Discovery Renegotiates Purchase Price in Leo’s Stereo Acquisition

Discovery Associates reported Monday that it has renegotiated the price it paid in December for Leo’s Stereo.

As previously reported, Encino-based Discovery had sought to renegotiate the terms of its acquisition because of unexpectedly large returns of a defective car stereo made in Korea for Leo’s Jet Sound Division. In previous filings with the U.S. Securities and Exchange Commission, Discovery reported that the initial purchase price was to be $34.5 million in cash, stock and notes.

Discovery reported that the sellers, brothers Simon and Leo David, will repay Discovery Associates $1.25 million in cash. The principal amount of notes issued to the Davids will also be reduced from $13 million to $6.75 million.

In addition, the interest Discovery will pay on those notes will be cut to 9.5% from 11.75%, but it will not have to pay any interest for two years, board member Gary Lubliner said. He added that the preferred stock, which would have paid up to 20% of the net income under the original terms in two years, will now pay 4%.

In return, the Davids are released from any claims that Discovery might make against them stemming from the Jet Sound problem. B. J. Adelson, an attorney who represents the Davids, said the groups have resolved their differences.

Discovery was a so-called “blind pool,” formed by Encino lawyer Harvey Bibicoff and businessman Stephen Berglas, until it bought Leo’s, a Long Beach-based chain of 44 stereo stores that had $91 million in sales in the year ended March 31. In a blind pool, investors put their money into a corporate shell that does not specify what businesses it will buy.

Last week, Discovery confirmed that a partnership led by Lubliner, an Encino developer, gained control of Discovery when the company defaulted on a $1.5-million note. Discovery had borrowed the money from the partnership to help buy Leo’s, promising a one-third stake to the Lubliner group if it defaulted. The new shares bring the Lubliner group’s stake to 43%.

Lubliner said last week his partners are James Jariv, chairman and president of First Statewide Capital, an Encino mortgage company; Jay Steinbeck, chairman of Industrial Bank in Sepulveda, and John Benner and Uri Halfon, partners in Compucraft, a Torrance company that computerizes tax returns.

Discovery expected to pay off the money borrowed from the partnership with $1.7 million from investors exercising certain stock purchase rights, Berglas, Discovery’s president, said last week. But, he said, that plan was contingent on the stock price reaching $7 a share, which it never did. Discovery’s stock traded Friday at $3.88.

The Jet Sound problems were the major cause of a steep decline in Leo’s working capital since late last year. According to SEC documents, working capital fell from $5.7 million Sept. 30 to $785,000 June 30.

Discovery, which said it will retain Bibicoff as chairman and Berglas as president, said it believes its financial position has been strengthened as a result of converting the Lubliner group’s note into equity.

Discovery reported a net loss of $574,000 in the quarter ended June 30 on sales of $21 million. However, the company is making a profit from operations, Berglas said.