Aura Systems Deal With Former Executives Threatens Its Future
WALL STREET WEST
Aura Systems Inc. has managed to survive scrapes with the Securities and Exchange Commission, ties to stock promoter Rafi Khan and going-concern warnings from its accountants. Now a bungled real estate deal with a group that includes its SEC-barred founder is threatening to cause its demise.
To gain a cash infusion, the El Segundo-based power products manufacturer sold its headquarters and manufacturing plant in December for $6.5 million, including assumption of a $5.1 million mortgage.
As part of the two-step deal, Aura handed over an initial 49.9 percent of the properties, and received most of its $1.5 million in proceeds. It also agreed to pay its prospective landlords, including Aura founder Zvi “Harry” Kurtzman, $800,000 in security deposits and other fees as part of a leaseback arrangement.
But the deal soon went awry.
According to a filing last month with the Securities and Exchange Commission, Aura reported that the mortgage holder “did not consent” to the rest of the deal, creating “significant doubt” that it would be completed. Meanwhile, Aura defaulted on its payments to the Kurtzman group, which also includes four other former Aura executives. In June, Aura agreed to settle up with the buyers by handing over one of its receivables and putting the buildings up for sale.
But it may be too late. Aura reported that the mortgage holder began foreclosure proceedings in September, after the company failed to make $480,000 in back payments. While it is trying to strike a deal to stave off the proceedings, the company admitted that these problems could force it to “cease operations.”
In 2002, Kurtzman was barred for life by the SEC from ever serving as an officer of a public company.
In the meantime, Aura has managed to stem its losses and boost sales. For the second quarter ended Sept. 30, it reported a loss of $3.5 million compared with a loss of $5.7 million loss in the like year-earlier period. Revenues nearly doubled to $519,679.
Merrill Lynch & Co. has started contacting buyers interested in Pacific Union Bank, the No. 3 Korean-American bank in Los Angeles.
The sale is expected to be a speedy one as bank sales go, with the Federal Reserve Bank pressing Lone Star Funds, an $8.3 billion Dallas private equity fund, to expedite a sale within the next six months, according to one person familiar with the auction.
Lone Star is buying a controlling interest in Pacific Union’s parent company, Korea Exchange Bank of Seoul, and must sell the publicly traded U.S. subsidiary to avoid being reclassified as a bank holding company subject to bank regulations.
Obvious candidates to purchase Pacific Union include Los Angeles-based Nara Bancorp and Hamni Financial Corp., both catering to Korean-American customers. Nara has retained Keefe Bruyette & Woods Inc. as its investment banker and Hanmi has hired Credit Suisse First Boston. However, they may not have the financial strength to muster a purchase.
Another possibility is Chinese-American Cathay Bancorp, which just finished its acquisition of L.A.-based competitor GBC Bancorp. According to a source familiar with the bidding process, Cathay has shown little interest.
Others with interest include South Korean banks that are interested in increasing their U.S. presence, the source said, and at least one private equity fund.
While other pension funds around the nation have been retreating from real estate, the $11 billion Los Angeles Fire and Police Pension System is in the process of boosting its real estate portfolio by nearly 50 percent.
The board of the city’s Department of Fire and Police Pensions, which manages the pension fund, decided in June to pour another $355 million into real estate.
On Nov. 6, the board met with four real estate firms to choose an investment vehicle for a $125 million portion of the targeted increase. Those included L.A.-based developer Lowe Enterprises and Chicago-based real estate investor and fund manager Heitman LLC.
Lowe and Heitman already handle portions of the fund’s existing $755 million real estate portfolio, according to Police and Fire Chief Investment Officer Tom Lopez. A final decision on where to place the new investment isn’t expected this month, Lopez said.
The system’s investment strategy goes counter to a national trend among pension funds to reduce their real estate holdings, largely because they have exceeded their expected percentage. Pensions held $90.4 billion in real estate in 2002, down 5.9 percent from the prior year, according to trade weekly Real Estate Alert.
But Fire and Police has remained below its own targets. The pension fund currently has less than 7 percent of its assets in real estate versus its present target of 10 percent.
The fund’s goal is to boost its income potential. Its real estate investments have been returning at least 7 percent annually, far higher than the 1 percent return yielded by dividends from its stock holdings, according to Lopez. The five funds under consideration have projected returns of between 11 percent and 18 percent.
“We’re a mature fund, so we’re looking for the income instead of just unrealized gains. So real estate is the better investment,” Lopez said.
Homestore Inc. continued to make progress toward resolving its accounting scandals and instituting a workable business model. The Westlake Village-based provider of online real estate information reported a third quarter loss of $30.6 million, versus a $94 million loss from continuing operations in the like year-ago period. Both periods included a number of non-cash charges; the EBITDA loss was $4.8 million in the third quarter versus positive $722,000 in the year-ago quarter and negative $7.6 million in the preceding second quarter. Homestore’s stock, which once traded above $100 a share, closed at $3.55 on Nov. 12, a gain of 318 percent year to date
En Pointe Technologies Inc. regained its Nasdaq SmallCap listing after its stock traded above the $1 a share minimum for at least 10 days. En Pointe, based in El Segundo, was demoted to the SmallCap from the Nasdaq National Market in May due to its flagging stock price, and it received an extension from the Nasdaq Listing Qualifications panel in July, when its stock remained below the SmallCap’s share-price minimum. The stock began to rebound in September, and in October Chief Executive Bob Din withdrew a 70 cents-per-share offer he had made to purchase the company in July. At the Nov. 12 close, En Pointe’s shares were trading at $1.72 each, compared with a 52-week low of 31 cents reached April 25. En Pointe provides back-office technology services to businesses.