##### Table of Contents



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, 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 Way 
Vista, 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



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
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16PART II  OTHER INFORMATION
    
    
    16Item 1. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 6. Exhibits
    
    
    17SIGNATURES
    
    
    18EX-31.1EX-31.2EX-32.1EX-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 per share amounts)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,069
    
    
    $
    9,861Accounts receivable, net of allowance for doubtful accounts of $1,539
and $1,464 at June 30, 2007 and December 31, 2006, respectively
    
    
    70,286
    
    
    
    157,013Inventories
    
    
    60,675
    
    
    
    122,697Other receivables
    
    
    10,805
    
    
    
    1,942Prepaid expenses and other current assets
    
    
    20,106
    
    
    
    15,774Deferred tax assets
    
    
    13,446
    
    
    
    14,039Total current assets
    
    
    188,387
    
    
    
    321,326Property and equipment, net
    
    
    6,988
    
    
    
    7,068Intangible assets, net
    
    
    186,454
    
    
    
    186,112Goodwill
    
    
    163,903
    
    
    
    156,617Other assets
    
    
    8,384
    
    
    
    7,584Total assets
    
    $
    554,116
    
    
    $
    678,707LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,641
    
    
    $
    116,690Accrued liabilities
    
    
    21,923
    
    
    
    32,858Current portion of senior notes payable
    
    
    3,068
    
    
    
    3,068Taxes payable
    
    
    
    
    
    
    7,772Total current liabilities
    
    
    49,632
    
    
    
    160,388Revolving loan
    
    
    24,000
    
    
    
    37,000Senior notes, less current portion
    
    
    300,625
    
    
    
    302,159Deferred tax liabilities
    
    
    53,473
    
    
    
    53,473Other liabilities
    
    
    2,730
    
    
    
    1,296Total liabilities
    
    
    430,460
    
    
    
    554,316Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $0.01 par value:Authorized shares  100,000; issued and outstanding shares  25,238 and 25,164
at June 30, 2007 and December 31, 2006, respectively
    
    
    251
    
    
    
    251Paid-in capital
    
    
    114,470
    
    
    
    114,571Notes receivable from shareholders
    
    
    (3
    )
    
    
    (10
    )Accumulated other comprehensive income
    
    
    1,810
    
    
    
    235Retained earnings
    
    
    7,128
    
    
    
    9,344Total shareholders equity
    
    
    123,656
    
    
    
    124,391Total liabilities and shareholders equity
    
    $
    554,116
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    85,634
    
    
    $
    76,895
    
    
    $
    162,468
    
    
    $
    150,161Royalty and other revenue
    
    
    1,096
    
    
    
    783
    
    
    
    2,195
    
    
    
    1,818Net sales
    
    
    86,730
    
    
    
    77,678
    
    
    
    164,663
    
    
    
    151,979Cost of sales
    
    
    58,351
    
    
    
    57,004
    
    
    
    104,650
    
    
    
    108,547Gross profit
    
    
    28,379
    
    
    
    20,674
    
    
    
    60,013
    
    
    
    43,432Operating expenses:Selling, general and administrative
    
    
    20,365
    
    
    
    11,665
    
    
    
    42,592
    
    
    
    24,651Amortization of intangibles
    
    
    1,203
    
    
    
    679
    
    
    
    2,407
    
    
    
    1,339Provision for litigation
    
    
    (420
    )
    
    
    
    
    
    
    5,074
    
    
    
    Total operating expenses
    
    
    21,148
    
    
    
    12,344
    
    
    
    50,073
    
    
    
    25,990Income from operations
    
    
    7,231
    
    
    
    8,330
    
    
    
    9,940
    
    
    
    17,442Other income (expense):Interest expense
    
    
    (6,860
    )
    
    
    (3,486
    )
    
    
    (13,897
    )
    
    
    (6,975
    )Interest income
    
    
    126
    
    
    
    195
    
    
    
    204
    
    
    
    409Income (loss) before provision for (benefit from) income taxes
    
    
    497
    
    
    
    5,039
    
    
    
    (3,753
    )
    
    
    10,876Provision for (benefit from) income taxes
    
    
    486
    
    
    
    1,965
    
    
    
    (996
    )
    
    
    3,805Net income (loss)
    
    $
    11
    
    
    $
    3,074
    
    
    $
    (2,757
    )
    
    $
    7,071Net income (loss) per common share:Basic
    
    $
    0.00
    
    
    $
    0.12
    
    
    $
    (0.11
    )
    
    $
    0.27Diluted
    
    $
    0.00
    
    
    $
    0.12
    
    
    $
    (0.11
    )
    
    $
    0.27Weighted average number of common shares:Basic
    
    
    25,928
    
    
    
    25,748
    
    
    
    25,942
    
    
    
    25,750Diluted
    
    
    25,931
    
    
    
    25,749
    
    
    
    25,942
    
    
    
    25,751
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Six Months Ended June 30,2007
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (2,757
    )
    
    $
    7,071Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,666
    
    
    
    2,945Non-cash interest expense
    
    
    591
    
    
    
    683Non-cash stock-based compensation
    
    
    415
    
    
    
    147Deferred taxes
    
    
    547
    
    
    
    (432
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable, net
    
    
    87,750
    
    
    
    54,032Inventories
    
    
    64,017
    
    
    
    (14,478
    )Prepaid expenses and other current assets
    
    
    (12,926
    )
    
    
    2,730Accounts payable
    
    
    (92,830
    )
    
    
    (20,229
    )Accrued liabilities
    
    
    (12,873
    )
    
    
    (15,822
    )Taxes payable
    
    
    (7,186
    )
    
    
    (2,480
    )Other
    
    
    1,681
    
    
    
    195Net cash provided by operating activities
    
    
    31,095
    
    
    
    14,362Investing activitiesPurchases of property and equipment
    
    
    (1,184
    )
    
    
    (933
    )Acquisitions of businesses, net of cash acquired
    
    
    (11,057
    )
    
    
    (3,956
    )Net cash used in investing activities
    
    
    (12,241
    )
    
    
    (4,889
    )Financing activitiesProceeds from revolving loan
    
    
    72,500
    
    
    
    7,800Payments on
senior notes and revolving loan
    
    
    (87,034
    )
    
    
    (13,850
    )Debt amendment fees
    
    
    (1,011
    )
    
    
    (17
    )Payments received on shareholder loan
    
    
    8
    
    
    
    91Net cash used in financing activities
    
    
    (15,537
    )
    
    
    (5,976
    )Net effect of exchange rates on cash
    
    
    (109
    )
    
    
    (26
    )Increase in cash and cash equivalents
    
    
    3,208
    
    
    
    3,471Cash and cash equivalents at beginning of period
    
    
    9,861
    
    
    
    12,167Cash and cash equivalents at end of period
    
    $
    13,069
    
    
    $
    15,638
  3




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
 1. Basis of Presentation
  2. Summary of Significant Accounting Policies
  Revenue Recognition
  Accounting for Income Taxes
   Accounting for Derivative Instruments and Hedging Activities
 4




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
    Reclassifications
  3. Accounting for Stock-Based Compensation Expense
     5




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
  4. Net Income (Loss) Per Common Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    11
    
    
    $
    3,074
    
    
    $
    (2,757
    )
    
    $
    7,071Weighted average common shares outstanding  basic
    
    
    25,928
    
    
    
    25,748
    
    
    
    25,942
    
    
    
    25,750Net income (loss) per common share  basic
    
    $
    0.00
    
    
    $
    0.12
    
    
    $
    (0.11
    )
    
    $
    0.27Weighted average common shares outstanding  basic
    
    
    25,928
    
    
    
    25,748
    
    
    
    25,942
    
    
    
    25,750Dilutive effect of stock options
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    1Weighted average common shares outstanding  diluted
    
    
    25,931
    
    
    
    25,749
    
    
    
    25,942
    
    
    
    25,751Net income (loss) per common share  diluted
    
    $
    0.00
    
    
    $
    0.12
    
    
    $
    (0.11
    )
    
    $
    0.27
  5. Other Comprehensive Income (Loss)
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    11
    
    
    $
    3,074
    
    
    $
    (2,757
    )
    
    $
    7,071Other comprehensive income (loss):Foreign currency translation effects, net of tax
    
    
    1,164
    
    
    
    68
    
    
    
    1,128
    
    
    
    (26
    )Unrealized gain on interest rate swap, net of tax
    
    
    947
    
    
    
    
    
    
    
    447
    
    
    
    Comprehensive income (loss)
    
    $
    2,122
    
    
    $
    3,142
    
    
    $
    (1,182
    )
    
    $
    7,045
  6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
 June 30,
    
    
    December 31,2007
    
    
    2006Foreign currency translation effects, net of tax
    
    $
    1,363
    
    
    $
    235Unrealized gains on interest rate swap, net of tax
    
    
    447
    
    
    
    Accumulated other comprehensive income
    
    $
    1,810
    
    
    $
    235
 6. Warranty Liability
   Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    4,854
    
    
    $
    5,059
    
    
    $
    8,631
    
    
    $
    7,412Charged to cost of sales
    
    
    1,970
    
    
    
    4,439
    
    
    
    3,872
    
    
    
    7,924Warranty claims
    
    
    (2,471
    )
    
    
    (3,752
    )
    
    
    (8,150
    )
    
    
    (9,590
    )Ending balance
    
    $
    4,353
    
    
    $
    5,746
    
    
    $
    4,353
    
    
    $
    5,746
  7. Acquisitions, Goodwill, and Other Intangible Assets
   7




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
   Balance at January 1, 2007
    
    $
    156,617Acquisition
    
    
    6,730Accrual of contingent consideration
    
    
    750Adjustment to 2006 acquired working capital
    
    
    (212
    )Foreign exchange translation adjustment
    
    
    18Balance at June 30, 2007
    
    $
    163,903
 8. Income Taxes
     9. Derivative Instruments and Hedging Activities
   8




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
   Six Months EndedJune 30, 2007Beginning balance
    
    $
    Changes in fair value of derivatives
    
    
    727Deferred income tax provision
    
    
    (280
    )Ending balance
    
    $
    447
 10. Other Receivables
   11. Related Parties
   12. Litigation
  9




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited and in thousands, except per share amounts)
    10




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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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.3
    %
    
    
    73.4
    %
    
    
    63.6
    %
    
    
    71.4
    %Gross profit
    
    
    32.7
    %
    
    
    26.6
    %
    
    
    36.4
    %
    
    
    28.6
    %Total operating expenses
    
    
    24.4
    %
    
    
    15.9
    %
    
    
    30.4
    %
    
    
    17.1
    %Income from operations
    
    
    8.3
    %
    
    
    10.7
    %
    
    
    6.0
    %
    
    
    11.5
    %Interest expense, net
    
    
    7.8
    %
    
    
    4.2
    %
    
    
    8.3
    %
    
    
    4.3
    %Income (loss) before provision for (benefit from) income taxes
    
    
    0.6
    %
    
    
    6.5
    %
    
    
    (2.3
    )%
    
    
    7.2
    %Provision for (benefit from) income taxes
    
    
    0.6
    %
    
    
    2.5
    %
    
    
    (0.6
    )%
    
    
    2.5
    %Net income (loss)
    
    
    0.0
    %
    
    
    4.0
    %
    
    
    (1.7
    )%
    
    
    4.7
    %
  11




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross security and entertainment sales
    
    $
    62,353
    
    
    $
    37,968
    
    
    $
    127,085
    
    
    $
    77,202Gross satellite radio sales
    
    
    28,349
    
    
    
    41,253
    
    
    
    43,780
    
    
    
    77,530Sales returns, rebates and payment discounts
    
    
    (5,068
    )
    
    
    (2,326
    )
    
    
    (8,397
    )
    
    
    (4,571
    )Net product sales
    
    
    85,634
    
    
    
    76,895
    
    
    
    162,468
    
    
    
    150,161Royalty and other revenues
    
    
    1,096
    
    
    
    783
    
    
    
    2,195
    
    
    
    1,818Net sales
    
    $
    86,730
    
    
    $
    77,678
    
    
    $
    164,663
    
    
    $
    151,979
 Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
 Net Sales
    Gross Profit and Income from Operations
   Interest Expense
  12




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Provision for (benefit from) Income Taxes
  Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 Net Sales
    Gross Profit and Income from Operations
  Part II, Item 1. Legal Proceedings
 Interest Expense
  Provision for (benefit from) Income Taxes
  13




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Liquidity and Capital Resources
        14




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Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense
  Recent Accounting Pronouncements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
  15




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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.
   16




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Item 4. Submission of Matters to a Vote of Security Holders.
   Nominee
    
    Votes in Favor
    
    WithheldVictor J. Orler
S. James Spierer
    
    22,810,471
22,824,015
    
    130,548
117,004
   Votes in Favor
    
    Votes Against
    
    Abstain
    
    Broker Non-Votes18,727,474
    
    
    241,177
    
    
    
    44,874
    
    
    
    3,927,494
  Votes in Favor
    
    Votes Against
    
    Abstain
    
    Broker Non-Votes22,839,288
    
    
    71,689
    
    
    
    30,041
    
    
    
    
 
 Item 6. Exhibits.
 31.1
    
    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
 17




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SIGNATURES
  DIRECTED ELECTRONICS, INC.(Registrant)Date: August 9, 2007
    By:
    /s/ James E. MinarikName:
    James E. MinarikTitle:
    President and Chief Executive OfficerDate: August 9, 2007
    By:
    /s/ Ronald F. DuttName:
    Ronald F. DuttTitle:
    Executive Vice President and Chief Financial Officer 18




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EXHIBIT INDEX
 31.1
    
    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