Aura Systems Inc. Annual Meeting of Stockholders Remarks of Chairman Zvi -Harry- Kurtzman
10 January 2001
Aura Systems Inc. Annual Meeting of Stockholders Remarks of Chairman Zvi -Harry- Kurtzman
EL SEGUNDO, Calif.--Jan. 10, 2001--AURA SYSTEMS, INC. (OTC:AURA) held its Annual Meeting of Stockholders yesterday. Below are the remarks of Zvi (Harry) Kurtzman, Chairman and Chief Executive Officer of the Company.Remarks of Zvi (Harry) Kurtzman:
Dear Shareholders and guests:
There was a company called Aura Systems that was developing new electro-optical display systems, new electromagnetic actuators, new speaker drivers, and a host of other products. That company is no more. At the last annual meeting in March 2000, we discussed the events of the previous years and our restructure plan, to return Aura into a viable company. Ten months later, the new Aura Systems thank God, is alive and while it is rebuilding itself rapidly into an operational business, we are building a new era for mobile electric power. Today I would like to share with you, the last year's events and then proceed with our business plan for the coming year. We have conviction and determination as well as a planned approach to build a better world, a pleasant working environment for our staff, a partnership with our suppliers and value for our shareholders.
Twelve Months
What a difference. On February 20, 2000 we reached a final agreement with one of our major convertible bondholder. The Company was finally ready to restructure its debt, revamp its organization and think how to rejuvenate itself. Before the financial restructure, the Company had approximately $85 million in debt. Today, while still too high, the debt is less than $32 million. Just before the restructure we were losing staff on a regular basis as we were cutting back, as some people lost faith, felt insecure and looked for other jobs. Today, morale is high and we are hiring again adding muscle to the skeleton. Only a year ago, we were overwhelmed with lawsuits and other legal actions. Today, just about all of the litigation is settled. Twelve months ago we only had a 5 KW AuraGen. Today we have 5 and 8 KW machines with AC/DC options and the development work has been completed on the inverter battery charger option. This option will be available by April. In October 1999 we touched the abyss as confidence from suppliers and creditors hit its low point. Today we have payment agreements with most creditors and while much more work needs to be done, we have started to rebuild relations with our suppliers. We hope to regain their confidence in the months to come as we continue to rebuild and rejuvenate our company. Finally, one year ago, many friends and foes were wondering if we would survive. Today, survival is no longer an issue, but instead the questions are, how quickly will we grow and expand and how soon will we create value for our shareholders.
To answer the questions I would like to share with you our business philosophy and plan. We have a portfolio of assets. This portfolio carries with it a value creating logic also known as a business model. The portfolio's composition and the business model will then drive the design of the company's organization and functions.
Our assets are composed of our patents, employees and relatively small facilities. Our most valuable assets are our people, their ability to work as a team under intense pressure, and the technological know how, that they have accumulated over the last 10 years. It is the value creation logic that is responsible for the capacity of the company to create wealth. Our value creation logic is: to be in a business, where we can become a dominating player in that industry. The other parts of the logic equation are to be in a business that is matured, where the industry has not had any recent technological changes, and where changes and events in other industries as well as other considerations such as environmental issues, or power shortages are driving demand for change. We strongly believe that mobile electric power is that industry. The Company's organizational structure is designed to implement our value creating logic within the constraints of our assets. And now to our business plan.
Business Plan
Our Company is totally focused on the AuraGen technology and its product line. First I would like to take a few minutes and discuss with you what exactly is the AuraGen technology, and what are the products. The AuraGen technology is composed of 3 basic elements a) a revolutionary new patented mechanical approach, b) a highly proprietary control system and c) the patented fully integrated system.
The key for our mechanical approach is the solid rotor. The rotor is a cast part composed of steel and aluminum. On each side of the rotor we have a Stator which is wound in a very calculated and specific configuration. Next we have the two cast Aluminum Endbells. When the above parts are assembled together we have our mechanical Axial Induction Machine. The Electronic Control Unit ("ECU") is the brain that controls the system and provides clean sine wave power. Finally in order to function, the mechanical device and ECU are integrated into a system that is integrated into a vehicle.
Let me explain how it works. First the stators generate a Magnetic Wave, the Magnetic Wave produces an Electric Wave in the rotor, the Electric Wave generates an electric current in the rotor and that generates a force which produces the famous AuraGen Torque. Now the vehicle's engine rotates the rotor and our famous torque opposes this rotation. When the engine torque is less than or equal to the AuraGen torque, oops no good, we just stalled the engine. Let's try again. With the aid of the throttle control we adjust the engine torque to be larger than our AuraGen torque. The delta between the two torques, somehow, thank God our technical staff understands how, is generating a current in the winding of the stator and that's how we generate electric power. Just to make sure everyone understands how simple it is lets go over it again, but this time with some charts.
Well, maybe, it is not so simple and that's why no one was able to do this before. Now that we understand how everything works, what was left was a tremendous engineering effort to make this a practical and economical machine. It took a large team of very smart people years to understand the theory and implement it into the AuraGen machine, as we know it today. The beauty of the AuraGen is that our team of scientists, engineers, and technicians working with our suppliers made this very complex machine simple and elegant. Recently we extended the operational capability of the AuraGen to include AC/DC options, which are currently available. In addition, in the next few months the company will have available the Inverter and Battery Charger options. The Inverter and Battery Charger option will provide the capability to produce the full power from the battery system with the engine off and then charge the battery quickly as soon as the engine is turned on. The Company will also start shipping 8 KW machines in February 2001.
The system is very different from any other available mobile or stationary induction power generator. To illustrate the differences let me show you a comparison. As you can see our machine is a lot smaller than a typical machine. In addition to the size difference, which is approximately two-thirds to three-quarters smaller than a typical machine, the weight is also significantly less. What does it all mean, and why would anyone care? In some applications, like mobile power, size is very critical. Size determines where the system can be integrated. If one would like to fit under the hood of a vehicle size is essential. In all situations price is very important. Since our machine is made from the same types of materials as a typical machine and furthermore since there are no special esoteric manufacturing needs, our machine is inherently significantly cheaper to manufacture once tooling is in place and significant manufacturing volume is achieved. Our Company is currently totally focused on under-the-hood applications for two basic reasons. First, because in this niche, the AuraGen has the potential to become the solution of choice because it is the very best, and in many cases the only solution for the rapidly growing mobile power needs. Secondly, we are able to price our products very competitively in the existing market place with very significant margins, without massive manufacturing volume.
The AuraGen is not a gizmo, it is not a fad, and it is not a marketing gimmick. The AuraGen is not just a Generator and it is not just an Inverter or a battery charger, it is also not a heavy duty or modified alternator. The AuraGen is an INDUCTION POWER SYSTEM ("IPS") for mobile power needs by industry, government and consumers.
Market Size and Share
Who are the industrial users of this mobile power and what is the market for such a device? Industrial users are found everywhere, ambulances and other emergency and rescue vehicles, cable, telecommunication, news broadcasting, utilities, catering trucks, RVs and many others. We conducted a marketing study looking at industrial and government users. The domestic market for the AuraGen is approximately 900,000 units per year for industrial users and an additional 200,000 for the Federal Government with growth of approximately 7.5% per year. In the study we did not consider the growing shift to digital technology that should increase demand for our specific product and accelerate growth. We did not consider the power crisis that is rapidly spreading and we did not consider any consumer users.
Competition
There are over 40 manufacturers of Gensets and numerous suppliers of inverters. When discussing industrial grade the best known Gensets are Honda, Onan and Kohler. The best-known Inverter manufacturers are Dimension and Vanner. None of the above provide a product with the functionality of the AuraGen. We conducted an Economic Value Analysis ("EVA") for life cycle costs for the main providers of transportable power. In this analysis we considered the five basic elements a) initial cost, b) operating costs, c) maintenance costs d) other costs and e) replacement costs. When one considers the total life cycle costs the AuraGen is not only a superior performing product but also is substantially cheaper.
Research and Development
With a small but dedicated staff we aggressively pursue activities to enhance our products and provide more flexibility to an ever-growing customer base. We have a plan to expand our product line family to include different power levels. We constantly are researching product improvements and cost reduction. We absolutely need to increase our engineering staff, in order to be able to carry out the planned activities. These activities will generate additional products to support customer needs. In addition the R&D activities will allow us to create common parts for different models and this will result in cost reduction across the board.
Manufacturing
Aura Systems is a complete system integrator. All of the science and engineering is done in house. All of the parts are designed in house and we contract out manufacturing to build to print. Our manufacturing role is limited to coordinating and scheduling the production chain with suppliers, assembly of a few subsystems and testing the system before shipping to customers. In addition we are responsible for quality assurance and control throughout the entire parts chain. Keeping to this role allows us to focus on our strengths.
We do not require the typical very large capital investment in plants and factories. However we do need to invest in additional personnel and tooling to be able to develop the new products and enhance our ability for supply chain management. We estimate a need for several million dollars in new tooling equipment and machinery over the next year, which we strongly believe, will be available from cash flow.
Aura, our Company, has committed itself to set up a Quality System that fully complies with Industry standards, as defined in ISO 9001, QS 999 and OEM's supplementary requirements. A similar commitment is required from all of our suppliers, the majority of whom are ISO 9001/2 certified. We are currently undergoing a systematic process to upgrade compliance in all necessary areas. The area covers policies, procedures, work instructions and also streamlining engineering, manufacturing, purchasing, shipping and receiving, inspection and service. All to insure a quality product and customer satisfaction. This process will take some time. Our goals are to be in full compliance within 18 months.
Sales Approach
Our Company is still bootstrapping and therefore we must proceed with caution in terms of spending large sums of money for marketing and promotion and expanding staff for sales activities across the nation. General Motors promoted our product throughout the last year at many trade shows and on their web site and we expect this to continue in the coming year. This gave us an opportunity to save substantial monies that one would normally spend on trade shows. We focused our marketing activities on building a new Web site www.aurasystems.com. We developed printed material and collected large amounts of data on demographics, markets and the competition. In addition we invested substantial effort in direct mailers to fleet managers, local and state agencies and others. We have also invested time and human resources in doing hundreds of AuraGen demonstrations in many different parts of the country. In a very focused way we were marketing and laying the foundation for many different industrial users. We will continue to expand our activities in the coming year.
Our sales approach has evolved over the last six months. We believe that in order to be effective in sales with our limited resources we must leverage our talents and know-how. In order to achieve this leverage we decided to focus our sales on a three-prong approach a) major distributors, b) OEMs and c) government. First we will establish a powerful distributor network by focusing on a limited number of substantial experienced distributors. The criteria for such a distributor will be based on:
a. Experience in the Industrial Energy Industry.
b. Ability to provide 24 hour 7 days a week product support
warranty service and installation in numerous locations.
c. Have a dealer network established under them
d. Promote the AuraGen in trade shows, advertisements and other
media
e. Be financially capable to make the investment.
We expect that over 55% of our sales in the next twelve months will be from such distributors. We are pleased to welcome The American Body Company ("ABC") as such a distributor. ABC is the nations largest up-fitters for tucks and vans. They currently up-fit over 150,000 vehicles a year for many different industrial users in 14 locations. ABC has a close working relationship with Ford and GM and is the current upfitter for the GM Goodwrench Mobile Service Vans. ABCs territory will be Florida, Ohio, Pennsylvania, New Jersey, Maryland, Missouri and Kentucky.
We are also pleased to welcome Stewart and Stevenson ("S&S") as such a distributor. S&S is a billion-dollar company with extensive experience in the energy business. S&S has five regions that cover most of the Western part of the country. To date, two of the regions have executed agreements and we expect one other region to join later in the month. We also hope that the remaining regions will join shortly. With S&S we now have very good coverage in California, Arizona, Nevada, Washington, Oregon and North Texas. In addition, S&S will provide service and installation for Aura's GSA customers including the military. We will be adding a number of other such distributors in the next several months to cover the South East and the Great Lakes areas.
The other focus area will be Original Equipment Manufacturers ("OEM"). We are focused on two basic OEM groups. The first group we will refer to as MEGA OEMs and those are GM, Ford, etc. and the second group is the traditional Industrial OEMs. Numerous discussions are on-going with GM about some kind of supplier relationship. There are complex issues that need to be resolved. We have also started activities with Ford. We believe that GM and Ford will develop some long-term relationships with Aura, however these are very big and complex organizations and no assurances can be given by anyone as to if and when a supplier OEM relationship will be established. We do know that GM is using the AuraGen in the Goodwrench Service program and we were pleased to learn recently that GM will continue and expand on that program. Because of the unknowns at this time we can not estimate the contribution from the Mega OEMs to our sales in the next twelve months. The numbers could be very, very large or very few.
There are many, many OEMs in different industries across the nation. The focus of our sales force will be on them. We are currently working with a number of such OEMs in different areas. We are exploring relationships with Ambulance OEMs as well as RVs, and other specialty suppliers.
We recently reached our first OEM agreement with a company called Altec Industries Inc. Altec is a billion-dollar company supplying, among other things, buckets trucks to utilities and phone companies. We are currently working with their engineers to design an AuraGen solution to the bucket truck needs. We believe that the solution will use the AC/DC as well as the inverter/battery charger options.
We have also recently reached an OEM agreement with Semi-Truck Co. in Salt Lake City, Utah. This agreement is for the use of the AuraGen in conjunction with GM Savannah Vans.
We estimate that the industrial OEMs will contribute approximately 35% of our sales in the coming year.
We estimate that the balance of the sales for the coming year will come from the numerous fleets and different government agencies. The AuraGen GSA sales are broken down into military and non-military. We are currently selling relatively small number of AuraGen units to the military. While we expect constant increase in military sales throughout the coming year, we don't expect very large numbers. In order to be in a position to sell to the Army on an institutional basis, we first need for the army to have an established Operational Requirement Document "ORD". This document is scheduled to be released by the military in the middle of the year. Until the military requirements are well defined, we can only sell to individual military units but not to the military as an institution.
A Better World
AuraGen is changing the concept of mobile power. The basic sources for mobile power prior to the AuraGen were Gensets and Inverters. Everybody who ever used Gensets knows that they are heavy, bulky, require constant maintenance and users always need to fuss around with them for a variety of reasons. Gensets are transportable power. AuraGen is mobile power. Inverter users know that they normally have to recharge batteries overnight and that inverters with pure sine wave power are very expensive.
In recent years we all have experienced the wide penetration of digital devices in our daily lives. Similarly Industry is experiencing this digital wave in ever-increasing applications. The need for industrial digital mobile power is rapidly growing as more digital devices and sensors are integrated into mobile applications. This need for clean power once again separates the AuraGen from traditional approaches. AuraGen provides pure sine wave power for the digital world.
People everywhere are more aware of environmental issues than ever before. A major source of air pollution is from small engines that do not have all of the emissions reduction technology that was developed and incorporated into the automobiles over the last decade. AuraGens are designed to be integrated into vehicles and thus take advantage of all these benefits. AuraGen provides environmental friendly clean mobile power for the industrial and digital world. The AuraGen products are totally unique and provide the needed power whenever and wherever needed, totally transparent to the users.
Conclusion
The world produces 50 million new cars and light trucks per year, along with 400,000 heavy duty trucks. The "Installed" base in North America is over 200 million vehicles. This installed base provides an opportunity to generate very large amount of power. For example 100,000 AuraGens each generating 6 KW of power can provide 600 Mega watts per hour, the equivalent of a major power generating facility. According to the December issue of the Gilder report electric power generated from the automobile power plants is where the future is. We are pleased and honored at the mention of Aura Systems by the Gilder report as one of the companies that is helping shape the powercosom.
It took many years, a great deal of money and a few major explosions along the way but we are now ready. In the last several months, while still very modest, we have experienced a constant increase in sales and shipments and the demand for the product is accelerating. December was our best month, and we now know that January will be substantially better. Our focus has created a lean company, ready to implement the value creating logic.
Toward that goal we have developed a conservative but solid operational plan for the coming year. Our plan calls for shipping of over 20,000 units for the next fiscal year and we expect to be cash flow positive within the first half of the next fiscal year.
The road is still full of bumps but they are different kinds of bumps. Managing the supply chain, quality control, field service, to provide our customers with one stop shopping for their total mobile power needs are some of the issues. We will deal with the problems associated with controlled growth in the face of limited resources.
But to our friends and shareholders these are high-class problems that we will overcome.
We had a dream, we saw it shattered but we refused to give up and die. We now have a reality. Who ever said dreams can not come true?
Thank you.
(End of Remarks by Zvi (Harry) Kurtzman)
Aura Systems, Inc., a leader in electromagnetic systems, is located in El Segundo, CA. More information about the Company is available on the Company's website http://www.aurasystems.com/.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this release which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in the Company's Securities and Exchange Commission filings.