Mr. Kurtzman will work together with the Board to recruit a new Chief Executive Officer and other senior management to achieve the Company s business goals.

3 The Company s Board of Directors has formed a Search Committee, chaired by Carl Albert, and also including directors Stephen Talesnick and Harvey Cohen, for this purpose. Mr. Albert, who has been a director since July 10, 2001, is presently a member of the Board of Directors of Fairchild Dornier Corporation, a privately held company in the business of manufacturing aircraft. From 1996 through 1999, following Fairchild Aircraft s purchase of Daimler-Benz s 80% interest in Dornier, he was the Chairman of the Board of Directors and Chief Executive Officer of Fairchild Aerospace Corporation, now known as Fairchild Dornier Corporation. From 1990 through 1996 Mr. Albert was the Chairman of the Board and CEO of Fairchild Aircraft. Mr. Albert s business experience includes 18 years as an attorney, specializing in business and corporate law in Los Angeles, California. He also serves and has served as a Member of the Board of Directors of a number of privately and publicly held corporations, including Wings West Airlines, Dr. Pepper Bottling Company of Southern California, K & K Properties, Ozark Airlines and Tulip Corporation. Mr. Talesnick is presently Vice Chairman of the Company s Board of Directors and Mr. Cohen is a member of the Board s Audit Committee. The Search Committee is in the process of considering several resumes of potential candidates. The Company has been informed by the Staff of the SEC that it intends to recommend that the Commission bring a civil action against Aura, NewCom (a former subsidiary of Aura), Mr. Kurtzman, Steven Veen and Gerald Papazian for violations of the antifraud and books and records provisions of the securities laws. This grew out of an investigation into the Company s financial statements for various transactions during fiscal years 1996 through The Company originally disclosed the investigation by press release in January The Staff advised the Company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations. In addition, the SEC staff would recommend that the SEC impose director and officer bars against Messrs. Kurtzman and Veen and a bar against Mr. Veen to prohibit his practicing as an accountant before the SEC. The Company is informed that in order to avoid potential lengthy and costly litigation the individuals have agreed to propose to settle with the SEC without admitting or denying any of the staff s allegations. The Company has engaged in conversations with the Staff of the SEC regarding settlement of the matter, but no agreements have yet been reached. Although Aura believes that it will reach a settlement in a manner that will not have a material adverse effect on the Company s business, it cannot predict with certainty when or if such a settlement will occur or what the actual effects of such a settlement would be. The Audit Committee of the Board will conduct a full review of the Company s accounting controls and procedures. ITEM 7. (c) Exhibits Financial Statements and Exhibits Form of Agreement Regarding Termination of Employment Contract

4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AURA SYSTEMS, INC. Date: December 26, 2001 By: //Steven C. Veen Steven C. Veen Chief Financial Officer

5 Exhibit 10.1 Form of Agreement Regarding Termination of Employment Contract

6 Tier One AGREEMENT REGARDING TERMINATION OF EMPLOYMENT CONTRACT This Agreement Regarding Termination of Employment Contract ("Agreement") is entered into as of this 21st day of December, 2001 by and between ("Executive"), on the one hand, and Aura Systems, Inc., a Delaware corporation ("Company"), on the other hand (collectively, the "Parties"). RECITALS WHEREAS, Executive has been employed by the Company as, pursuant to an employment agreement with the Company dated March 5, 1998 (the "Employment Agreement"); WHEREAS, Executive and the Company wish to voluntarily terminate Executive's Employment Agreement and make Executive an at-will employee of the Company effective December 21, 2001; WHEREAS, pursuant to the terms of the Employment Agreement Executive is entitled to receive a severance payment upon such termination of the Employment Agreement; and WHEREAS, the Company and Executive has determined that it would be in the best interest of Executive, the Company and its shareholders to offer Executive a buyout of the Employment Agreement and the severance package set forth herein, in exchange for covenants and agreements contained herein and in lieu of any severance payment Executive would otherwise be entitled to receive under the Employment Agreement. WHEREAS, Executive and the Compensation Committee of the Board of Directors have negotiated the terms and conditions of this Agreement, which Agreement has been approved by the Board of Directors of the Company. NOW THEREFORE, in consideration of the promises and mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are expressly acknowledged, the Parties agree and promise as follows:

7 1. TERMINATION OF EXECUTIVE'S EMPLOYMENT AGREEMENT. Pursuant to this Agreement, Executive's Employment Agreement with the Company is terminated effective December 21, 2001 (the "Term Date"). Executive shall continue as an at-will employee of the Company until the Company or Executive terminates such at-will relationship (the "Separation Date"). 2. BUYOUT AND SEVERANCE PAYMENT. In consideration of Executive's covenants and agreements contained herein, the Company shall pay Executive as a severance benefit (the "Severance Benefit") the following: A. Tier One Buy-Out Stock Option The Company shall grant to the Executive an option to purchase that number of shares of Common Stock of the Company (the "Stock") equal to the quotient of (x) three (3) times the Executive's Base Salary (as defined in the Employment Agreement) divided by (y) $0.32 multiplied by (z) two (2), (the "Buy-Out Stock Option"), which option shall have an exercise price equal to $0.55 per share. The Buy-Out Stock Option shall vest and become exercisable over a ten (10) year period from the date of grant, with (i) one-third (1/3) of the total shares represented by the Buy-Out Stock Option (the "Option Shares") vesting and becoming exercisable after the expiration of six (6) months from the date of this Agreement (the "First Vesting Date"), and (ii) two-thirds (2/3) of the Option Shares vesting twelve (12) months after the First Vesting Date. The Buy-Out Stock Option shall be exercisable, to the extent vested, for the full ten (10) year term of the option without regard to the Executive's status as an employee of the Company. The Buy-Out Stock Option shall be subject to such other terms as evidenced by a stock option agreement entered into between Executive and the Company and attached hereto. The Company shall grant the Buy-Out Stock Option pursuant to a shareholder-approved option plan (a "Company Option Plan"), and to the extent of any shortfall where no additional Stock is available for grant of options under any Company Option Plan, then in the form of a warrant to purchase Stock, outside of any Company Option Plan; provided, however, that if the Company shall grant the Executive a warrant, the Executive shall be entitled to receive any piggyback registration rights customarily offered to similarly situated holders of warrants to purchase Stock. B. Medical Benefits Executive shall receive continued medical benefits for a period of three (3) years following termination of employment or be entitled to receive a payment in the form of cash in lieu of such continuation of medical benefits; provided, that the Company shall not be obligated to pay a premium or incur any costs related to the provision of such continued coverage in excess of one thousand dollars ($1,000.00) per month for such three (3) year period. The medical benefits shall be substantially similar to the medical benefits Executive received from the Company prior to termination of employment.

8 C. Limitation of Benefits Except for (i) the Severance Benefit and (ii) Executive's salary and all other compensation through the Separation Date, including any earned but unpaid vacation pay, Executive shall not be entitled to receive any other compensation or benefits of any sort including, without limitation, salary, vacation, bonuses, stock options, short-term or long-term disability benefits, health care coverage and any severance Executive might otherwise be entitled to received under the Employment Agreement from the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. 3. NO DISPARAGEMENTS. Executive and the Company agree that neither Executive nor the Company shall make any oral or written, public or private, statements that are disparaging of Executive or the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or their respective predecessors, successors or assigns at any time; provided, however, nothing in this Section 3 shall preclude Executive or the Company from making truthful factual statements regarding Executive or former officers, directors or employees of the Company. 4. NON-COMPETITION. A. For a period of three (3) years from the Separation Date, Executive shall not, directly or indirectly, without the prior written consent of the Company, provide consultative services or otherwise provide services to (whether as an employee or a consultant, with or without pay), own, manage, operate, join, control, participate in, or be connected with (as a stockholder, partner, or otherwise), any business, individual, partner, firm, corporation, or other entity that is a competitor of the Company, its subsidiaries or affiliates in any business now conducted, or conducted at any time through the Separation Date, by the Company, its subsidiaries or affiliates (each such competitor a "Competitor of the Company"). Executive and the Company acknowledge and agree that the business of the Company extends throughout the United States, Europe and Asia, and that the terms of the non-competition agreement set forth herein shall apply throughout the United States, Europe and Asia B. Non-Solicitation of Customers and Suppliers. For a period of three years from the Separation Date, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company, or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. C. Non-Solicitation of Employees. Executive recognizes that he possesses and will possess confidential information about other employees of the Company, its subsidiaries and affiliates, relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with customers of the Company, its subsidiaries and affiliates. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company, its

9 subsidiaries and affiliates in developing their business and in securing and retaining customers, and has been and will be acquired by him because of his business position with the Company, its subsidiaries and affiliates. Executive agrees that for a period of three (3) years from the Separation Date, he will not, directly or indirectly, solicit or recruit any employee of the Company, its subsidiaries and affiliates for the purpose of being employed by him or by any company on whose behalf he is acting as an agent, representative or employee and that he will not convey any such confidential information or trade secrets about other employees of the Company, its subsidiaries and affiliates to any other person. If Executive in any way violates the provisions of this Section 4, all Severance Benefits shall cease, including the continued vesting of the Stock Options. 5. RETURN OF THE COMPANY'S DOCUMENTS AND PROPERTY. Executive agrees to return all records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company, its affiliates, and/or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. In addition, Executive shall return to the Company all property or equipment that he has been issued during the course of his employment or which he otherwise currently possesses. Executive shall deliver to the Company before the Separation Date at Executive's expense all of the Company's records, documents, proposals, notes, lists, files and materials and property and equipment that are in his possession. Executive is not authorized to retain any copies of any such records, documents, proposals, notes, lists, files or materials. Nor is he authorized to retain any other of the Company's property or equipment. 6. PROPRIETARY INFORMATION. Executive acknowledges that Executive has had or may have had access to proprietary information, trade secrets, and confidential material of the Company or its affiliates, including, but not limited to, all ideas, information and materials, tangible or intangible, not generally known to the public, relating in any manner to the business of the Company, its personnel (including partners, principals, employees and contractors), its clients or others with whom it does business that Executive learned, acquired, or created, or helped to create during the period of Executive's employment with the Company ("Proprietary Information"). Proprietary Information includes, but is not limited to, all trade secrets, patents and pending patents, documents, computer programs, source code, users manuals, algorithms, compilations of technical, financial, legal or other data, client or prospective client lists, names of suppliers, specifications, designs, business or marketing plans, forecasts, financial information, work in progress, and other technical or business information. Executive agrees, without limitation in time or until such Proprietary Information shall become public other than by Executive's unauthorized disclosure, to maintain the confidentiality of such information and to refrain from divulging, disclosing or using said Proprietary Information for any other purpose. Executive acknowledges and affirms that all existing Proprietary Information is the exclusive property of the Company and Executive hereby assigns to the Company any and all rights the Executive may have had or acquired (or hereinafter may have or acquire) in any Proprietary Information.

10 Executive further acknowledges and agrees that the Company is the sole owner of such Proprietary Information and Executive has no claim of ownership to such Proprietary Information. 7. CONSULTING ARRANGEMENT. For a period of one (1) year following the Separation Date, Executive shall consult for the Company and make himself available to the Company as reasonably needed and requested by the Company (the "Consulting Period"). During the Consulting Period Executive shall receive an amount equal to 85% of the Base Salary under Executive's Employment Contract on a monthly basis. All such payments shall be paid in accordance with normal payroll practices of the Company. In the event that the Company and the Executive enter into an arrangement subsequent to the date hereof whereby the Executive accepts a position as an employee of the Company, the provisions of this Section 7 shall be subject to appropriate modification. 8. COOPERATION IN LITIGATION. Executive shall cooperate with the Company, its affiliates, and each of their respective attorneys, barristers, solicitors or other legal representatives (collectively, "Attorneys") in connection with any claim, litigation, or judicial or arbitral proceeding which is now pending or may hereinafter be brought against the Company or its affiliates by any thirdparty. Executive's duty of cooperation shall include, but not be limited to, (a) meeting with the Company's and/or its affiliates' Attorneys by telephone or in person at mutually convenient times and places in order to state truthfully his knowledge of matters at issue and recollection of events; (b) appearing at the Company's, its affiliates' and/or their Attorneys' request (and, to the extent possible, at a time convenient to Executive that does not conflict with the needs or requirements of his then-current employer) as a witness at depositions or trials, without necessity of a subpoena, in order to state truthfully Executive's knowledge of matters at issue; and (c) signing at the Company's, its affiliates' and/or their Attorneys' request declarations or affidavits that truthfully state matters of which Executive has knowledge. The Company and/or its affiliates shall promptly reimburse Executive for his actual and reasonable travel or other expenses that he may incur in cooperating with the Company, its affiliates, and/or their Attorneys pursuant to this Section INDEMNIFICATION. The Company shall continue to indemnify Executive for all actions and inactions related to his service as an officer or director of the Company to the extent such actions and inactions are covered by the Company's Directors and Officers insurance policy as then in effect ("Indemnified Actions'') through the expiration of the applicable statute of limitations. Notwithstanding the foregoing, in the event such Indemnified Actions result from Executive's gross negligence or willful misconduct, the indemnification hereunder shall not apply. 10. BINDING EFFECT. This Agreement shall be binding upon the Parties and their respective heirs, administrators, representatives, executors, successors and assigns, and shall inure to the

11 benefit of the Parties and their respective heirs, administrators, representatives, executors, successors and assigns. 11. SEVERABILITY. While the provisions contained in this Agreement are considered by the Parties to be reasonable in all circumstances, it is recognized that some provisions may fail for technical reasons. Accordingly, it is hereby agreed and declared that if any one or more of such provisions shall, either by itself or themselves or taken with others, be adjudged to be invalid as exceeding what is reasonable in all circumstances for the protection of the interests of the Company, but would be valid if any particular restrictions or provisions were deleted or restricted or limited in a particular manner, then the said provisions shall apply with any such deletions, restrictions, limitations, reductions, curtailments, or modifications as may be necessary to make them valid and effective and the remaining provisions shall be unaffected thereby. 12. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire understanding among the Parties and may not be modified without the express written consent of the Parties. This Agreement supersedes all prior written and/or oral and all contemporaneous oral agreements, understandings and negotiations regarding the subject matter hereof. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced pursuant to the laws of the State of California applicable to contracts made and entirely to be performed therein. 14. VOLUNTARY AGREEMENT; NO INDUCEMENTS. Each Party to this Agreement acknowledges and represents that he or it (a) has fully and carefully read this Agreement prior to signing it, (b) has been, or has had the opportunity to be, advised by independent legal counsel of his or its own choice as to the legal effect and meaning of each of the terms and conditions of this Agreement, and (c) is signing and entering into this Agreement as a free and voluntary act without duress or undue pressure or influence of any kind or nature whatsoever and has not relied on any promises, representations or warranties regarding the subject matter hereof other than as set forth in this Agreement.

12 first written above. IN WITNESS WHEREOF, the Parties have set their hand as of the date EXECUTIVE: AURA SYSTEMS, INC. By: Michael Froch Title: Sr. Vice President, General Counsel and Secretary Approved and Agreed to by the Board of Directors By: Title: Stephen A. Talesnick Vice Chairman

13 Tier Two AGREEMENT REGARDING TERMINATION OF EMPLOYMENT CONTRACT This Agreement Regarding Termination of Employment Contract ("Agreement") is entered into as of this 21st day of December, 2001 by and between ("Executive"), on the one hand, and Aura Systems, Inc., a Delaware corporation ("Company"), on the other hand (collectively, the "Parties"). RECITALS WHEREAS, Executive has been employed by the Company as, pursuant to an employment agreement with the Company dated March 5, 1998 (the "Employment Agreement"); WHEREAS, Executive and the Company wish to voluntarily terminate Executive's Employment Agreement and make Executive an at-will employee of the Company effective December 21, 2001; WHEREAS, pursuant to the terms of the Employment Agreement Executive is entitled to receive a severance payment upon such termination of the Employment Agreement; and WHEREAS, the Company and Executive has determined that it would be in the best interest of Executive, the Company and its shareholders to offer Executive a buyout of the Employment Agreement and the severance package set forth herein, in exchange for covenants and agreements contained herein and in lieu of any severance payment Executive would otherwise be entitled to receive under the Employment Agreement. WHEREAS, Executive and the Compensation Committee of the Board of Directors have negotiated the terms and conditions of this Agreement, which Agreement has been approved by the Board of Directors of the Company. NOW THEREFORE, in consideration of the promises and mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are expressly acknowledged, the Parties agree and promise as follows:

14 1. TERMINATION OF EXECUTIVE'S EMPLOYMENT AGREEMENT. Pursuant to this Agreement, Executive's Employment Agreement with the Company is terminated effective December 21, 2001 (the "Term Date"). Executive shall continue as an at-will employee of the Company until the Company or Executive terminates such at-will relationship (the "Separation Date"). 2. BUYOUT AND SEVERANCE PAYMENT. In consideration of Executive's covenants and agreements contained herein, the Company shall pay Executive as a severance benefit (the "Severance Benefit") the following: A. Tier Two Buy-Out Stock Option The Company shall grant to the Executive an option to purchase that number of shares of Common Stock of the Company (the "Stock") equal to the quotient of (x) one and one-half (1 1/2) times the Executive's Base Salary (as defined in the Employment Agreement) divided by (y) $0.32 multiplied by (z) two (2), (the "Buy-Out Stock Option"), which option shall have an exercise price equal to $0.55 per share. The Buy-Out Stock Option shall vest and become exercisable over a ten (10) year period from the date of grant, with (i) one-third (1/3) of the total shares represented by the Buy-Out Stock Option (the "Option Shares") vesting and becoming exercisable after the expiration of six (6) months from the date of this Agreement (the "First Vesting Date"), and (ii) two-thirds (2/3) of the Option Shares vesting twelve (12) months after the First Vesting Date. The Buy-Out Stock Option shall be exercisable, to the extent vested, for the full ten (10) year term of the option without regard to the Executive's status as an employee of the Company. The Buy-Out Stock Option shall be subject to such other terms as evidenced by a stock option agreement entered into between Executive and the Company and attached hereto. The Company shall grant the Buy-Out Stock Option pursuant to a shareholderapproved option plan (a "Company Option Plan"), and to the extent of any shortfall where no additional Stock is available for grant of options under any Company Option Plan, then in the form of a warrant to purchase Stock, outside of any Company Option Plan; provided, however, that if the Company shall grant the Executive a warrant, the Executive shall be entitled to receive any piggyback registration rights customarily offered to similarly situated holders of warrants to purchase Stock. B. Medical Benefits Executive shall receive continued medical benefits for a period of three (3) years following termination of employment or be entitled to receive a payment in the form of cash in lieu of such continuation of medical benefits; provided, that the Company shall not be obligated to pay a premium or incur any costs related to the provision of such continued coverage in excess of one thousand dollars ($1,000.00) per month for such three (3) year period. The medical benefits shall be substantially similar to the medical benefits Executive received from the Company prior to termination of employment.

15 C. Limitation of Benefits Except for (i) the Severance Benefit and (ii) Executive's salary and all other compensation through the Separation Date, including any earned but unpaid vacation pay, Executive shall not be entitled to receive any other compensation or benefits of any sort including, without limitation, salary, vacation, bonuses, stock options, short-term or long-term disability benefits, health care coverage and any severance Executive might otherwise be entitled to received under the Employment Agreement from the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. 3. NO DISPARAGEMENTS. Executive and the Company agree that neither Executive nor the Company shall make any oral or written, public or private, statements that are disparaging of Executive or the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or their respective predecessors, successors or assigns at any time; provided, however, nothing in this Section 3 shall preclude Executive or the Company from making truthful factual statements regarding Executive or former officers, directors or employees of the Company. 4. NON-COMPETITION. A. For a period of three (3) years from the Separation Date, Executive shall not, directly or indirectly, without the prior written consent of the Company, provide consultative services or otherwise provide services to (whether as an employee or a consultant, with or without pay), own, manage, operate, join, control, participate in, or be connected with (as a stockholder, partner, or otherwise), any business, individual, partner, firm, corporation, or other entity that is a competitor of the Company, its subsidiaries or affiliates in any business now conducted, or conducted at any time through the Separation Date, by the Company, its subsidiaries or affiliates (each such competitor a "Competitor of the Company"). Executive and the Company acknowledge and agree that the business of the Company extends throughout the United States, Europe and Asia, and that the terms of the non-competition agreement set forth herein shall apply throughout the United States, Europe and Asia B. Non-Solicitation of Customers and Suppliers. For a period of three years from the Separation Date, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company, or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. C. Non-Solicitation of Employees. Executive recognizes that he possesses and will possess confidential information about other employees of the Company, its subsidiaries and affiliates, relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with customers of the Company, its subsidiaries and affiliates. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company, its

16 subsidiaries and affiliates in developing their business and in securing and retaining customers, and has been and will be acquired by him because of his business position with the Company, its subsidiaries and affiliates. Executive agrees that for a period of three (3) years from the Separation Date, he will not, directly or indirectly, solicit or recruit any employee of the Company, its subsidiaries and affiliates for the purpose of being employed by him or by any company on whose behalf he is acting as an agent, representative or employee and that he will not convey any such confidential information or trade secrets about other employees of the Company, its subsidiaries and affiliates to any other person. If Executive in any way violates the provisions of this Section 4, all Severance Benefits shall cease, including the continued vesting of the Stock Options. 5. RETURN OF THE COMPANY'S DOCUMENTS AND PROPERTY. Executive agrees to return all records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company, its affiliates, and/or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. In addition, Executive shall return to the Company all property or equipment that he has been issued during the course of his employment or which he otherwise currently possesses. Executive shall deliver to the Company before the Separation Date at Executive's expense all of the Company's records, documents, proposals, notes, lists, files and materials and property and equipment that are in his possession. Executive is not authorized to retain any copies of any such records, documents, proposals, notes, lists, files or materials. Nor is he authorized to retain any other of the Company's property or equipment. 6. PROPRIETARY INFORMATION. Executive acknowledges that Executive has had or may have had access to proprietary information, trade secrets, and confidential material of the Company or its affiliates, including, but not limited to, all ideas, information and materials, tangible or intangible, not generally known to the public, relating in any manner to the business of the Company, its personnel (including partners, principals, employees and contractors), its clients or others with whom it does business that Executive learned, acquired, or created, or helped to create during the period of Executive's employment with the Company ("Proprietary Information"). Proprietary Information includes, but is not limited to, all trade secrets, patents and pending patents, documents, computer programs, source code, users manuals, algorithms, compilations of technical, financial, legal or other data, client or prospective client lists, names of suppliers, specifications, designs, business or marketing plans, forecasts, financial information, work in progress, and other technical or business information. Executive agrees, without limitation in time or until such Proprietary Information shall become public other than by Executive's unauthorized disclosure, to maintain the confidentiality of such information and to refrain from divulging, disclosing or using said Proprietary Information for any other purpose. Executive acknowledges and affirms that all existing Proprietary Information is the exclusive property of the Company and Executive hereby assigns to the Company any and all rights the Executive may have had or acquired (or hereinafter may have or acquire) in any Proprietary Information.

17 Executive further acknowledges and agrees that the Company is the sole owner of such Proprietary Information and Executive has no claim of ownership to such Proprietary Information. 7. CONSULTING ARRANGEMENT. For a period of one (1) year following the Separation Date, Executive shall consult for the Company and make himself available to the Company as reasonably needed and requested by the Company (the "Consulting Period"). During the Consulting Period Executive shall receive an amount equal to 85% of the Base Salary under Executive's Employment Contract on a monthly basis. All such payments shall be paid in accordance with normal payroll practices of the Company. In the event that the Company and the Executive enter into an arrangement subsequent to the date hereof whereby the Executive accepts a position as an employee of the Company, the provisions of this Section 7 shall be subject to appropriate modification. 8. COOPERATION IN LITIGATION. Executive shall cooperate with the Company, its affiliates, and each of their respective attorneys, barristers, solicitors or other legal representatives (collectively, "Attorneys") in connection with any claim, litigation, or judicial or arbitral proceeding which is now pending or may hereinafter be brought against the Company or its affiliates by any thirdparty. Executive's duty of cooperation shall include, but not be limited to, (a) meeting with the Company's and/or its affiliates' Attorneys by telephone or in person at mutually convenient times and places in order to state truthfully his knowledge of matters at issue and recollection of events; (b) appearing at the Company's, its affiliates' and/or their Attorneys' request (and, to the extent possible, at a time convenient to Executive that does not conflict with the needs or requirements of his then-current employer) as a witness at depositions or trials, without necessity of a subpoena, in order to state truthfully Executive's knowledge of matters at issue; and (c) signing at the Company's, its affiliates' and/or their Attorneys' request declarations or affidavits that truthfully state matters of which Executive has knowledge. The Company and/or its affiliates shall promptly reimburse Executive for his actual and reasonable travel or other expenses that he may incur in cooperating with the Company, its affiliates, and/or their Attorneys pursuant to this Section INDEMNIFICATION. The Company shall continue to indemnify Executive for all actions and inactions related to his service as an officer or director of the Company to the extent such actions and inactions are covered by the Company's Directors and Officers insurance policy as then in effect ("Indemnified Actions'') through the expiration of the applicable statute of limitations. Notwithstanding the foregoing, in the event such Indemnified Actions result from Executive's gross negligence or willful misconduct, the indemnification hereunder shall not apply. 10. BINDING EFFECT. This Agreement shall be binding upon the Parties and their respective heirs, administrators, representatives, executors, successors and assigns, and shall inure to the

18 benefit of the Parties and their respective heirs, administrators, representatives, executors, successors and assigns. 11. SEVERABILITY. While the provisions contained in this Agreement are considered by the Parties to be reasonable in all circumstances, it is recognized that some provisions may fail for technical reasons. Accordingly, it is hereby agreed and declared that if any one or more of such provisions shall, either by itself or themselves or taken with others, be adjudged to be invalid as exceeding what is reasonable in all circumstances for the protection of the interests of the Company, but would be valid if any particular restrictions or provisions were deleted or restricted or limited in a particular manner, then the said provisions shall apply with any such deletions, restrictions, limitations, reductions, curtailments, or modifications as may be necessary to make them valid and effective and the remaining provisions shall be unaffected thereby. 12. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire understanding among the Parties and may not be modified without the express written consent of the Parties. This Agreement supersedes all prior written and/or oral and all contemporaneous oral agreements, understandings and negotiations regarding the subject matter hereof. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced pursuant to the laws of the State of California applicable to contracts made and entirely to be performed therein. 14. VOLUNTARY AGREEMENT; NO INDUCEMENTS. Each Party to this Agreement acknowledges and represents that he or it (a) has fully and carefully read this Agreement prior to signing it, (b) has been, or has had the opportunity to be, advised by independent legal counsel of his or its own choice as to the legal effect and meaning of each of the terms and conditions of this Agreement, and (c) is signing and entering into this Agreement as a free and voluntary act without duress or undue pressure or influence of any kind or nature whatsoever and has not relied on any promises, representations or warranties regarding the subject matter hereof other than as set forth in this Agreement.

19 first written above. IN WITNESS WHEREOF, the Parties have set their hand as of the date EXECUTIVE: AURA SYSTEMS, INC. By: Michael Froch Title: Sr. Vice President, General Counsel and Secretary Approved and Agreed to by the Board of Directors By: Title: Stephen A. Talesnick Vice Chairman