An Encino partnership has acquired control of the new owner of the Leo's Stereo chain after the company defaulted on a $1.5-million note, company officials confirmed Thursday.
The partnership, led by Encino developer Gary Lubliner, gains control of the company, Discovery Associates, after it failed to pay back the money borrowed to help buy Leo's, a Long Beach-based chain of 43 stereo stores in Southern California.
Separately, Discovery executives confirmed they were renegotiating late Thursday with the sellers of Leo's Stereo, brothers Leo and Simon David, to lower the $34.5-million price they paid in December. Leo's had $91 million in sales in the year ended March 31.
Discovery has been seeking to renegotiate the price, which included cash, notes and stock, in part because of unexpectedly large returns by customers of defective car stereos made in Korea for Leo's Jet Sound division. Representatives of the Davids could not be reached for comment.
Discovery Associates was a so-called "blind pool" until it bought Leo's. In a blind pool, investors put their money into a corporate shell with no promises made in anticipation that the money will eventually be used to buy a business.
The company expected to pay off the money borrowed from the partnership with $1.7 million from investors exercising certain stock purchase rights, Discovery President Stephen Berglas said. But that plan was contingent on the stock price reaching $7 a share, he said, which it never did. Berglas said he cannot explain why the stock never reached that price. Discovery's stock closed Thursday at $2.875 bid.
Because Discovery failed to pay the note, the Lubliner partnership received a one-third stake in Discovery. That boosted its ownership to 43%.
Documents filed with the Securities and Exchange Commission show a steep decline in the company's working capital over the past year, attributable largely to the Jet Sound problem. According to the documents, Leo's working capital plunged from $5.7 million last Sept. 30 to $785,000 on June 30.
Discovery had a net loss of $574,000 in the quarter ended June 30 on sales of $21 million, documents show.
Berglas said, however, that the company is now making a profit from operations, in part because it is cleaning up the Jet Sound problem and because it is selling more higher-profit items, such as car stereos.
Lubliner said in an interview that Discovery's founders, Berglas and Chairman Harvey Bibicoff, will continue to run the company. Bibicoff, an Encino lawyer, was the largest shareholder with 27% of the stock until the Lubliner group converted its note. Bibicoff now owns about 17%.