Promises and More Promises, Losses and More Losses
Investors have handed Aura Systems Inc. tens of millions of dollars over the last nine years, lured by the El Segundo company’s myriad promises about its supposed technological breakthroughs.
So far, here’s what Aura shareholders have to show for their trouble: $54 million in company losses since 1992; a stock that has lost about three-quarters of its value from its peak, to $3.13 as of Friday; and now, the possibility of fraud charges against management.
Aura is an extreme example of just how dicey stock investing can be, and why, as a shareholder of a small company, you have to keep your eye on many things. There was, and maybe still is, lots of potential in Aura’s magnetic-power technology. But soaring sales, to $82 million last year, haven’t translated into profit. And all the while, management has sharply diluted shareholders’ ownership by selling new stock overseas, to feed Aura’s monstrous appetite for cash.
Under Zvi (Harry) Kurtzman, Aura’s 49-year-old president, the firm has made a habit of hoisting eyebrows on Wall Street with its promises and practices--so much so that the Securities and Exchange Commission has been investigating Aura since 1992.
Last week, Aura disclosed in its annual financial review that the SEC staff has warned it may bring civil fraud and reporting-violation charges against the firm, based on treatment of certain revenue booked in 1992 and ’93.
Yet Kurtzman, typically, is unbowed. In the same document disclosing the SEC staff’s intent, Aura tells shareholders that, at least in its opinion, any SEC charges won’t mean fines or restatement of financial results. And in an interview late last week, Kurtzman went one better, asserting that SEC staff members “are overstepping their boundaries,” and insisting that “they are not going to bring charges.”
About his so-far-unprofitable company, Kurtzman is no less effusive. “Things are coming into fruition now,” he says. “Companies like Chrysler that spend [billions] on research do not have the accomplishments we have made over the past few years.”
Kurtzman, a former “consultant to major defense contractors,” co-founded Aura in 1987, and he has continually promoted the firm as a winning example of how defense contractors can beat swords into plowshares.
Aura’s early work was with the Pentagon on classified programs, the firm says. Now its technology, involving electromagnetism, has gone commercial, Aura says.
The basic idea, as Aura describes it, is to arrange “high-energy permanent magnets . . . to focus nearly all of their magnetic energy into useful work,” such as making machine parts move cleanly and quietly, without friction. “The company believes it has a core electromagnetic technology which can be used for many applications in numerous fields,” Aura states.
But then, that has been Aura’s promise for the last six years, as it has steadily announced new product ideas, joint ventures and assorted transactions involving other manufacturing companies in nearly every part of the world, including Japan, Indonesia, India and Russia.
So where are all of the new products? “Harry has a credibility problem,” concedes Robert Bacarella, head of Monetta Financial Services in Wheaton, Ill., and an owner of 1 million Aura shares.
Like many of Aura’s supporters over the years, Bacarella believes the firm has real technology. The question, he says, is whether current management can develop it.
The first Aura product to go into mass production was its Interactor vest, in 1993. The vest, designed for video game players, converted video game audio signals into “vibratory sensations”--to enhance the player’s experience.
Aura, which advertised the product heavily, says it sold 420,000 of the vests at $59 each, most in calendar 1994, bringing in $21 million in revenue that year. But then sales collapsed. By the fourth quarter of last year, Aura opted to write off $17 million in costs associated with the Interactor and halt its production.
Kurtzman denies there were quality-control troubles with the vest. The problem, he maintains, was that “the video game industry in general collapsed.”
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Now Aura is pinning its electromagnetic-technology hopes on loudspeakers. The firm says it is manufacturing four categories of speakers that use its magnet-powered technology to drive speaker cones. Aura says the advantages over speakers of competitors--including giants such as JBL and Panasonic--are lower distortion, enhanced bass output and lighter weight, among others.
Last year, Aura says it sold $19 million in “sound-related” products, up tenfold from 1994. This year, Kurtzman contends, Aura will do $70 million in speaker sales, including to car stereo makers and directly to consumers.
There is no question that Aura is shipping some speakers. Alpine Electronics, a Torrance audio systems manufacturer, has for five months been using Aura’s bass enhancer in its car speakers, says Keith Lehmann, Alpine marketing communications manager.
But the speaker business is extremely competitive, and that generally means low profit margins. Can Aura make decent money in this business? “Speakers are very profitable,” insists Kurtzman, who predicts Aura’s speaker unit will boast “10% to 12% net margins.”
Aura’s plans to carry electromagnetic technology into every corner of industry notwithstanding, its biggest business unit last year was involved in something less than grandiose.
Aura’s NewCom unit assembles computer chips and circuit boards into internal fax modems and multimedia kits for computers, selling to manufacturers, resellers and retailers. This, too, is a highly competitive business, and a relatively new one for Aura: NewCom’s sales soared to $45 million last year from $9 million in 1994.
NewCom “has set up a distribution system in a very short period of time,” Aura’s 1996 financial review says. Moreover, $20.6 million of the $45 million in NewCom sales last year was to an unnamed “single third-party,” Aura says--a heavy concentration of sales.
“Even though the company does not have any long-term agreement with this customer, it has no reason to believe that sales to this customer will be abruptly curtailed,” Aura confidently states.
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Yet however fast NewCom’s sales grew last year, the business still lost $3.5 million. Kurtzman blames start-up costs and chip shortages. NewCom “will be profitable this year,” he says.
A cynic might say that Aura is stumbling from business to business and that it has felt the need to show fast sales growth just to keep investors interested. The SEC staff’s problems with Aura wouldn’t make a cynic feel better.
Aura says the SEC didn’t like the way it reported certain revenue in one quarter of 1993 only to revise the figure downward later.
In a separate issue, investigators had a problem with the reporting of Aura’s sales of computer monitors in 1992 and 1993 to Micro Computer Distribution Power, a once-major Aura customer. Aura’s sales swelled in those years thanks to the MCDP sales. Yet Aura admits the sales “generated little or no profit.” The SEC staff, Aura says, thinks the firm should have been more forthcoming about the nature of the sales.
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Some shareholders might argue that Aura also should have been more forthcoming about its fund-raising in recent years.
Aura’s shares outstanding have ballooned to 62.9 million now from 27 million in 1993. But the company didn’t sell that stock at market prices in the United States. Instead, it has issued the shares in Europe, usually at a discount to the U.S. market price, through so-called Regulation S stock sales.
“Reg. S,” under federal securities laws, allows U.S. companies to fairly quietly raise capital overseas. Aura sold enough stock to raise $60.7 million last year and $27.7 million the year before--a hefty sum that has obviously kept the company going despite heavy operating losses.
The advantage to foreign buyers of the stock: They paid, on average, 15% below the prevailing market price, according to Kurtzman. That also meant the possibility of turning and selling the shares at a profit in the U.S. market.
For U.S. shareholders, meanwhile, that massive amount of new Aura stock has meant massive dilution of their ownership.
What does Kurtzman, who was paid $192,000 last year and owns 1.7 million shares himself, say to those shareholders? “The money [Aura has raised] was not thrown away. We own buildings, patents and technology,” he says. “We have taken the money and developed some things that you would be amazed by. . . . You’ll see.”
