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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 March 31, 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 Way
Vista, California
    
    92081(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 598-6200
 
 (Registrants Telephone Number, Including Area Code)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer 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
    
    
    11Item 4. Controls and Procedures
    
    
    12PART II  OTHER INFORMATION
    
    
    14Item 1. Legal Proceedings
    
    
    14Item 6. Exhibits
    
    
    14SIGNATURES
    
    
    15Exhibit 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)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    30,249
    
    
    $
    12,167Accounts receivable, net of allowance of $1,623 and $1,802 at March
31, 2006 and December 31, 2005, respectively
    
    
    36,692
    
    
    
    100,140Inventories
    
    
    61,193
    
    
    
    43,324Prepaid expenses and other assets
    
    
    6,281
    
    
    
    8,578Deferred tax assets
    
    
    9,089
    
    
    
    8,019Total current assets
    
    
    143,504
    
    
    
    172,228Property and equipment, net
    
    
    4,672
    
    
    
    4,649Intangible assets, net
    
    
    89,233
    
    
    
    90,246Goodwill
    
    
    97,807
    
    
    
    97,807Other assets
    
    
    5,380
    
    
    
    5,690Total assets
    
    $
    340,596
    
    
    $
    370,620LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    38,961
    
    
    $
    54,520Accrued liabilities
    
    
    13,097
    
    
    
    26,023Current portion of notes payable
    
    
    1,699
    
    
    
    1,699Taxes payable
    
    
    4,279
    
    
    
    5,014Total current liabilities
    
    
    58,036
    
    
    
    87,256Revolving loan
    
    
    
    
    
    
    5,200Senior notes, less current portion
    
    
    164,486
    
    
    
    164,911Deferred tax liabilities
    
    
    13,328
    
    
    
    12,690Other
    
    
    1,190
    
    
    
    1,040Total liabilities
    
    
    237,040
    
    
    
    271,097Commitments and contingencies (Note 5)Shareholders equity:Common Stock, $0.01 par value:Authorized shares - 100,000; issued and outstanding shares  24,769
at both March 31, 2006 and December 31, 2005
    
    
    248
    
    
    
    248Paid-in capital
    
    
    110,819
    
    
    
    111,110Notes receivable from shareholders
    
    
    (55
    )
    
    
    (126
    )Deferred compensation
    
    
    
    
    
    
    (350
    )Accumulated other comprehensive income
    
    
    212
    
    
    
    306Retained earnings (deficit)
    
    
    (7,668
    )
    
    
    (11,665
    )Total shareholders equity
    
    
    103,556
    
    
    
    99,523Total liabilities and shareholders equity
    
    $
    340,596
    
    
    $
    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 March 31,2006
    
    
    2005Net product sales
    
    $
    73,266
    
    
    $
    51,339Royalty and other revenue
    
    
    1,035
    
    
    
    726Net sales
    
    
    74,301
    
    
    
    52,065Cost of sales
    
    
    51,543
    
    
    
    33,460Gross profit
    
    
    22,758
    
    
    
    18,605Operating expenses:Selling, general and administrative
    
    
    13,646
    
    
    
    10,993Management fee to related party
    
    
    
    
    
    
    188Total operating expenses
    
    
    13,646
    
    
    
    11,181Income from operations
    
    
    9,112
    
    
    
    7,424Other income (expense):Interest expense
    
    
    (3,489
    )
    
    
    (5,019
    )Interest income
    
    
    214
    
    
    
    9Income before provision for income taxes
    
    
    5,837
    
    
    
    2,414Provision for income taxes
    
    
    1,840
    
    
    
    983Net income
    
    
    3,997
    
    
    
    1,431Net income attributable to participating securityholders
    
    
    
    
    
    
    16Net income available to common shareholders
    
    $
    3,997
    
    
    $
    1,415Net income per common share:Basic
    
    $
    0.16
    
    
    $
    0.08Diluted
    
    $
    0.16
    
    
    $
    0.08Weighted average number of common shares:Basic
    
    
    25,753
    
    
    
    18,583Diluted
    
    
    25,753
    
    
    
    18,583
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Three Months Ended March 31,2006
    
    
    2005Operating activitiesNet income
    
    $
    3,997
    
    
    $
    1,431Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    456
    
    
    
    283Amortization
    
    
    1,013
    
    
    
    1,010Non-cash interest expense
    
    
    342
    
    
    
    425Non-cash stock-based compensation
    
    
    59
    
    
    
    Deferred taxes
    
    
    (432
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    63,448
    
    
    
    11,710Inventories
    
    
    (17,869
    )
    
    
    1,061Prepaid expenses and other assets
    
    
    2,297
    
    
    
    2,262Other assets
    
    
    (17
    )
    
    
    78Accounts payable
    
    
    (15,559
    )
    
    
    (15,181
    )Accrued liabilities
    
    
    (12,926
    )
    
    
    (711
    )Taxes payable
    
    
    (735
    )
    
    
    (1,584
    )Other liabilities
    
    
    150
    
    
    
    456Net cash provided by operating activities
    
    
    24,224
    
    
    
    1,240Investing activitiesPurchases of property and equipment
    
    
    (479
    )
    
    
    (52
    )Net cash used in investing activities
    
    
    (479
    )
    
    
    (52
    )Financing activitiesProceeds from revolving loan
    
    
    7,800
    
    
    
    2,600Payments on revolving loan
    
    
    (13,000
    )
    
    
    (2,600
    )Payments on senior notes
    
    
    (425
    )
    
    
    Debt issuance costs
    
    
    (17
    )
    
    
    (481
    )Issuance of common shares
    
    
    
    
    
    
    95Payment of employee loan
    
    
    73
    
    
    
    Net cash used in financing activities
    
    
    (5,569
    )
    
    
    (386
    )Net effect of exchange rates on cash
    
    
    (94
    )
    
    
    126Increase in cash and cash equivalents
    
    
    18,082
    
    
    
    928Cash and cash equivalents at beginning of period
    
    
    12,167
    
    
    
    3,784Cash and cash equivalents at end of period
    
    $
    30,249
    
    
    $
    4,712Supplemental disclosure of cash flow informationInterest paid
    
    $
    2,389
    
    
    $
    4,741Taxes paid
    
    $
    3,141
    
    
    $
    2,520Supplemental disclosure of non-cash financing activitiesIssuance of common stock for promissory note
    
    $
    
    
    
    $
    95Accrued interest on shareholder notes payable
    
    $
    2
    
    
    $
    1
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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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  (Continued)
MARCH 31, 2006
        5




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2006
 3. Net Income Per Common Share
   Three Months Ended March 31,2006
    
    
    2005Net income available to common shareholders
    
    $
    3,997
    
    
    $
    1,415Weighted average common shares outstanding  basic
    
    
    25,753
    
    
    
    18,583Net income per common share  basic
    
    $
    0.16
    
    
    $
    0.08Weighted average common shares outstanding  basic
    
    
    25,753
    
    
    
    18,583Plus dilutive stock options
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    25,753
    
    
    
    18,583Net income per common share  diluted
    
    $
    0.16
    
    
    $
    0.08
  4. Other Comprehensive Income
  5. Commitments and Contingencies
    6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2006
 6. Related Parties
    7. Income Taxes
   7




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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 March 31,2006
    
    2005Net sales
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    69.4
    %
    
    
    64.3
    %Gross profit
    
    
    30.6
    %
    
    
    35.7
    %Total operating expenses
    
    
    18.4
    %
    
    
    21.5
    %Income from operations
    
    
    12.2
    %
    
    
    14.2
    %Interest expense, net
    
    
    4.4
    %
    
    
    9.6
    %Income before provision for income taxes.
    
    
    7.8
    %
    
    
    4.6
    %Provision for income taxes
    
    
    2.5
    %
    
    
    1.9
    %Net income
    
    
    5.3
    %
    
    
    2.7
    %
  8




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Three
Months Ended March 31,2006
    
    
    2005(In thousands)Gross security and entertainment sales
    
    $
    39,234
    
    
    $
    40,520Gross satellite radio sales
    
    
    36,277
    
    
    
    13,045Rebate/payment discount .
    
    
    (2,245
    )
    
    
    (2,226
    )Net product sales .
    
    
    73,266
    
    
    
    51,339Royalty and other revenue
    
    
    1,035
    
    
    
    726Net sales
    
    $
    74,301
    
    
    $
    52,065
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 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
  Liquidity and Capital Resources
       10




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Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  11




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Foreign Currency Exchange Risk
  Impact of Inflation
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    12




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
    
    We have added a controller and a financial reporting manager. 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.
 Changes in Internal Control over Financial Reporting.
  13




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 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: May 15, 2006
    
    
    
    DIRECTED ELECTRONICS, INC.(Registrant)By:
    
    /s/ James E. MinarikName:
    
    James E. MinarikTitle:
    
    President and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ John D. MorbergName:
    
    John D. MorbergTitle:
    
    Vice President  Finance, Chief FinancialOfficer, and Treasurer (Principal Accountingand 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