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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, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 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
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II  OTHER INFORMATION
    
    
    17Item 1.
    
    Legal Proceedings
    
    
    17Item 1A.
    
    Risk Factors
    
    
    17Item 6.
    
    Exhibits
    
    
    18SIGNATURES
    
    
    
    
    19Ex-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)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,461
    
    
    $
    9,861Accounts receivable, net of allowance for doubtful accounts of$1,575 and $1,464
at September 30, 2007 and December 31, 2006, respectively
    
    
    66,441
    
    
    
    157,013Inventories
    
    
    74,191
    
    
    
    122,697Other receivables
    
    
    1,447
    
    
    
    1,942Prepaid expenses and other current assets
    
    
    12,696
    
    
    
    15,774Deferred tax assets
    
    
    13,676
    
    
    
    14,039Total current assets
    
    
    173,912
    
    
    
    321,326Property and equipment, net
    
    
    7,156
    
    
    
    7,068Intangible assets, net
    
    
    185,447
    
    
    
    186,112Goodwill
    
    
    166,370
    
    
    
    156,617Other assets
    
    
    7,679
    
    
    
    7,584Total assets
    
    $
    540,564
    
    
    $
    678,707LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    31,273
    
    
    $
    116,690Accrued liabilities
    
    
    17,925
    
    
    
    32,858Current portion of senior notes payable
    
    
    3,068
    
    
    
    3,068Taxes payable
    
    
    
    
    
    
    7,772Total current liabilities
    
    
    52,266
    
    
    
    160,388Revolving loan
    
    
    7,000
    
    
    
    37,000Senior notes, less current portion
    
    
    299,858
    
    
    
    302,159Deferred tax liabilities
    
    
    54,703
    
    
    
    53,473Other liabilities
    
    
    3,678
    
    
    
    1,296Total liabilities
    
    
    417,505
    
    
    
    554,316Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $0.01 par value:Authorized shares  100,000; issued and outstanding shares  25,281 and 25,164
at September 30, 2007 and December 31, 2006, respectively
    
    
    251
    
    
    
    251Paid-in capital
    
    
    114,499
    
    
    
    114,571Notes receivable from shareholders
    
    
    (3
    )
    
    
    (10
    )Accumulated other comprehensive income
    
    
    2,436
    
    
    
    235Retained earnings
    
    
    5,876
    
    
    
    9,344Total shareholders equity
    
    
    123,059
    
    
    
    124,391Total liabilities and shareholders equity
    
    $
    540,564
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    83,461
    
    
    $
    74,498
    
    
    $
    245,929
    
    
    $
    224,659Royalty and other revenue
    
    
    1,029
    
    
    
    1,002
    
    
    
    3,224
    
    
    
    2,820Net sales
    
    
    84,490
    
    
    
    75,500
    
    
    
    249,153
    
    
    
    227,479Cost of sales
    
    
    54,902
    
    
    
    50,516
    
    
    
    159,552
    
    
    
    159,063Gross profit
    
    
    29,588
    
    
    
    24,984
    
    
    
    89,601
    
    
    
    68,416Operating expenses:Selling, general and administrative
    
    
    23,084
    
    
    
    13,892
    
    
    
    65,676
    
    
    
    38,543Amortization of intangibles
    
    
    1,255
    
    
    
    743
    
    
    
    3,662
    
    
    
    2,082Provision for litigation
    
    
    
    
    
    
    1,576
    
    
    
    5,074
    
    
    
    1,576Total operating expenses
    
    
    24,339
    
    
    
    16,211
    
    
    
    74,412
    
    
    
    42,201Income from operations
    
    
    5,249
    
    
    
    8,773
    
    
    
    15,189
    
    
    
    26,215Other income (expense):Interest expense
    
    
    (6,717
    )
    
    
    (4,286
    )
    
    
    (20,614
    )
    
    
    (11,261
    )Interest income
    
    
    58
    
    
    
    166
    
    
    
    262
    
    
    
    575Income (loss) before provision for (benefit from) income taxes
    
    
    (1,410
    )
    
    
    4,653
    
    
    
    (5,163
    )
    
    
    15,529Provision for (benefit from) income taxes
    
    
    (158
    )
    
    
    1,475
    
    
    
    (1,154
    )
    
    
    5,280Net income (loss)
    
    $
    (1,252
    )
    
    $
    3,178
    
    
    $
    (4,009
    )
    
    $
    10,249Net income (loss) per common share:Basic
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.40Diluted
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.40Weighted average number of common shares:Basic
    
    
    25,904
    
    
    
    25,776
    
    
    
    25,929
    
    
    
    25,759Diluted
    
    
    25,904
    
    
    
    25,780
    
    
    
    25,929
    
    
    
    25,761
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Nine Months Ended September 30,2007
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (4,009
    )
    
    $
    10,249Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    7,147
    
    
    
    4,489Non-cash interest expense
    
    
    911
    
    
    
    1,375Non-cash stock-based compensation
    
    
    657
    
    
    
    1,003Deferred taxes
    
    
    (98
    )
    
    
    (432
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable, net
    
    
    92,039
    
    
    
    40,724Inventories
    
    
    50,824
    
    
    
    (33,551
    )Prepaid expenses and other current assets
    
    
    3,909
    
    
    
    (2,738
    )Accounts payable
    
    
    (86,726
    )
    
    
    14,919Accrued liabilities
    
    
    (16,970
    )
    
    
    (18,168
    )Taxes payable
    
    
    (7,072
    )
    
    
    (3,346
    )Other
    
    
    1,621
    
    
    
    79Net cash provided by operating activities
    
    
    42,233
    
    
    
    14,603Investing activitiesPurchases of property and equipment
    
    
    (2,178
    )
    
    
    (1,412
    )Acquisitions of businesses, net of cash acquired
    
    
    (11,066
    )
    
    
    (143,486
    )Net cash used in investing activities
    
    
    (13,244
    )
    
    
    (144,898
    )Financing activitiesProceeds from senior notes and revolving loan
    
    
    74,500
    
    
    
    148,800Payments on senior notes and revolving loan
    
    
    (106,801
    )
    
    
    (14,616
    )Debt amendment fees
    
    
    (1,011
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    (3,404
    )Issuance of common shares
    
    
    
    
    
    
    3,500Payments received on shareholder loan
    
    
    7
    
    
    
    98Net cash provided by (used in) financing activities
    
    
    (33,305
    )
    
    
    134,378Net effect of exchange rates on cash
    
    
    (84
    )
    
    
    69Increase (decrease) in cash and cash equivalents
    
    
    (4,400
    )
    
    
    4,152Cash and cash equivalents at beginning of period
    
    
    9,861
    
    
    
    12,167Cash and cash equivalents at end of period
    
    $
    5,461
    
    
    $
    16,319
  3




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
   4




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




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited and in thousands, except per share amounts)
  4. Net Income (Loss) Per Common Share
   Three Months Ended Sept 30,
    
    
    Nine Months Ended Sept 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (1,252
    )
    
    $
    3,178
    
    
    $
    (4,009
    )
    
    $
    10,249Weighted average common shares outstanding  basic
    
    
    25,904
    
    
    
    25,776
    
    
    
    25,929
    
    
    
    25,759Net income (loss) per common share  basic
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.40Weighted average common shares outstanding  basic
    
    
    25,904
    
    
    
    25,776
    
    
    
    25,929
    
    
    
    25,759Dilutive effect of stock options
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    2Weighted average common shares outstanding  diluted
    
    
    25,904
    
    
    
    25,780
    
    
    
    25,929
    
    
    
    25,761Net income (loss) per common share  diluted
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.40
  5. Other Comprehensive Income (Loss)
  Three Months
    
    
    Nine MonthsEnded Sept 30,
    
    
    Ended Sept 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (1,252
    )
    
    $
    3,178
    
    
    $
    (4,009
    )
    
    $
    10,249Other comprehensive income (loss):Foreign currency translation effects
    
    
    2,170
    
    
    
    95
    
    
    
    3,298
    
    
    
    69Unrealized loss on interest rate swap, net of tax
    
    
    (1,544
    )
    
    
    
    
    
    
    (1,097
    )
    
    
    Comprehensive income (loss)
    
    $
    (626
    )
    
    $
    3,273
    
    
    $
    (1,808
    )
    
    $
    10,318
  6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited and in thousands, except per share amounts)
 Sept 30,
    
    
    December 31,2007
    
    
    2006Foreign currency translation effects
    
    $
    3,533
    
    
    $
    235Unrealized loss on interest rate swap, net of tax
    
    
    (1,097
    )
    
    
    Accumulated other comprehensive income
    
    $
    2,436
    
    
    $
    235
 6. Warranty Liability
   Three Months
    
    
    Nine MonthsEnded Sept 30,
    
    
    Ended Sept 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    4,353
    
    
    $
    5,543
    
    
    $
    8,631
    
    
    $
    7,412Charged to cost of sales
    
    
    3,534
    
    
    
    2,608
    
    
    
    7,605
    
    
    
    1,952Warranty claims
    
    
    (3,995
    )
    
    
    (2,317
    )
    
    
    (12,344
    )
    
    
    (3,530
    )Ending balance
    
    $
    3,892
    
    
    $
    5,834
    
    
    $
    3,892
    
    
    $
    5,834
  7. Acquisitions, Goodwill, and Other Intangible Assets
   7




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited and in thousands, except per share amounts)
     Balance at January 1, 2007
    
    $
    156,617Acquisition
    
    
    6,755Accrual of contingent consideration
    
    
    750Adjustment to 2006 acquired working capital
    
    
    (212
    )Adjustment to acquired deferred tax liabilities
    
    
    1,645Foreign exchange translation adjustment
    
    
    815Balance at September 30, 2007
    
    $
    166,370
 8. Income Taxes
     8




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited and in thousands, except per share amounts)
  9. Derivative Instruments and Hedging Activities
    Nine Months EndedSeptember 30, 2007Balance January 1, 2007
    
    $
    Changes in fair value of derivatives
    
    
    (1,790
    )Deferred income tax provision
    
    
    693Balance September 30, 2007
    
    $
    (1,097
    )
 10. Other Receivables
   11. Related Parties
   9




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited and in thousands, except per share amounts)
 12. Litigation
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.0
    %
    
    
    66.9
    %
    
    
    64.0
    %
    
    
    69.9
    %Gross profit
    
    
    35.0
    %
    
    
    33.1
    %
    
    
    36.0
    %
    
    
    30.1
    %Total operating expenses
    
    
    28.8
    %
    
    
    21.5
    %
    
    
    29.9
    %
    
    
    18.6
    %Income from operations
    
    
    6.2
    %
    
    
    11.6
    %
    
    
    6.1
    %
    
    
    11.5
    %Interest expense, net
    
    
    7.9
    %
    
    
    5.5
    %
    
    
    8.2
    %
    
    
    4.7
    %Income (loss) before provision for (benefit from) income taxes
    
    
    (1.7
    )%
    
    
    6.1
    %
    
    
    (2.1
    )%
    
    
    6.8
    %Provision for (benefit from) income taxes
    
    
    (0.2
    )%
    
    
    2.0
    %
    
    
    (0.5
    )%
    
    
    2.3
    %Net income (loss)
    
    
    (1.5
    )%
    
    
    4.1
    %
    
    
    (1.6
    )%
    
    
    4.5
    %
  11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross security and entertainment sales
    
    $
    69,806
    
    
    $
    48,592
    
    
    $
    196,891
    
    
    $
    125,794Gross satellite radio sales
    
    
    17,909
    
    
    
    28,565
    
    
    
    61,689
    
    
    
    106,095Rebates and payment discounts
    
    
    (4,254
    )
    
    
    (2,659
    )
    
    
    (12,651
    )
    
    
    (7,230
    )Net product sales
    
    
    83,461
    
    
    
    74,498
    
    
    
    245,929
    
    
    
    224,659Royalty and other revenues
    
    
    1,029
    
    
    
    1,002
    
    
    
    3,224
    
    
    
    2,820Net sales
    
    $
    84,490
    
    
    $
    75,500
    
    
    $
    249,153
    
    
    $
    227,479
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Net Sales
    Gross Profit and Income from Operations
    12




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Interest Expense
  Provision for (benefit from) Income Taxes
  Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Net Sales
    Gross Profit and Income from Operations
    13




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Interest Expense
  Provision for (benefit from) Income Taxes
  Liquidity and Capital Resources
     14




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Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense
  Recent Accounting Pronouncements
  15




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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
   16




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    
 Item 1A. Risk Factors.
 If our goodwill or other intangible assets were to become impaired, we would be required to record
a charge to earnings reflecting the impairment.
  17




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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
 18




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SIGNATURES
  DIRECTED ELECTRONICS, INC. 
(Registrant)Date: November 8, 2007
    By:
    /s/ James E. MinarikName:
    James E. MinarikTitle:
    President and Chief Executive OfficerDate: November 8, 2007
    By:
    /s/ Ronald F. DuttName:
    Ronald F. DuttTitle:
    Executive Vice President and Chief Financial Officer 19




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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