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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 September 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 (unaudited)
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    15PART II  OTHER INFORMATION
    
    
    16Item 1. Legal Proceedings
    
    
    16Item 6. Exhibits
    
    
    16SIGNATURES
    
    
    17Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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 par value)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,319
    
    
    $
    12,167Accounts receivable, net of allowance
of $2,086 and $1,802 at September 30,
2006 and December 31, 2005,
respectively
    
    
    70,492
    
    
    
    100,140Inventories
    
    
    95,231
    
    
    
    43,324Prepaid expenses and other assets
    
    
    12,158
    
    
    
    8,578Deferred tax assets
    
    
    11,487
    
    
    
    8,019Total current assets
    
    
    205,687
    
    
    
    172,228Property and equipment, net
    
    
    6,794
    
    
    
    4,649Intangible assets, net
    
    
    179,751
    
    
    
    90,246Goodwill
    
    
    177,702
    
    
    
    97,807Other assets
    
    
    7,874
    
    
    
    5,690Total assets
    
    $
    577,808
    
    
    $
    370,620LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    69,439
    
    
    $
    54,520Accrued liabilities
    
    
    22,215
    
    
    
    26,023Current
portion of senior notes payable
    
    
    3,068
    
    
    
    1,699Taxes payable
    
    
    1,667
    
    
    
    5,014Total current liabilities
    
    
    96,389
    
    
    
    87,256Revolving loan
    
    
    
    
    
    
    5,200Senior notes, less current portion
    
    
    302,926
    
    
    
    164,911Deferred tax liabilities
    
    
    62,779
    
    
    
    12,690Other liabilities
    
    
    1,276
    
    
    
    1,040Total liabilities
    
    
    463,370
    
    
    
    271,097Commitments
and contingencies (Note 9)Shareholders equity:Common stock, $0.01 par value:Authorized shares  100,000; issued
and outstanding shares  25,051 and
24,769 at September 30, 2006 and
December 31, 2005, respectively
    
    
    251
    
    
    
    248Paid-in capital
    
    
    115,261
    
    
    
    111,110Notes receivable from shareholders
    
    
    (30
    )
    
    
    (126
    )Deferred compensation
    
    
    
    
    
    
    (350
    )Accumulated other comprehensive income
    
    
    375
    
    
    
    306Retained earnings (deficit)
    
    
    (1,419
    )
    
    
    (11,665
    )Total shareholders equity
    
    
    114,438
    
    
    
    99,523Total liabilities and shareholders equity
    
    $
    577,808
    
    
    $
    370,620
  1




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net product sales
    
    $
    74,498
    
    
    $
    60,522
    
    
    $
    224,659
    
    
    $
    166,820Royalty and other revenue
    
    
    1,002
    
    
    
    794
    
    
    
    2,820
    
    
    
    2,217Net sales
    
    
    75,500
    
    
    
    61,316
    
    
    
    227,479
    
    
    
    169,037Cost of sales
    
    
    50,516
    
    
    
    39,662
    
    
    
    159,063
    
    
    
    109,367Gross profit
    
    
    24,984
    
    
    
    21,654
    
    
    
    68,416
    
    
    
    59,670Operating expenses:Selling, general and administrative
    
    
    16,211
    
    
    
    11,966
    
    
    
    42,201
    
    
    
    34,838Management fee to related party
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    539Total operating expenses
    
    
    16,211
    
    
    
    12,151
    
    
    
    42,201
    
    
    
    35,377Income from operations
    
    
    8,773
    
    
    
    9,503
    
    
    
    26,215
    
    
    
    24,293Other income (expense):Interest expense
    
    
    (4,286
    )
    
    
    (5,613
    )
    
    
    (11,261
    )
    
    
    (15,697
    )Interest income
    
    
    166
    
    
    
    28
    
    
    
    575
    
    
    
    50Income before provision for income taxes
    
    
    4,653
    
    
    
    3,918
    
    
    
    15,529
    
    
    
    8,646Provision for income taxes
    
    
    1,475
    
    
    
    1,944
    
    
    
    5,280
    
    
    
    4,109Net income
    
    
    3,178
    
    
    
    1,974
    
    
    
    10,249
    
    
    
    4,537Net income attributable to participating securityholders
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    56Net income available to common shareholders
    
    $
    3,178
    
    
    $
    1,948
    
    
    $
    10,249
    
    
    $
    4,481Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    $
    0.24Diluted
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    $
    0.24Weighted average number of common shares:Basic
    
    
    25,776
    
    
    
    18,583
    
    
    
    25,759
    
    
    
    18,583Diluted
    
    
    25,780
    
    
    
    18,583
    
    
    
    25,761
    
    
    
    18,583
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Nine Months Ended September 30,2006
    
    
    2005Operating
activitiesNet income
    
    $
    10,249
    
    
    $
    4,537Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,348
    
    
    
    887Amortization
    
    
    3,141
    
    
    
    3,033Non-cash interest expense
    
    
    1,375
    
    
    
    1,310Non-cash stock-based compensation
    
    
    1,003
    
    
    
    Deferred taxes
    
    
    (432
    )
    
    
    Loss on disposal or sale of property and equipment
    
    
    3
    
    
    
    Forgiveness of notes receivable from shareholder
    
    
    
    
    
    
    35Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable, net
    
    
    40,724
    
    
    
    5,567Inventories
    
    
    (33,551
    )
    
    
    (18,914
    )Prepaid expenses and other assets
    
    
    (2,738
    )
    
    
    (1,545
    )Other assets
    
    
    (158
    )
    
    
    229Accounts payable
    
    
    14,919
    
    
    
    (7,103
    )Accrued liabilities
    
    
    (18,168
    )
    
    
    1,321Taxes payable
    
    
    (3,346
    )
    
    
    (2,529
    )Other liabilities
    
    
    234
    
    
    
    473Net cash provided by (used in) operating activities
    
    
    14,603
    
    
    
    (12,699
    )Investing activitiesPurchases of property and equipment
    
    
    (1,412
    )
    
    
    (1,053
    )Acquisitions of businesses, net of cash acquired
    
    
    (143,486
    )
    
    
    (825
    )Net cash used in investing activities
    
    
    (144,898
    )
    
    
    (1,878
    )Financing activitiesProceeds from revolving loan
    
    
    7,800
    
    
    
    Payments on revolving loan
    
    
    (13,000
    )
    
    
    Proceeds from senior notes
    
    
    141,000
    
    
    
    15,000Payments on senior notes
    
    
    (1,616
    )
    
    
    Debt issuance costs
    
    
    (3,404
    )
    
    
    (955
    )Issuance of common shares
    
    
    3,500
    
    
    
    105Payments received on employee loan
    
    
    98
    
    
    
    Net cash provided by financing activities
    
    
    134,378
    
    
    
    14,150Net effects
of exchange rates on cash
    
    
    69
    
    
    
    140Increase in cash and cash equivalents
    
    
    4,152
    
    
    
    (287
    )Cash and cash equivalents at beginning of period
    
    
    12,167
    
    
    
    3,785Cash and cash equivalents at end of period
    
    $
    16,319
    
    
    $
    3,498
  3




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
 (Unaudited and in thousands, except per share amounts)
 1. Basis of Presentation
    2. Accounting for Stock-Based Compensation Expense
   4




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
 (Unaudited and in thousands, except per share amounts)
        3. Net Income Per Common Share
  5




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
 (Unaudited and in thousands, except per share amounts)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net income available to common shareholders
    
    $
    3,178
    
    
    $
    1,948
    
    
    $
    10,249
    
    
    $
    4,481Weighted average common shares outstanding  basic
    
    
    25,776
    
    
    
    18,583
    
    
    
    25,759
    
    
    
    18,583Net income per common share  basic
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    $
    0.24Weighted average common shares outstanding  basic
    
    
    25,776
    
    
    
    18,583
    
    
    
    25,759
    
    
    
    18,583Plus dilutive stock options
    
    
    4
    
    
    
    
    
    
    
    2
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    25,780
    
    
    
    18,583
    
    
    
    25,761
    
    
    
    18,583Net income per common share  diluted
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    $
    0.24
  4. Other Comprehensive Income
  5. Income Taxes
   6.
Acquisitions
   6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
 (Unaudited and in thousands, except per share amounts)
     Three Months Ended
    
    Nine Months EndedPro Forma Information
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    96,529
    
    
    $
    82,884
    
    
    $
    288,526
    
    
    $
    228,263Operating income
    
    
    8,105
    
    
    
    11,545
    
    
    
    33,064
    
    
    
    28,984Net income
    
    
    1,046
    
    
    
    1,280
    
    
    
    9,285
    
    
    
    1,750Basic net income per common share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.36
    
    
    $
    0.09Diluted net income per common share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.36
    
    
    $
    0.09
 7. Senior Credit Facility
    7




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
 (Unaudited and in thousands, except per share amounts)
 8. Related Parties
    9. Commitments and Contingencies
    8




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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, 2005, and elsewhere in this report.
 Overview
    Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    66.9
    %
    
    
    64.7
    %
    
    
    69.9
    %
    
    
    64.7
    %Gross profit
    
    
    33.1
    %
    
    
    35.3
    %
    
    
    30.1
    %
    
    
    35.3
    %Total operating expenses
    
    
    21.5
    %
    
    
    19.8
    %
    
    
    18.6
    %
    
    
    20.9
    %Income from operations
    
    
    11.6
    %
    
    
    15.5
    %
    
    
    11.5
    %
    
    
    14.4
    %Interest expense, net
    
    
    5.5
    %
    
    
    9.1
    %
    
    
    4.7
    %
    
    
    9.3
    %Income before provision for income taxes
    
    
    6.1
    %
    
    
    6.4
    %
    
    
    6.8
    %
    
    
    5.1
    %Provision for income taxes
    
    
    2.0
    %
    
    
    3.2
    %
    
    
    2.3
    %
    
    
    2.4
    %Net income
    
    
    4.1
    %
    
    
    3.2
    %
    
    
    4.5
    %
    
    
    2.7
    %
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)
    
    
    (In thousands)Gross security and entertainment sales
    
    $
    48,592
    
    
    $
    46,484
    
    
    $
    125,794
    
    
    $
    128,146Gross satellite radio sales
    
    
    28,565
    
    
    
    16,233
    
    
    
    106,095
    
    
    
    45,006Rebate/payment discount
    
    
    (2,659
    )
    
    
    (2,195
    )
    
    
    (7,230
    )
    
    
    (6,332
    )Net product sales
    
    
    74,498
    
    
    
    60,522
    
    
    
    224,659
    
    
    
    166,820Royalty and other revenues
    
    
    1,002
    
    
    
    794
    
    
    
    2,820
    
    
    
    2,217Net sales
    
    $
    75,500
    
    
    $
    61,316
    
    
    $
    227,479
    
    
    $
    169,037
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Net Sales
   Gross Profit and Income from Operations
    10




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Interest Expense
  Provision for Income Taxes
  Net Income Available to Common Shareholders
  Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Net Sales
  Gross Profit and Income from Operations
    11




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Interest Expense
  Provision for Income Taxes
  Net Income Available to Common Shareholders
  Liquidity and Capital Resources
      12




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Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense
  13




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Recent Accounting Pronouncements
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
   Foreign Currency Exchange Risk
  14




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Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  15




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    
 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
 16




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SIGNATURES
  Date: November 14, 2006
    
    DIRECTED
ELECTRONICS, INC.(Registrant)By:
    
    /s/ James E. MinarikName:
    
    James E. MinarikTitle:
    
    President and Chief Executive OfficerBy:
    
    /s/ John D. MorbergName:
    
    John D. MorbergTitle:
    
    Vice President  Finance, Chief Financial Officer,
and 

Treasurer
 17




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##### Table of Contents



EXHIBIT INDEX
 31.1
    
    Rule 13a-l4(a)/15d-l4(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(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
 18