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UNITED
STATESSECURITIES 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 March 31, 2007
 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 þ o
 o þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements (unaudited)
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4. Controls and Procedures
    
    
    14PART II  OTHER INFORMATION
    
    
    14Item 1. Legal Proceedings
    
    
    14Item 6. Exhibits
    
    
    15SIGNATURES
    
    
    16EX-10.28EX-10.29EX-31.1EX-31.2EX-32.1EX-32.2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 DIRECTED ELECTRONICS, INC. CONSOLIDATED
BALANCE SHEETS
(Unaudited and in thousands, except per share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,137
    
    
    $
    9,861Accounts receivable, net of allowance for doubtful accounts of
 $1,729 and $1,464
at March 31, 2007 and December 31, 2006, respectively
    
    
    53,019
    
    
    
    157,013Inventories
    
    
    70,122
    
    
    
    122,697Other receivables
    
    
    36,191
    
    
    
    1,942Prepaid expenses and other current assets
    
    
    16,980
    
    
    
    15,774Deferred tax assets
    
    
    13,882
    
    
    
    14,039Total current assets
    
    
    204,331
    
    
    
    321,326Property and equipment, net
    
    
    7,046
    
    
    
    7,068Intangible assets, net
    
    
    184,292
    
    
    
    186,112Goodwill
    
    
    156,602
    
    
    
    156,617Other assets
    
    
    7,306
    
    
    
    7,584Total assets
    
    $
    559,577
    
    
    $
    678,707LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    33,460
    
    
    $
    116,690Accrued liabilities
    
    
    23,341
    
    
    
    32,858Current portion of senior notes payable
    
    
    3,068
    
    
    
    3,068Taxes payable
    
    
    
    
    
    
    7,772Total current liabilities
    
    
    59,869
    
    
    
    160,388Revolving loan
    
    
    20,000
    
    
    
    37,000Senior notes, less current
portion
    
    
    301,392
    
    
    
    302,159Deferred tax liabilities
    
    
    53,473
    
    
    
    53,473Other liabilities
    
    
    3,352
    
    
    
    1,296Total liabilities
    
    
    438,086
    
    
    
    554,316Commitments and contingenciesShareholders equity:Common stock, $0.01 par value:Authorized shares  100,000; issued and outstanding shares 
25,199 and 25,164
at March 31, 2007 and December 31, 2006, respectively
    
    
    251
    
    
    
    251Paid-in capital
    
    
    114,427
    
    
    
    114,571Notes receivable from shareholders
    
    
    (3
    )
    
    
    (10
    )Accumulated other comprehensive income (loss)
    
    
    (301
    )
    
    
    235Retained earnings
    
    
    7,117
    
    
    
    9,344Total shareholders equity
    
    
    121,491
    
    
    
    124,391Total liabilities and shareholders equity
    
    $
    559,577
    
    
    $
    678,707
  1




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 Three Months Ended March 31,2007
    
    
    2006Net product sales
    
    $
    76,834
    
    
    $
    73,266Royalty and other revenue
    
    
    1,099
    
    
    
    1,035Net sales
    
    
    77,933
    
    
    
    74,301Cost of sales
    
    
    46,299
    
    
    
    51,543Gross profit
    
    
    31,634
    
    
    
    22,758Operating expenses:Selling, general and administrative
    
    
    22,227
    
    
    
    12,986Amortization of intangibles
    
    
    1,204
    
    
    
    660Provision for litigation
    
    
    5,494
    
    
    
    Total operating expenses
    
    
    28,925
    
    
    
    13,646Income from operations
    
    
    2,709
    
    
    
    9,112Other income (expense):Interest expense
    
    
    (7,037
    )
    
    
    (3,489
    )Interest income
    
    
    78
    
    
    
    214Income (loss) before provision for (benefit from) income taxes
    
    
    (4,250
    )
    
    
    5,837Provision for (benefit from) income taxes
    
    
    (1,482
    )
    
    
    1,840Net income (loss)
    
    $
    (2,768
    )
    
    $
    3,997Net income (loss) per common share:Basic and diluted
    
    $
    (0.11
    )
    
    $
    0.16Weighted average number of common shares:Basic and diluted
    
    
    25,955
    
    
    
    25,753
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Three Months Ended March 31,2007
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (2,768
    )
    
    $
    3,997Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,290
    
    
    
    1,469Provision for litigation
    
    
    5,494
    
    
    
    Non-cash interest expense
    
    
    280
    
    
    
    342Non-cash stock-based compensation
    
    
    125
    
    
    
    59Deferred taxes
    
    
    157
    
    
    
    (432
    )Changes in operating assets and liabilitiesAccounts receivable, net
    
    
    104,104
    
    
    
    63,448Inventories
    
    
    52,607
    
    
    
    (17,869
    )Prepaid expenses and other assets
    
    
    (35,598
    )
    
    
    2,297Accounts payable
    
    
    (83,949
    )
    
    
    (15,559
    )Accrued liabilities
    
    
    (14,625
    )
    
    
    (12,926
    )Taxes payable
    
    
    (7,231
    )
    
    
    (735
    )Other
    
    
    1,704
    
    
    
    133Net cash provided by operating activities
    
    
    22,590
    
    
    
    24,224Investing activitiesPurchases of property and equipment
    
    
    (592
    )
    
    
    (479
    )Net cash used in investing activities
    
    
    (592
    )
    
    
    (479
    )Financing activitiesProceeds from long-term debt
    
    
    56,500
    
    
    
    7,800Payments on long-term debt
    
    
    (74,267
    )
    
    
    (13,425
    )Debt issuance costs
    
    
    
    
    
    
    (17
    )Payments received on shareholder loan
    
    
    7
    
    
    
    73Net cash used in financing activities
    
    
    (17,760
    )
    
    
    (5,569
    )Net effect of exchange rates on cash
    
    
    38
    
    
    
    (94
    )Increase in cash and cash equivalents
    
    
    4,276
    
    
    
    18,082Cash and cash equivalents at beginning of period
    
    
    9,861
    
    
    
    12,167Cash and cash equivalents at end of period
    
    $
    14,137
    
    
    $
    30,249
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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
 1. Basis of Presentation
  2. Summary of Significant Accounting Policies
  Accounting for Income Taxes
   Accounting for Derivative Instruments and Hedging Activities
   4




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
  Presentation of Taxes Collected from Customers
  Reclassifications
  3. Accounting for Stock-Based Compensation Expense
     5




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
 4. Net Income (Loss) Per Common Share
   5. Other Comprehensive Income (Loss)
  Three MonthsEnded March 31,2007
    
    
    2006Net income (loss)
    
    $
    (2,768
    )
    
    $
    3,997Other comprehensive income (loss):Foreign currency translation effects, net of tax
    
    
    (36
    )
    
    
    (94
    )Unrealized losses on interest rate swap, net of tax
    
    
    (500
    )
    
    
    Comprehensive income (loss)
    
    $
    (3,304
    )
    
    $
    3,903
  March 31,
    
    
    December 31,2007
    
    
    2006Foreign currency translation effects, net of tax
    
    $
    199
    
    
    $
    235Unrealized gains (losses) on interest rate swap, net of tax
    
    
    (500
    )
    
    
    Accumulated other comprehensive income (loss)
    
    $
    (301
    )
    
    $
    235
 6. Warranty Liability
   6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
 Three MonthsEnded March 31,2007
    
    
    2006Beginning balance
    
    $
    8,631
    
    
    $
    7,412Charged to cost of sales
    
    
    1,902
    
    
    
    3,485Warranty claims
    
    
    (5,679
    )
    
    
    (5,838
    )Ending balance
    
    $
    4,854
    
    
    $
    5,059
  7. Income Taxes
     8. Derivative Instruments and Hedging Activities
   7




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
  Three MonthsEndedMarch 31, 2007Beginning balance
    
    $
    Changes in fair value of derivatives
    
    
    (813
    )Deferred income tax benefit
    
    
    313Ending balance
    
    $
    (500
    )
 9. Other Receivables
   10. Related Parties
   11. Litigation
  8




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited and in thousands, except per share amounts)
    9




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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 of 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, 2006, and elsewhere in this report.
 Overview
    Results of Operations
  Three Months EndedMarch 31,2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    59.4
    %
    
    
    69.4
    %Gross profit
    
    
    40.6
    %
    
    
    30.6
    %Total operating expenses
    
    
    37.1
    %
    
    
    18.4
    %Income from operations
    
    
    3.5
    %
    
    
    12.2
    %Interest expense, net
    
    
    8.9
    %
    
    
    4.4
    %Income (loss) before provision for (benefit from) income taxes
    
    
    (5.4
    )%
    
    
    7.8
    %Provision for (benefit from) income taxes
    
    
    (1.9
    )%
    
    
    2.5
    %Net income (loss)
    
    
    (3.5
    )%
    
    
    5.3
    %
  10




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Three Months EndedMarch 31,2007
    
    
    2006Gross security and entertainment sales
    
    $
    64,732
    
    
    $
    39,234Gross satellite radio sales
    
    
    15,431
    
    
    
    36,277Rebate/payment discount
    
    
    (3,329
    )
    
    
    (2,245
    )Net product sales
    
    
    76,834
    
    
    
    73,266Royalty and other revenues
    
    
    1,099
    
    
    
    1,035Net sales
    
    $
    77,933
    
    
    $
    74,301
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Net Sales
  Gross Profit and Income from Operations
  Part II, Item 1. Legal Proceedings
 Interest Expense
  Provision for (benefit from) Income Taxes
  11




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Liquidity and Capital Resources
        12




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Contractual Obligations
  Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense
  Recent Accounting Pronouncements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
  13




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Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   14




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Item 6. Exhibits.
 10.28
    
    Second Amendment to Industrial/Commercial Lease Agreement Multi-Tenant  Net by and
between the Registrant and Greene Properties, Inc., dated as of March 31, 200610.29
    
    Amendment and Waiver No. 1 to Credit Agreement by and among DEI Sales, Inc., the Guarantors
listed on the signature pages thereto, the Lenders (as defined therein), and Canadian Imperial
Bank of Commerce, acting through its New York Agency as Administrative Agent, dated as of
April 20, 200731.1
    
    Rule 13a-l4(a)/15d-l4(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-l4(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
 15




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SIGNATURES
  DIRECTED ELECTRONICS, INC.
(Registrant)Date: May 10, 2007
    By:
    /s/ James E. MinarikName:
    James E. MinarikTitle:
    President and Chief Executive OfficerDate: May 10, 2007
    By:
    /s/ Ronald F. DuttName:
    Ronald F. DuttTitle:
    Executive Vice President and Chief Financial Officer 16




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EXHIBIT INDEX
 10.28
    
    Second Amendment to Industrial/Commercial Lease Agreement Multi-Tenant  Net by and
between the Registrant and Greene Properties, Inc., dated as of March 31, 200610.29
    
    Amendment and Waiver No. 1 to Credit Agreement by and among DEI Sales, Inc., the Guarantors
listed on the signature pages thereto, the Lenders (as defined therein), and Canadian Imperial
Bank of Commerce, acting through its New York Agency as Administrative Agent, dated as of
April 20, 200731.1
    
    Rule 13a-l4(a)/15d-l4(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-l4(a)/15d-l4(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer