Exhibit 10.18
 
THIS DEBENTURE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS DEBENTURE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
DEBENTURE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS DEBENTURE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS DEBENTURE UNDER SAID ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO AURA SYSTEMS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
 
$[__________]
 
NO. [___]
 
DATE OF ISSUANCE: January ___, 2008
 
AURA SYSTEMS, INC.
 
7% Convertible Subordinated Debenture
 
AURA SYSTEMS, INC., a Delaware corporation (together with its successors, the
“Corporation”), for value received hereby promises to pay to:
 
[__________________________]
 
(the “Holder”), the principal sum of [___________________] Dollars ($[________])
(“Total Principal Amount”), on January ___, 2013 (the “Maturity Date”) and to
pay interest at such times and on such terms and conditions as specified herein.
 
This 7% Convertible Subordinated Debenture (this “Convertible Debenture”) is one
of a duly authorized issuance of $3,000,000.00 aggregate principal amount of
Convertible Subordinated Debentures of the Corporation (the “Series”). Any
payment of principal on this Convertible Debenture shall be made pro rata with
all principal payments made on the other Convertible Subordinated Debentures
issued in the Series.
 
1. CERTAIN DEFINITIONS.
 
In addition to the defined terms included elsewhere herein, the following terms
as used herein shall have the following meanings:
 
“Affiliate” means, with respect to any Holder, any person that directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Holder including without limitation any
member, manager, partner, director or senior executive officer of any such
person or Affiliate thereof. As used in this definition, the terms "control,"
"controlled by" and "under common control with" shall be mean the power,
directly or indirectly, to vote more than fifty percent (50%) of the securities
having voting power for the election of directors of such person or to direct or
cause the direction of the management and policies of such person, whether by
voting power, contract or otherwise.
 

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“Change of Control” means when any person or group of persons (within the
meaning of Sections 13 and 14 of the Securities and Exchange Act of 1934 (the
“Exchange Act”) and the rules and regulations of the Securities and Exchange
Commission (the “Commission”) relating to such Sections) shall have acquired
after the date hereof beneficial ownership (within the meaning of Rules 13d-3
and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 50.1%
or more of the outstanding shares of Common Stock of the Corporation after the
date hereof.
 
“Common Stock” means the common stock of the Corporation, par value $0.0001 per
share.
 
“Family Member” means any parent, spouse, lineal descendent or adopted child of
a Holder.
 
“Permitted Transfer” means a transfer by the Holder of no less than all such
Holder’s right, title and interest in this Convertible Debenture to any of the
following: (i) any wholly-owned subsidiary or Affiliate of such Holder; (ii) any
partnership of which such Holder or any Family Member or Affiliate of such
Holder is a general partner and, together with such Holder’s Family Members or
Affiliates, holds in excess of fifty percent (50%) of the economic interest of
the partnership; (iii) any Family Member of such Holder; (iv) any trust of which
there is, while the obligations of this Convertible Debenture remain
outstanding, no beneficiary other than a person or entity described in
subsections (i) through (iii) above; or (v) an executor or administrator of a
Holder’s estate upon his or her death or, in the event of a Holder that is a
decedent’s estate, any testamentary trusts created under the will of the
decedent.
 
“Sale Event” means one of the following: (i) the occurrence of a Change of
Control of the Corporation; (ii) a transfer of all or substantially all of the
assets of the Corporation to any person or entity in a single transaction or
series of related transactions; or (iii) a consolidation or merger of the
Corporation with or into another person or entity in which the Corporation is
not the surviving entity or survives solely as a wholly-owned subsidiary of
another entity (other than a merger which is effected solely to change the
jurisdiction of incorporation of the Corporation and results in a
reclassification, conversion or exchange of outstanding shares of Common Stock
solely into shares of Common Stock).
 
2. INTEREST AND PRINCIPAL.
 
2.1. Interest Rate, Payment of Interest and Calculation. The Corporation
promises to pay interest in cash on the Total Principal Amount of this
Convertible Debenture outstanding from time to time at the rate of seven percent
(7%) per annum (the “Interest Rate”) or, if less, the maximum rate permitted by
applicable law. Past due amounts (including interest, to the extent permitted by
law) will accrue interest at the Interest Rate plus two percent (2%) per annum
or, if less, the maximum rate permitted by applicable law, and will be payable
on demand. Interest on this Convertible Debenture will be calculated on the
basis of a 360-day year of twelve 30 day months. The Corporation will pay
interest in cash (a) quarterly in arrears, on the last day of each fiscal
quarter of each year (each, an “Interest Payment Date”) until the Maturity Date,
commencing on May 31, 2008 (unless such day is not a business day, in which
event, on the next succeeding business day) (the “First Interest Payment Date”),
(b) the Maturity Date, (c) each Conversion Date (as hereafter defined), and (d)
the date the principal amount of this Convertible Debenture shall be declared to
be or shall automatically become due and payable, on the principal sum hereof
outstanding, from the most recent Interest Payment Date to which interest has
been paid on this Convertible Debenture, or if no interest has been paid on this
Convertible Debenture, from the date of this Convertible Debenture, until
payment in full of the principal sum hereof has been made.
 

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2.2. Payment of Principal. If not sooner paid in accordance with the provisions
of this Convertible Debenture, the Corporation shall repay the remaining unpaid
principal balance of this Convertible Debenture on the Maturity Date.
 
2.3. Method of Payment. The Corporation will pay in cash all sums becoming due
on this Convertible Debenture for principal, interest or otherwise by check or
wire transfer to the Holder of this Convertible Debenture in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts at the address
specified for such purpose below the Holder’s name above, or by such other
method or at such other address as such Holder shall have from time to time
specified to the Corporation in writing for such purpose, without the
presentation or surrender of this Convertible Debenture.
 
3. REGISTRATION.
 
3.1. Record Ownership. The Corporation shall maintain a register of the Holder
of this Convertible Debenture (the “Register”) showing its name and address and
the serial number and principal amount of Convertible Debenture issued to or
transferred of record by it pursuant to Section 3.2 hereof. The Register may be
maintained in electronic, magnetic or other computerized form. The Corporation
may treat the person named as the Holder in the Register as the sole owner of
this Convertible Debenture.
 
3.2. Registration of Permitted Transfer. Except for Permitted Transfers, the
Holder may not transfer or otherwise assign this Convertible Debenture, in whole
or in part, and no transfer of this Convertible Debenture other than a Permitted
Transfer may be registered on the Register. Permitted Transfers shall be
registered when this Convertible Debenture is (a) presented to the Corporation
with a request to register the Permitted Transfer hereof, (b) the Convertible
Debenture is accompanied by a written instrument of transfer in form reasonably
satisfactory to the Corporation, duly executed by the Holder thereof or his or
its attorney duly authorized in writing, and reasonable assurances are given
that the endorsements are genuine and effective, (c) the Corporation has
received any and all accompanying documents that it may reasonably request,
including but not limited to representations regarding the investor suitability
of the proposed transferee, and (d) the Corporation has received evidence
reasonably satisfactory to it that such Permitted Transfer is rightful and in
compliance with this Convertible Debenture and all applicable laws, including
state and Federal securities laws. When this Convertible Debenture is presented
for such transfer and duly transferred hereunder, it shall be canceled and a new
Convertible Debenture showing the name of the transferee as the record holder
thereof shall be issued in lieu hereof.
 
3.3. Worn and Lost Securities. If this Convertible Debenture becomes worn,
defaced or mutilated, but is still substantially intact and recognizable, the
Corporation or its agent may issue a new Convertible Debenture in lieu hereof
upon its surrender bearing a number not contemporaneously outstanding. Where the
Holder claims that the Convertible Debenture has been lost, destroyed or
wrongfully taken, the Corporation shall issue a new Convertible Debenture in
place of the original Convertible Debenture bearing a number not
contemporaneously outstanding if the Holder so requests by written notice to the
Corporation actually received by the Corporation before it is notified that the
Convertible Debenture has been acquired by a bona fide purchaser and the Holder
has delivered to the Corporation an indemnity bond in such amount and issued by
such surety as the Corporation deems reasonably satisfactory, together with an
affidavit of the Holder setting forth the facts concerning such loss,
destruction or wrongful taking, and such other information in such form with
such proof or verification as the Corporation may reasonably request.
 

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4. CONVERSION.
 
4.1. Conversion at the Option of the Holder. Subject to Section 4.5 and the
provisions for Mandatory Conversion set forth therein, at the option of the
Holder and at any time or from time to time, all (but not less than all) of the
outstanding principal balance of this Convertible Debenture may be converted
into that certain number of fully paid and nonassessable shares of Common Stock
as is determined under Section 4.2 below (the “Conversion Shares”).
 
4.2. Conversion Price. Subject to the adjustments set forth in Section 4.4, this
Convertible Debenture may be converted into that number of shares of Common
Stock equal to the Total Principal Amount of this Convertible Debenture
outstanding on the Conversion Date (as defined below) divided by $3.00 (the
“Conversion Price”).
 
4.3. Conversion Procedures.
 
(a) The conversion of this Convertible Debenture (the “Conversion”) will be
deemed to have been effected as of the close of business on the date on which
the Holder delivers a notice of conversion, in the form attached hereto as
Exhibit A (including via telecopy), to the Corporation of the Conversion of this
Convertible Debenture (the “Conversion Date”). Within five (5) business days of
the Conversion Date, the Holder shall surrender this Convertible Debenture at
the principal office of the Corporation. On the Conversion Date, the rights of
the Holder of this Convertible Debenture will cease and the person or persons in
whose name or names any certificate or certificates for Conversion Shares are to
be issued upon such Conversion will be deemed to have become the holder or
holders of record of the shares of Common Stock represented thereby.
 
(b) As soon as possible after a Conversion has been effected (but in any event
within ten (10) business days), the Corporation will deliver to the converting
Holder a certificate or certificates representing the number of shares of Common
Stock issuable by reason of the Conversion, pursuant to Section 4.1. To the
extent necessary, fractional shares of Common Stock will be issued upon
Conversion.
 
(c) The issuance of certificates for shares of Common Stock upon a Conversion of
this Convertible Debenture will be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such Conversion and the related issuance of shares of Common
Stock. Upon Conversion of this Convertible Debenture, the Corporation will take
all such actions as are necessary in order to insure that the Common Stock
issuable with respect to such Conversion will be validly issued, fully paid and
nonassessable.
 

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(d) All accrued unpaid interest on this Convertible Debenture shall be payable
upon Conversion in cash.
 
4.4. Adjustments. The Conversion Price shall be subject to adjustment from time
to time as follows:
 
(a) Share Reorganization. If and whenever the Corporation shall:
 
(i) subdivide the outstanding shares of Common Stock into a greater number of
shares;
 
(ii) consolidate the outstanding shares of Common Stock into a smaller number of
shares;
 
(iii) issue Common Stock or securities convertible into or exchangeable for
shares of Common Stock (without the payment of additional consideration
therefor) as a stock dividend to all or substantially all the holders of Common
Stock; or
 
(iv) make a distribution on the outstanding Common Stock to all or substantially
all the holders of Common Stock payable in Common Stock or securities
convertible into or exchangeable for Common Stock (without the payment of
additional consideration therefor);
 
(any of such events being herein called a “Share Reorganization”), then in each
such case the Conversion Price shall be adjusted, effective immediately after
the record date at which the holders of Common Stock are determined for the
purposes of the Share Reorganization or, if no record date is fixed, the
effective date of the Share Reorganization, by multiplying the applicable
Conversion Price in effect on such record or effective date, as the case may be,
by a fraction of which:

(I) the numerator shall be the number of shares of Common Stock outstanding
after giving effect to such Share Reorganization, including, in the case of a
distribution of securities convertible into or exchangeable for shares of Common
Stock, the number of shares of Common Stock that would have been outstanding if
such securities had been converted into or exchanged for Common Stock on such
record or effective date; and
 
(II) the denominator shall be the number of shares of Common Stock outstanding
on such record or effective date (without giving effect to the transaction).
 
(v) Capital Reorganization. If and whenever there shall occur a reclassification
or redesignation of the shares of Common Stock or any change of the shares of
Common Stock into other shares, other than in a Share Reorganization (any such
event being herein called a “Capital Reorganization”), then in each such case,
the Holder who exercises the right to convert this Convertible Debenture after
the effective date of such Capital Reorganization shall be entitled to receive
and shall accept, upon the exercise of such right, in lieu of the number of
shares of Common Stock to which such Holder was theretofore entitled upon the
exercise of the conversion privilege, the aggregate number of shares or other
securities or property of the Corporation or of the entity resulting from such
Capital Reorganization that such Holder would have been entitled to receive as a
result of such Capital Reorganization if, on the effective date thereof, such
Holder had been the holder of the number of shares of Common Stock to which such
Holder was theretofore entitled upon conversion of this Convertible Debenture;
provided, however, that no such Capital Reorganization shall be consummated
unless all necessary steps shall have been taken so that such Holder shall
thereafter be entitled to receive such number of shares or other securities of
the Corporation or of the entity resulting from such Capital Reorganization,
subject to adjustment thereafter in accordance with provisions the same, as
nearly as may be possible, as those contained above.
 

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(b) Adjustment Rules. The following rules and procedures shall be applicable to
adjustments made in this Article 4:
 
(i) no adjustment in the Conversion Price shall be required unless such
adjustment would result in a change of at least one percent (1%) in the
Conversion Price then in effect; provided, however, that any adjustments which,
but for the provisions of this clause would otherwise have been required to be
made, shall be carried forward and taken into account in any subsequent
adjustment;
 
(ii) if any event occurs of the type contemplated by the adjustment provisions
of this Article 4 but not expressly provided for by such provisions, the
Corporation will give notice of such event as provided herein, and the
Corporation’s Board of Directors will make an appropriate adjustment in the
Conversion Price so that the rights of the Holder shall not be diminished by
such event; and
 
(iii) if a dispute shall at any time arise with respect to any adjustment of the
Conversion Price, such dispute shall be conclusively determined by the auditors
of the Corporation or, if they are unable or unwilling to act, by a firm of
independent certified public accountants selected by the Board of Directors of
the Corporation and any such determination shall be binding upon the Corporation
and the Holder.
 
(c) Certificate as to Adjustment. The Corporation shall from time to time
promptly after the occurrence of any event that requires an adjustment in the
Conversion Price deliver to the Holder a certificate specifying the nature of
the event requiring the adjustment, the amount of the adjustment necessitated
thereby, the Conversion Price after giving effect to such adjustment and setting
forth, in reasonable detail, the method of calculation and the facts upon which
such calculation is based.
 
(d) Notice to Holders. If the Corporation shall fix a record date for:
 

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(i) any Share Reorganization (other than the subdivision of outstanding Common
Stock into a greater number of shares or the consolidation of outstanding Common
Stock into a smaller number of shares), or
 
(ii) any Capital Reorganization (other than a reclassification or redesignation
of the Common Stock into other shares), or
 
(iii) any Sale Event; then
 
the Corporation shall, not less than ten (10) days prior to such record date or,
if no record date is fixed, prior to the effective date of such event, give to
the Holder notice of the particulars of the proposed event or the extent that
such particulars have been determined at the time of giving the notice.

4.5. Mandatory Conversion.
 
(a) In the event that the Closing Price (as hereinafter defined) per share of
the Common Stock of the Corporation is equal to or greater than two (2) times
the Conversion Price (as may be adjusted from time to time as set forth in
Section 4.4 above) per share for fifteen (15) consecutive Trading Days (as
hereinafter defined), then the outstanding principal balance of this Convertible
Debenture shall be automatically converted into Conversion Shares at the
Conversion Price as set forth in Section 4.2, all without any further action by
the Holder, and whether or not the Holder surrenders this Convertible Debenture
to the Corporation (any such event being herein called a “Mandatory
Conversion”). “Closing Price” means the last reported sale price regular way or,
in case no such reported sale takes place on such Trading Day, the average of
the last closing bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or if not listed or admitted to trading on any national
securities exchange, the closing sale price for such day reported by Nasdaq, if
the Common Stock is traded over-the-counter and quoted in the National Market
System or in the “pink sheets” distributed by the National Quotation Service of
the National Quotation Bureau, Inc., or if the Common Stock is so traded, but
not so quoted, the average of the closing reported bid and asked prices of the
Common Stock as reported by Nasdaq or any comparable system, or, if the Common
Stock is not listed on Nasdaq or any comparable system, the average of the
closing bid and asked prices as furnished by two members of the National
Association of Securities Dealers, Inc. selected from time to time by the Board
of Directors for that purpose. If the Common Stock is not publicly traded or is
not traded in such manner that the quotations referred to above are available
for the period required hereunder, Closing Price per share of Common Stock shall
be deemed to be the fair value per share of Common Stock as determined in good
faith by a majority of the Corporation’s Board of Directors, and if such
directors are unable to reach a decision on the Closing Price, the Closing Price
shall be determined by a nationally recognized investment banking firm,
accounting firm or valuation firm mutually acceptable to a majority of the Board
of Directors and the holders of a majority of the then outstanding shares of
Common Stock. “Trading Day” means at any time a day on which the principal
securities market for the Common Stock is open for general trading of
securities.
 
(b) The conversion procedures as set forth above in Section 4.3 shall be
followed in connection with any Mandatory Conversion pursuant to this Section
4.5.
 

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4.6. Option of Holder Upon Sale Event. Holder shall have the option, within
[five (5)] days of Holder’s receipt of notice of a Sale Event as provided in
Section 4.4(e) above, upon written notice to the Corporation in the form
attached hereto as Exhibit A, to convert the Total Principal Amount of this
Convertible Debenture into the number of Conversion Shares as is determined
under Section 4.2, in accordance with the conversion procedures set forth in
Section 4.3. If Holder does not deliver such notice of conversion within such
five (5) day period and in accordance with the terms hereof, Holder the
Corporation shall, without any further action by the Holder, promptly pay Holder
in full the amount of the outstanding balance of the Convertible De benture,
including accrued but unpaid interest, out of the proceeds of the Sale Event.
 
5. EVENTS OF DEFAULT.
 
5.1. Events of Default. If one or more of the following described events (each
an “Event of Default”) shall occur:
 
(a) The Corporation shall default in the payment of principal on this
Convertible Debenture or on any other Convertible Subordinated Debenture
included in the Series; or
 
(b) The Corporation shall default in the payment of interest on this Convertible
Debenture, or any other Convertible Subordinated Debenture included in the
Series, when and as due, which is not cured within ten (10) business days of the
date such sum is due and owing; or
 
(c) The Corporation shall fail to perform or observe any other term, provision,
condition, agreement or obligation of the Corporation under this, or any other
Convertible Subordinated Debenture issued in the Series, and such failure shall
continue uncured for a period of ten (10) business days after notice from the
Holder of such failure; or
 
(d) The Corporation shall (i) admit in writing its inability to pay its debts as
they mature, (ii) make an assignment for the benefit of creditors or commence
proceedings for its dissolution; or (iii) apply for or consent to the
appointment of a trustee, liquidator or receiver for it or for a substantial
part of its property or business; or
 
(e) A trustee, liquidator or receiver shall be appointed for the Corporation or
for a substantial part of its property or business without its consent and shall
not be discharged within ninety (90) days after such appointment; or
 
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of the whole
or any substantial portion of the properties or assets of the Corporation and
shall not be dismissed within ninety (90) days thereafter; or
 
(g) Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Corporation and, if instituted
against the Corporation, shall not be dismissed, stayed or bonded within ninety
(90) days after such institution or the Corporation shall in any action or
answer approve of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any such
proceedings;
 

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then, or at any time thereafter, and in each such case, unless such Event of
Default shall have been waived in writing by the Holder of this Convertible
Debenture (which waiver shall not be deemed to be a waiver for any subsequent
default), at the option of the Holder and in such Holder’s sole discretion,
Holder may declare the outstanding principal balance of, and accrued but unpaid
interest on, this Convertible Debenture to be immediately due and payable
without presentment, demand, protest or notice of any kind, all of which are
hereby waived, anything herein or in any note or other instruments to the
contrary notwithstanding, and may immediately, and without expiration of any
period of grace, enforce any and all of such Holder’s rights and remedies
provided herein or any other rights or remedies afforded by law. The separate
occurrence of any of the events described above shall be deemed a separate Event
of Default for all purposes.
 
5.2. Powers and Remedies Cumulative. No right or remedy herein conferred upon or
reserved to the Holder is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy. Every power
and remedy given by this Convertible Debenture or by law may be exercised from
time to time, and as often as shall be deemed expedient, by the Holder.
 
5.3. Subordination. Payment of this Convertible Debenture shall be subordinate
and junior in right of payment to certain senior indebtedness of the Corporation
to the extent and in the manner set forth in this Section 5.3.
 
(a) Subordination of Convertible Debenture to Qualified Senior Obligations.
 
(i) The Subordinated Obligations (as defined below) are hereby expressly made
subordinate and junior in right of payment to the prior payment and satisfaction
in full of all Qualified Senior Obligations (as defined below) unless in the
instrument creating or evidencing such indebtedness it is provided that such
indebtedness is not senior in right of payment to this Convertible Debenture.
Such subordination is for the benefit of and may, together with the provisions
of this Section 5.3, be enforced by the holders of the Qualified Senior
Obligations against the Corporation and the holder of this Convertible
Debenture. The Qualified Senior Obligations shall continue to constitute
Qualified Senior Obligations for all purposes hereof notwithstanding the fact
that such Qualified Senior Obligations or any claim in respect thereof shall be
disallowed, avoided or subordinated pursuant to bankruptcy law or any other
applicable law or equitable principles as a claim for unmatured interest, a
fraudulent transfer or conveyance, a preference or otherwise.
 

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(ii) As used herein “Qualified Senior Obligations” shall mean any future payment
obligations of the Corporation (or any of its successors or assigns) under, in
respect of, or relating to, any document relating to the incurrence of debt,
however created, or any other indebtedness in respect of borrowed money or
evidenced by bonds, notes, debentures, guarantees or similar instruments or
letters of credit (or reimbursement agreements in respect thereof), whether
direct or indirect, joint or several, absolute or contingent, due or to become
due, and whether in respect of or relating to principal, interest (including,
without limitation, any interest accruing after the commencement of any case,
proceeding or other action relating to the bankruptcy, insolvency or
reorganization of the Corporation at the rate specified in the applicable
agreement, whether or not such interest is allowed in such proceeding), fees,
premiums, charges, expenses, reimbursements, indemnities, damages or any other
obligations or liabilities under, in respect of or related to any such agreement
in an amount of at least $10,000,000 and which is wholly or partially secured by
the assets of the Corporation.
 
(iii) As used herein, “Subordinated Obligations” shall mean all payment
obligations of the Corporation, its successors or assigns, however created,
whether direct or indirect, as obligor or guarantor, joint or several, absolute
or contingent, due or to become due, now existing or hereafter arising and
whether in respect of or relating to principal, interest (including, without
limitation, deferred interest), fees, premiums, charges, expenses,
reimbursements, indemnities, damages under, in respect of or related to this
Convertible Debenture.
 
(b) Option of Holder to be Prepaid. In the event the Corporation becomes
obligated under a Qualified Senior Obligation after the date hereof (such event
referred to hereinafter as a “Qualified Senior Financing”), the Holder shall
have the option (i) to be prepaid in full in the amount of the outstanding
balance, including accrued but unpaid interest, of this Convertible Debenture
out of the proceeds of the Qualified Senior Financing or (ii) to continue to
hold this Convertible Debenture under the terms and conditions contained herein,
including but not limited to the subordination provisions of this Section 5.3.
In addition, if the Holder opts to continue to hold this Convertible Debenture,
the Holder agrees to execute any additional subordination documents or
agreements as required by the lender(s) of the Qualified Senior Financing.
 
(c) Subordination upon Bankruptcy or Insolvency. In the event of (i) any
insolvency or bankruptcy case or proceeding under the Bankruptcy Code, 11 U.S.C.
101 et seq., as amended, or any receivership, liquidation, reorganization or
other similar case or proceeding against the Corporation or any of its assets,
(ii) any liquidation, dissolution or other winding up of the Corporation,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or (iii) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of the Corporation, then and in any such
event:
 
(i) the holders of the Qualified Senior Obligations shall be entitled to receive
indefeasible payment and satisfaction in full of all amounts due or to become
due on or in respect of all Qualified Senior Obligations, before the Holder is
entitled to receive any payment on account of this Convertible Debenture; and
 
(ii) any payment or distribution of any kind or character, whether in cash,
property or securities, by set-off or otherwise, to which the Holder would be
entitled but for the provisions of this Section 5.3, including any such payment
or distribution which may be payable or deliverable by reason of the payment of
any other indebtedness of the Corporation being subordinated to the payment
under this Convertible Debenture, shall be paid or delivered by the liquidating
trustee or agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly
to the holders of the Qualified Senior Obligations or any agent for such holders
to the extent necessary to make payment in full of all Qualified Senior
Obligations remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of the Qualified Senior Obligations.
 

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The Corporation shall give prompt notice to the Holder of the occurrence of any
of the events referred to in this subsection 5.3(c).
 
(d) Subordination upon Default on Qualified Senior Obligations. In the event
that any Event of Default (as such term is defined in any credit agreement
governing the Qualified Senior Obligations) in the payment of principal of or
premium or interest on any Qualified Senior Obligations shall have occurred and
be continuing (a “Senior Default”), then, no payment shall be made by the
Corporation on account of this Convertible Debenture from the date of the
occurrence of such Senior Default until the date, if any, on which the Qualified
Senior Obligations to which such Senior Default relates shall have ceased to
exist or such Senior Default is cured or waived in writing by the holder(s) of
such Qualified Senior Obligations.
 
Until all Qualified Senior Obligations shall have been indefeasibly paid and
satisfied in full, upon the occurrence of a Senior Default and during the
continuation thereof, (i) the Corporation shall not, directly or indirectly,
make any payment or prepayment on account of, or assign or transfer or grant a
security interest with respect to, any part of its properties, assets, capital
stock or rights (collectively, “Assets”) for or in respect of, or acquire,
Subordinated Obligations and (ii) the holders of indebtedness under this
Convertible Debenture shall not (A) demand, accelerate the maturity of, sue for
or accept, take or receive from the Corporation (or from any other person) any
payment, assignment, transfer, grant or acquisition described in the preceding
clause (i) (including, without limitation, taking any action to cause the
rescission of this Convertible Debenture or any other security issued in
connection with the Subordinated Obligations) or to otherwise enforce its rights
in respect of the Subordinated Obligations, (B) cancel, set off or otherwise
discharge any part of the Subordinated Obligations in partial or complete
satisfaction of any obligations of any nature whatsoever owing to the
Corporation by the Holder of this Convertible Debenture; or (C) commence or join
with any other creditor of the Corporation in the commencement of any proceeding
against the Corporation under any bankruptcy, reorganization, readjustment or
arrangement of debt, receivership, liquidation, insolvency, fraudulent
conveyance or other similar law.
 
The provisions of this subsection (d) shall not apply to any payment with
respect to which subsection (b) would be applicable.
 
(e) Payments Held in Trust. In the event that the Holder shall receive any
payment or distribution of any kind or character with respect to the
Subordinated Obligations, whether in cash, property or securities, at a time
when such payment or distribution is prohibited by subsections (c) or (d) above,
and before all Qualified Senior Obligations have been paid and satisfied in
full, then and in such event, such payment or distribution shall be deemed to be
the property of, segregated, received and held in trust for the benefit of, and
shall be immediately paid over or delivered forthwith to, the holders of the
Qualified Senior Obligations or any agent for such holders for application to
the payment of all Qualified Senior Obligations remaining unpaid until all such
Qualified Senior Obligations shall have been paid in full, after giving effect
to any concurrent payment or distribution to the holders of the Qualified Senior
Obligations, it being understood that nothing contained herein shall affect the
conversion rights of the Holder of this Convertible Debenture.
 

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(f) Holder’s Rights and Remedies. Nothing contained in this Section 5.3 shall,
at any time except during the pendency of any case or proceeding of the
Corporation referred to in subsection 5.3(c) or under the conditions described
in subsection 5.3(d), affect the obligation of the Corporation to make or
prevent the Corporation from making payments at any time of principal of or
interest or premium, if any, on this Convertible Debenture or any fees or other
amounts payable by the Corporation under this Convertible Debenture, or prevent
the Holder from exercising all of its conversion rights and all remedies
otherwise permitted by this Convertible Debenture or applicable law upon default
under this Convertible Debenture, subject to the rights, if any, under this
Section 5.3 of the holders of the Qualified Senior Obligations.
 
(g) Subrogation to Rights of Holders of the Qualified Senior Obligations.
Subject to the payment in full of all Qualified Senior Obligations, the Holder
shall be subrogated to the rights of the holders of the Qualified Senior
Obligations to receive payments and distributions of cash, property and
securities applicable to the Qualified Senior Obligations until the principal of
and interest and premium, if any, on this Convertible Debenture and any fees or
other amounts payable by the Corporation under this Convertible Debenture shall
have been paid in full. For purposes of such subrogation, no payments or
distributions to the holders of the Qualified Senior Obligations of any cash,
property or securities to which the Holder would have been entitled but for the
provisions of this Section 5.3, and no payments over pursuant to the provisions
of this Section 5.3 to the holders of the Qualified Senior Obligations by the
Holder, shall, as among the Corporation, the Holder and the Corporation’s
creditors other than the holders of the Qualified Senior Obligations, be deemed
to be a payment or distribution by the Corporation to or on account of the
Qualified Senior Obligations.
 
(h) Continuing Nature of the Subordination. This Section 5.3 is irrevocable
except under written agreement of the parties and shall continue until the
Qualified Senior Obligations have been paid and satisfied in full or are
otherwise discharged and released by the holders of Qualified Senior
Obligations, and the Holder shall not be released from any duty, obligation or
liability hereunder so long as there is any claim of the holders of Qualified
Senior Obligations against the Corporation arising out of any agreement which
relates to an obligation that has not been performed, settled, discharged or
satisfied in full. The Holder shall not be released nor shall the Holder’s
obligations hereunder be in any way diminished by (i) any extension of time for
payment or performance of the Qualified Senior Obligations, (ii) any action
taken under any agreement by or on behalf of the holders of Qualified Senior
Obligations in the exercise of any right thereby conferred, (iii) any delay,
failure or omission on the part of the holders of Qualified Senior Obligations
to enforce any such right, (iv) any amendment to any terms of any agreement
relating to any Qualified Senior Obligation, whether relating to any extension
of time for payment or performance, or increasing amounts to be borrowed or
otherwise, (v) any release, exchange, sale or surrender of collateral or
guarantees relating to any Qualified Senior Obligation, or (vi) any settlement
or compromise relating to any Qualified Senior Obligation.
 

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(i) The Corporation shall not give, and no holder of Subordinated Obligations
shall demand, accept or receive, any collateral security, direct or indirect,
for any Subordinated Obligations.
 
(j) If any Qualified Senior Obligations shall have become or been declared to be
immediately due and payable, the Subordinated Obligations shall become
immediately due and payable, notwithstanding any inconsistent terms thereof.
 
(k) For the purposes of this Section 5.3, no Qualified Senior Obligations shall
be deemed to have been paid in full unless the holder thereof shall have
received and have been permitted to retain cash equal to the amount thereof then
outstanding and such Qualified Senior Obligations shall have been fully
discharged.
 
(l) The Corporation and the Holder, for themselves and their successors and
assigns as holders of Subordinated Obligations, covenant to execute and deliver
to holders of Qualified Senior Obligations such further instruments and to take
such further action as the holders of Qualified Senior Obligations may at any
time or times reasonably request in order to carry out the provisions and intent
of this Section.
 
5.4. Modification of Convertible Debenture. This Convertible Debenture may be
modified with the written consent of the holders of not less than 80% of the
total Conversion Shares issued and issuable upon conversion of all of the
Convertible Subordinated Debentures of the Series outstanding on the date such
consent is requested. With respect to any such modification, the Corporation
shall be entitled to rely (without inquiry) upon any representation by Holder as
to the existence of such consent, with Holder’s execution of any modification
agreement being conclusive evidence of such consent.
 
5.5. Notices. Any notice or communication to the Corporation shall be duly given
if in writing and delivered via hand delivery or regular mail to the following
address:
 
Aura Systems, Inc.
2330 Utah Avenue
El Segundo, California 90245

5.6. Successors. All agreements of the Corporation in this Convertible Debenture
shall bind its successors.
 
5.7. Severability. In case any provision in this Convertible Debenture shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby,
and the Holder shall have no claim therefor against any party hereto.
 
5.8. Miscellaneous. This Convertible Debenture shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of said State. The parties
hereto, including all guarantors or endorsers, hereby waive presentment, demand,
notice, protest, notice of intent to acceleration, notice of acceleration and
all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Convertible Debenture, except as
specifically provided herein, and assent to extensions of the time of payment,
or forbearance or other indulgence without notice.
 

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The Holder by acceptance of this Convertible Debenture agrees to be bound by the
provisions of this Convertible Debenture which are expressly binding on such
Holder.
 
[Signature Page Follows]
 

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CONVERTIBLE SUBORDINATED DEBENTURE - Page 14
 
 
 

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IN WITNESS WHEREOF, the Corporation has caused this instrument to be duly
executed.
 
Dated: Effective January ___, 2008
 
AURA SYSTEMS, INC.
   
By:
 
Name:
 
Title:
 

 

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CONVERTIBLE SUBORDINATED DEBENTURE - Page 15 

 
 

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EXHIBIT A

NOTICE OF CONVERSION
OF 7% CONVERTIBLE SUBORDINATED DEBENTURE
OF AURA SYSTEMS, INC.
 

  To:
Aura Systems, Inc.

2335 Alaska Avenue
El Segundo, California 90245
Facsimile No.: (310) 643-8719

1. Pursuant to the terms of the 7% Convertible Subordinated Debenture due
January ____, 2013 (the “Convertible Debenture”), the undersigned hereby elects
to convert the Total Principal Amount of the Convertible Debenture into shares
of Common Stock of Aura Systems, Inc., a Delaware corporation (the
“Corporation”), at a Conversion Price per share equal to $_______________.
Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Convertible Debenture.

2. The number of shares of Common Stock issuable upon the conversion of the
Convertible Debenture to which this Notice relates is _______________ (the
“Conversion Shares”).

3. Please issue a certificate or certificates for _______________ Conversion
Shares in the name(s) specified immediately below or, if additional space is
necessary, on an attachment hereto:

     
Name
 
Name
     
Address
 
Address
     
SS or Tax ID Number
 
SS or Tax ID Number

Delivery Instructions
for Common Stock:                                                            
 
 

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4. If the shares of Common Stock issuable upon conversion of the Convertible
Debenture have not been registered for resale under the Securities Act of 1933,
as amended (the “1933 Act”), and the provisions of Rule 144(k) under the 1933
Act are inapplicable to the undersigned with respect to the Conversion Shares
relating to this Notice, the undersigned represents and warrants that (a) the
Conversion Shares to which this Notice relates are being acquired for the
account of the undersigned for investment, and not with a view to, or for resale
in connection with, the distribution thereof, and that the undersigned has no
present intention of distributing or reselling such shares and (b) the
undersigned is an “accredited investor” as defined in Regulation D under the
1933 Act. If the provisions of Rule 144(k) under the 1933 Act are inapplicable
to the undersigned with respect to the Conversion Shares relating to this
Notice, the undersigned further agrees that (i) such Conversion Shares shall not
be sold or transferred unless (A) they first shall have been registered under
the 1933 Act and applicable state securities laws or (B) the Company shall have
been furnished with an opinion of legal counsel reasonably satisfactory in form,
scope and substance to the Company to the effect that such sale or transfer is
exempt from the registration requirements of the 1933 Act and (ii) until such
Conversion Shares are registered for resale by the undersigned under the 1933
Act, the Company may place a legend on the certificate(s) for the Conversion
Shares to that effect and place a stop-transfer restriction in its records
relating to the shares.

NAME:
 

Date:
           
Signature of Registered Holder
     
(Must be signed exactly as name
   
  
appears in the Convertible Debenture.)

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EXHIBIT A TO CONVERTIBLE SUBORDINATED DEBENTURE - Page 2 

 
 

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