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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 Commission file number 000-51664
 DIRECTED ELECTRONICS, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Florida
    
    65-0964171(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 1 Viper WayVista, California
    
    92081(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 598-6200  (Registrants Telephone Number, Including Area Code)
  þ o
  o o þ
  o þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATION
    
    
    15Item 1. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 6. Exhibits
    
    
    15SIGNATURES
    
    
    16Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 DIRECTED ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except par value)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    15,638
    
    
    $
    12,167Accounts receivable, net of allowance
of $2,002 and $1,802 at June 30, 2006
and December 31, 2005, respectively
    
    
    46,108
    
    
    
    100,140Inventories
    
    
    58,823
    
    
    
    43,324Prepaid expenses and other assets
    
    
    5,848
    
    
    
    8,578Deferred tax assets
    
    
    9,089
    
    
    
    8,019Total current assets
    
    
    135,506
    
    
    
    172,228Property and equipment, net
    
    
    4,859
    
    
    
    4,649Intangible assets, net
    
    
    90,900
    
    
    
    90,246Goodwill
    
    
    98,182
    
    
    
    97,807Other assets
    
    
    5,044
    
    
    
    5,690Total assets
    
    $
    334,491
    
    
    $
    370,620LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    34,291
    
    
    $
    54,520Accrued liabilities
    
    
    10,521
    
    
    
    26,023Current portion of notes payable
    
    
    1,699
    
    
    
    1,699Taxes payable
    
    
    2,534
    
    
    
    5,014Total current liabilities
    
    
    49,045
    
    
    
    87,256Revolving loan
    
    
    
    
    
    
    5,200Senior notes, less current portion
    
    
    164,061
    
    
    
    164,911Deferred tax liabilities
    
    
    13,328
    
    
    
    12,690Other liabilities
    
    
    1,257
    
    
    
    1,040Total liabilities
    
    
    227,691
    
    
    
    271,097Commitments and contingencies (Note 8)Shareholders equity:Common Stock, $0.01 par value:Authorized
shares  100,000; issued
and outstanding shares  24,769 at
both June 30, 2006 and December 31,
2005
    
    
    248
    
    
    
    248Paid-in capital
    
    
    110,908
    
    
    
    111,110Notes receivable from shareholders
    
    
    (38
    )
    
    
    (126
    )Deferred compensation
    
    
    
    
    
    
    (350
    )Accumulated other comprehensive income
    
    
    280
    
    
    
    306Retained earnings (deficit)
    
    
    (4,598
    )
    
    
    (11,665
    )Total shareholders equity
    
    
    106,800
    
    
    
    99,523Total liabilities and shareholders equity
    
    $
    334,491
    
    
    $
    370,620
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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net product sales
    
    $
    76,895
    
    
    $
    54,959
    
    
    $
    150,161
    
    
    $
    106,298Royalty and other revenue
    
    
    783
    
    
    
    697
    
    
    
    1,818
    
    
    
    1,423Net sales
    
    
    77,678
    
    
    
    55,656
    
    
    
    151,979
    
    
    
    107,721Cost of sales
    
    
    57,004
    
    
    
    36,245
    
    
    
    108,547
    
    
    
    69,705Gross profit
    
    
    20,674
    
    
    
    19,411
    
    
    
    43,432
    
    
    
    38,016Operating expenses:Selling, general and administrative
    
    
    12,344
    
    
    
    11,879
    
    
    
    25,990
    
    
    
    22,872Management fee to related party
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    354Total operating expenses
    
    
    12,344
    
    
    
    12,045
    
    
    
    25,990
    
    
    
    23,226Income from operations
    
    
    8,330
    
    
    
    7,366
    
    
    
    17,442
    
    
    
    14,790Other income (expense):Interest expense
    
    
    (3,486
    )
    
    
    (5,065
    )
    
    
    (6,975
    )
    
    
    (10,084
    )Interest income
    
    
    195
    
    
    
    13
    
    
    
    409
    
    
    
    22Income before provision for income taxes
    
    
    5,039
    
    
    
    2,314
    
    
    
    10,876
    
    
    
    4,728Provision for income taxes
    
    
    1,965
    
    
    
    1,182
    
    
    
    3,805
    
    
    
    2,165Net income
    
    
    3,074
    
    
    
    1,132
    
    
    
    7,071
    
    
    
    2,563Net income attributable to participating securityholders
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    30Net income available to common shareholders
    
    $
    3,074
    
    
    $
    1,118
    
    
    $
    7,071
    
    
    $
    2,533Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.27
    
    
    $
    0.14Diluted
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.27
    
    
    $
    0.14Weighted average number of common shares:Basic
    
    
    25,748
    
    
    
    18,583
    
    
    
    25,750
    
    
    
    18,583Diluted
    
    
    25,749
    
    
    
    18,583
    
    
    
    25,751
    
    
    
    18,583
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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Six Months Ended June 30,2006
    
    
    2005Operating activitiesNet income
    
    $
    7,071
    
    
    $
    2,563Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    894
    
    
    
    629Amortization
    
    
    2,051
    
    
    
    2,020Non-cash interest expense
    
    
    683
    
    
    
    818Non-cash stock-based compensation
    
    
    147
    
    
    
    Deferred taxes
    
    
    (432
    )
    
    
    Loss on disposal or sale of property and equipment
    
    
    3
    
    
    
    Changes in operating assets and liabilities, net of effects of acquisition:Accounts receivable, net
    
    
    54,032
    
    
    
    10,952Inventories
    
    
    (14,478
    )
    
    
    (9,097
    )Prepaid expenses and other assets
    
    
    2,730
    
    
    
    (846
    )Other assets
    
    
    (22
    )
    
    
    (154
    )Accounts payable
    
    
    (20,229
    )
    
    
    (11,643
    )Accrued liabilities
    
    
    (15,822
    )
    
    
    (947
    )Taxes payable
    
    
    (2,480
    )
    
    
    (1,443
    )Other liabilities
    
    
    214
    
    
    
    542Net cash provided by (used in) operating activities
    
    
    14,362
    
    
    
    (6,606
    )Investing activitiesPurchases of property and equipment
    
    
    (933
    )
    
    
    (729
    )Cash paid for acquisition
    
    
    (3,956
    )
    
    
    (680
    )Net cash used in investing activities
    
    
    (4,889
    )
    
    
    (1,409
    )Financing activitiesProceeds from revolving loan
    
    
    7,800
    
    
    
    11,000Payments on revolving loan
    
    
    (13,000
    )
    
    
    (2,600
    )Payments on senior notes
    
    
    (850
    )
    
    
    Debt issuance costs
    
    
    (17
    )
    
    
    (527
    )Issuance of common shares
    
    
    
    
    
    
    210Payment of employee loan
    
    
    91
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (5,976
    )
    
    
    8,083Net effect of exchange rates on cash
    
    
    (26
    )
    
    
    139Increase in cash and cash equivalents
    
    
    3,471
    
    
    
    207Cash and cash equivalents at beginning of period
    
    
    12,167
    
    
    
    3,784Cash and cash equivalents at end of period
    
    $
    15,638
    
    
    $
    3,991Supplemental disclosure of cash flow informationInterest paid
    
    $
    5,397
    
    
    $
    9,470Taxes paid
    
    $
    6,889
    
    
    $
    3,859Supplemental disclosure of non-cash financing activitiesIssuance of common stock for promissory note
    
    $
    33
    
    
    $
    105Accrued interest on shareholder notes payable
    
    $
    5
    
    
    $
    
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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
 (Unaudited and in thousands, except per share amounts)
 1. Basis of Presentation
     2. Accounting for Stock-Based Compensation Expense
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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2006
 (Unaudited and in thousands, except per share amounts)
        3. Net Income Per Common Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income available to common shareholders
    
    $
    3,074
    
    
    $
    1,118
    
    
    $
    7,071
    
    
    $
    2,533Weighted average common shares outstanding  basic
    
    
    25,748
    
    
    
    18,583
    
    
    
    25,750
    
    
    
    18,583Net income per common share  basic
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.27
    
    
    $
    0.14Weighted average common shares outstanding  basic
    
    
    25,748
    
    
    
    18,583
    
    
    
    25,750
    
    
    
    18,583Plus dilutive stock options
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    25,749
    
    
    
    18,583
    
    
    
    25,751
    
    
    
    18,583Net income per common share  diluted
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.27
    
    
    $
    0.14
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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2006
 (Unaudited and in thousands, except per share amounts)
  4. Other Comprehensive Income
  5. Income Taxes
   6. Acquisition
  7. Related Parties
    8. Commitments and Contingencies
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 You should read the following discussion and analysis in conjunction with our financial
statements and related notes contained elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result a
variety of factors, including those set forth under Item 1A, Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, and elsewhere in this report.
 Overview
    Results of Operations
  Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    73.4
    %
    
    
    65.1
    %
    
    
    71.4
    %
    
    
    64.7
    %Gross profit
    
    
    26.6
    %
    
    
    34.9
    %
    
    
    28.6
    %
    
    
    35.3
    %Total operating expenses
    
    
    15.9
    %
    
    
    21.7
    %
    
    
    17.1
    %
    
    
    21.6
    %Income from operations
    
    
    10.7
    %
    
    
    13.2
    %
    
    
    11.5
    %
    
    
    13.7
    %Interest expense, net
    
    
    4.2
    %
    
    
    9.1
    %
    
    
    4.3
    %
    
    
    9.3
    %Income before provision for income taxes
    
    
    6.5
    %
    
    
    4.1
    %
    
    
    7.2
    %
    
    
    4.4
    %Provision for income taxes
    
    
    2.5
    %
    
    
    2.1
    %
    
    
    2.5
    %
    
    
    2.0
    %Net income
    
    
    4.0
    %
    
    
    2.0
    %
    
    
    4.7
    %
    
    
    2.4
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)
    
    
    (In thousands)Gross security and entertainment sales
    
    $
    37,968
    
    
    $
    41,142
    
    
    $
    77,202
    
    
    $
    81,662Gross satellite radio sales
    
    
    41,253
    
    
    
    15,728
    
    
    
    77,530
    
    
    
    28,773Rebate/payment discount
    
    
    (2,326
    )
    
    
    (1,911
    )
    
    
    (4,571
    )
    
    
    (4,137
    )Net product sales
    
    
    76,895
    
    
    
    54,959
    
    
    
    150,161
    
    
    
    106,298Royalty and other revenue
    
    
    783
    
    
    
    697
    
    
    
    1,818
    
    
    
    1,423Net sales
    
    $
    77,678
    
    
    $
    55,656
    
    
    $
    151,979
    
    
    $
    107,721
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Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Net Sales
   Gross Profit and Income from Operations
     Interest Expense
  9




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Provision for Income Taxes
  Net Income Available to Common Shareholders
  10




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Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Net Sales
  Gross Profit and Income from Operations
    Interest Expense
  Provision for Income Taxes
  Net Income Available to Common Shareholders
  Liquidity and Capital Resources
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Critical Accounting Policies and Estimates
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Stock-Based Compensation Expense
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
   Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
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Changes in Internal Control over Financial Reporting
   
    
    We have added a controller, a financial reporting manager, and various staff
level positions within our accounting department. Although we intend to further our
efforts, the addition of these individuals has increased the number and skills of our
personnel in order to increase our depth of experience in generally accepted accounting
principles and guidelines required by the SEC.
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Omega Patents, L.L.C. vs.
Fortin Auto Radio, Inc.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  Election of Directors
 For
    
    WithheldJon E. Elias
    
    
    18,551,831
    
    
    
    1,901,804Darrell E. Issa
    
    
    18,860,790
    
    
    
    1,592,845Kevin B. McColgan
    
    
    19,936,499
    
    
    
    517,136
  Ratification of Independent Registered Public Accounting Firm
  VotesFor:
    
    
    20,237,100Against:
    
    
    58,295Abstentions:
    
    
    58,239
 
 Item 6. Exhibits.
 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
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SIGNATURES
  Date: August 14, 2006
    
    DIRECTED ELECTRONICS, INC.(Registrant)By:
Name:
    
    /s/ James E. Minarik

James E. MinarikTitle:
    
    President and Chief Executive Officer(Principal Executive Officer)By:
Name:
    
    /s/ John D. Morberg

John D. MorbergTitle:
    
    Vice President  Finance, Chief Financial Officer, and
Treasurer (Principal Accounting and Financial Officer)
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EXHIBIT INDEX
 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 17