This 1994 Bloomberg story described events behind today's SEC action against
Aura Systems and its former officers for fraudulently overstating revenue.
Former CEO Harry Kurtzman was banned being an executive of a public company for
life, and ordered to pay a $75k fine. Sometimes justice requires patience.
Aura Systems Raises Revenue, Eyebrows With Sales to Single Buyer
1994-07-12 15:22 (New York)
El Segundo, Calif., July 12 (Bloomberg) -- Ten days before the
end of Aura Systems Inc.'s 1993 fiscal year, a small company was
incorporated across the Los Angeles basin that immediately became
its biggest customer.
Micro Computer Distribution Power Inc. bought $2.4 million of
products from Aura that year, accounting for 22% of the El Segundo,
Calif., company's total revenue.
It was a big contract for Aura, helping the electronics
company avoid a steep drop in revenue. In fiscal 1994, Micro
Computer came through again, accounting for $4.9 million, or 30%,
of Aura's total revenue.
The sales helped foster an image that Aura was forging ahead
with its strategy to find new and lucrative commercial applications
for electronic components known as ``electromagnetic actuators.''
High hopes for the actuator business have made Aura a stock-market
darling, with a market value of $330 million, or more than 20 times
its most recent annual revenue.
In reality, the sales to Micro Computer did little but boost
sales.
According to an amended registration statement filed with the
Securities and Exchange Commission last month, the products being
shipped to the Fountain Valley, Calif., company were nothing so
flashy as magnetic actuators.
Instead, Aura simply bought plain-vanilla computer monitors
from a company in Korea and resold them to Micro Computer at
``little or no profit,'' according to the June 22 filing. For the
year, Aura's losses widened to $10.6 million from $9.6 million.
SEC Investigating
Lumping such revenue with total sales raises eyebrows among
accounting experts.
``If it was merely a turnaround, and not an integral part of
Aura's business, it should have been excluded from revenue,'' said
Abraham Briloff, Emanuel Saxe professor emeritus at Baruch College
in New York.
Aura's relationship with Micro Computer also is under scrutiny
by federal regulators. An attorney for Micro Computer, Harris
Cohen, told Bloomberg Business News that his clients received a
subpoena from the SEC as part of an investigation of Aura.
Aura officials didn't return repeated phone calls seeking
comment. An attorney for the company, John Alioto, had no comment
on the SEC investigation, which the company has never disclosed to
shareholders.
Son of a Director
In an earlier response to written questions submitted by
Bloomberg, Alioto said Aura properly disclosed its relationship
with Micro Computer in SEC filings.
Micro Computer referred all questions to Cohen, its registered
agent and the son of Aura director Harvey Cohen.
The younger Cohen, operations manager for his father's Encino,
Calif.-based money management business, Margate Advisory Group
Inc., said there was nothing amiss about Micro Computer's purchases
from Aura. He said the two companies weren't related.
``Only because I'm my father's son does it look weird,'' he
said. Harvey Cohen held 80,000 shares of Aura as of June 10.
The sales to Micro Computer illustrate the difficulty of using
revenue to analyze the value of a developing technology company,
said Elliott Mittler, a management consultant and adjunct professor
at the University of Southern California.
``You've got to be careful where the revenue's coming from,''
Mittler said. ``If you're paying a high price for low-tech revenue,
you're an idiot.''
Unfulfilled Promises
While Aura's low-tech computer monitor business was growing in
1994, the company was having less success following through on
sales of its actuator technology to potential customers.
Take Nichimen Aviation. In January, Aura said the Japanese
company agreed to buy $4.4 million of Aura's ``virtual reality''
vibrating electromagnetic vests, called ``Interactors,'' to be worn
by video-game players.
In a telephone interview from his Tokyo office last week,
Nobuaki Matsumoto, president of Nichimen Aviation, said his company
was no longer interested in the product.
``We have been investigating the possibility to distribute the
Interactor,'' said Matsumoto. ``However, we have decided not to
distribute this product.'' He said the Interactor ``is not suitable
for our business line,'' which is manufacturing aircraft parts.
Alioto said Aura ``intends to make a public announcement
concerning its contract with Nichimen and other buyers of
Interactors in the near future.''
On Monday, Aura announced plans for a $5 million advertising
campaign to promote the Interactor vests, including a promotion
with Acclaim Entertainment Inc., makers of the popular Mortal
Kombat video games.
Cold War Conversion
Aura hopes that adding the sense of feel to video games will
be one of many commercial applications for its magnetic actuator
technology, first developed for the U.S. military. It has more than
three dozen patents issued and pending for the technology.
Actuators are used to create a lateral force on command. By
harnessing the forces of electromagnetism, Aura's actuators can
provide high forces with great precision.
Actuators made by Aura are used in the military for things
like isolating vibrations in helicopters. Commercial applications
include vibrating floors and chairs in two entertainment
attractions at the Luxor Hotel in Las Vegas, powering television
loudspeakers and controlling the ignition of combustion engines.
Founded in 1987 by President Harry Kurtzman, a physicist who
spent years working for defense contractors including Hughes
Aircraft Co., Aura has never posted a profit. Over seven years, the
company has accumulated losses of $36.6 million.
Major contracts announced over the past two years promised to
boost revenue by expanding the company into new areas. However,
several of the contracts have failed to materialize.
A $30 million joint venture with Israeli Aircraft Industries
collapsed after objections by an Israeli labor union. A golf cart
manufacturer is still waiting for prototypes for almost $1 million
of electric motors it would like to buy. And the company has yet to
record any revenue from an agreement to sell television
loudspeakers to Korea's Daewoo Electronics Ltd.
Silent Speakers
In December 1992 Aura announced an agreement to sell 240,000
Aurasound television speakers to Daewoo during fiscal 1994.
On April 22, 1993, Aura said Daewoo had increased its order to
two million speakers annually, representing $4 million in sales,
beginning in June. At $1 million a quarter, that would have
produced about $3 million in sales during the final nine months of
fiscal 1994.
But Aura's 10-K for the year ended Feb. 28, 1994, lists no
revenue from speaker sales to Daewoo. All of Aura's $1.49 million
revenue from Daewoo came from a 1992 research contract to develop
a new technology for large-screen televisions, according to the 10-
K.
Aura delivered 140,000 speakers during the fiscal year,
according to the 10-K. It says Daewoo approved manufacturing
samples of Aura's speakers in early fiscal 1995.
Robotic Golf Carts
Then there are the robotic golf carts. On Aug. 16, 1993, Aura
announced a $950,000 contract to sell 10,000 electric motors for
robotic golf carts to Golf Group of America in Camarillo, Calif.
The order was subject to the delivery of 10 prototypes by Nov. 10.
Golf Group is still waiting for the prototypes. ``They haven't
completed development of that yet,'' said Bob Allen, Golf Group's
executive vice president. He said his company has built about 100
of the carts to date, with conventional motors, and is looking
forward to testing versions using Aura's actuator technology.
Aura's attorney Alioto said the company is ``expanding the
relationship'' with Golf, but that until there is a contract, the
company can't elaborate.
Fans and Foes
Aura's continued losses and lofty stock value have attracted
short sellers, investors who place bets that a stock's price will
drop by selling borrowed shares in hopes of replacing them later at
a lower price.
Since December, the number of Aura shares sold short has
almost quadrupled to more than 8 million as of June 15, giving the
stock one of the largest short interests of any Nasdaq issue.
Some analysts remain bullish about the company's prospects,
however. A nine-page report issued by Tom Fendrich, of Fendrich
Associates Institutional Research Corp. of Lawrence, N.Y., on Feb.
28 valued Aura's technology at $1 billion to $2 billion,
translating into a share price of 30 to 60. Aura currently trades
at 8 5/32.
Fendrich bases his estimate on very bullish growth
expectations. He projected fiscal 1994 revenue of $20 million,
about 22% above the $16.4 million that was later reported. He
estimates revenue of about $150 million for the current year.
In another research report also dated Feb. 28, Tony Francel of
Statewide Securities Group in Sarasota, Fla. predicted explosive
revenue growth.
Francel wrote that Aura's management is seeking to produce
revenue of about $20 million in fiscal 1994, more than $140 million
in 1995, more than $300 million in 1996, and more than $660 million
in 1997. Within five years, Francel said Aura wants to grow revenue
to ``over $1 billion.''
Asked about his projections in a brief telephone conversation
last Friday, Francel was reluctant to discuss Aura. ``It's quite a
controversial name,'' he said, declining further comment.
-- David Evans in Los Angeles (310) 827-2348, through Princeton
newsroom (609) 279-4000/br
(Story illustration: For a graph of the short interest in
Aura, type AURA US Equity SI.
For company and stock information, price graph: AURA US
<Equity> BQ, GPO.
For industry information: NI CPR, NI ELE, NI ARO.
For more on Israel: NI ISRAEL)
15:22
-0- (BBN) Jul/12/94 15:22 |
