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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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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
    
    14PART II  OTHER INFORMATION
    
    15Item 1. Legal Proceedings
    
    15Item 6. Exhibits
    
    15SIGNATURES
    
    16EX-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 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,679
    
    
    $
    4,760Accounts receivable, net of allowance for doubtful
accounts of $1,709 and $1,521 at March 31, 2008 and
December 31, 2007, respectively
    
    
    47,445
    
    
    
    77,366Inventories, net
    
    
    67,880
    
    
    
    64,219Income taxes receivable
    
    
    11,218
    
    
    
    9,783Prepaid expenses and other current assets
    
    
    2,315
    
    
    
    7,115Deferred tax assets
    
    
    6,038
    
    
    
    6,038Total current assets
    
    
    151,575
    
    
    
    169,281Property and equipment, net
    
    
    7,202
    
    
    
    7,353Intangible assets, net
    
    
    154,929
    
    
    
    157,265Other assets
    
    
    7,888
    
    
    
    6,535Total assets
    
    $
    321,594
    
    
    $
    340,434LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    36,769
    
    
    $
    44,814Accrued liabilities
    
    
    27,122
    
    
    
    28,527Current portion of senior notes payable
    
    
    2,669
    
    
    
    2,669Total current liabilities
    
    
    66,560
    
    
    
    76,010Revolving loan
    
    
    
    
    
    
    4,000Senior notes, less current portion
    
    
    259,589
    
    
    
    260,257Deferred tax liabilities
    
    
    8,117
    
    
    
    8,864Other liabilities
    
    
    5,686
    
    
    
    5,201Total liabilities
    
    $
    339,952
    
    
    $
    354,332Commitments and contingencies (Note 11)Shareholders equity (deficit):Common stock, $0.01 par value:Authorized shares  100,000; issued and outstanding shares
 25,452 and 25,420 at March 31, 2008 and December 31,
2007, respectively
    
    
    254
    
    
    
    254Paid-in capital
    
    
    114,938
    
    
    
    114,674Accumulated other comprehensive income (loss)
    
    
    (1,864
    )
    
    
    1,257Accumulated deficit
    
    
    (131,686
    )
    
    
    (130,083
    )Total shareholders deficit
    
    
    (18,358
    )
    
    
    (13,898
    )Total liabilities and shareholders equity (deficit)
    
    $
    321,594
    
    
    $
    340,434
  1




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 Three Months Ended March 31,2008
    
    
    2007Sales:Security and entertainment product
sales, net
    
    $
    57,032
    
    
    $
    61,382Satellite radio product sales, net of $14,865
of cost
for the three months ended March
31, 2008 (Note 2)
    
    
    2,715
    
    
    
    15,452Royalty and other revenue
    
    
    801
    
    
    
    1,099Net sales
    
    
    60,548
    
    
    
    77,933Cost of sales:Cost of security and entertainment sales
    
    
    31,144
    
    
    
    33,295Cost of satellite radio sales (Note 2)
    
    
    
    
    
    
    13,004Total cost of sales
    
    
    31,144
    
    
    
    46,299Gross profit
    
    
    29,404
    
    
    
    31,634Operating expenses:Selling, general and administrative
    
    
    23,784
    
    
    
    22,227Amortization of intangibles
    
    
    1,370
    
    
    
    1,204Provision for litigation
    
    
    
    
    
    
    5,494Total operating expenses
    
    
    25,154
    
    
    
    28,925Income from operations
    
    
    4,250
    
    
    
    2,709Other income (expense):Interest expense
    
    
    (6,321
    )
    
    
    (7,037
    )Interest income
    
    
    89
    
    
    
    78Income (loss) before provision for
(benefit from) income taxes
    
    
    (1,982
    )
    
    
    (4,250
    )Provision for (benefit from) income taxes
    
    
    (379
    )
    
    
    (1,482
    )Net income (loss)
    
    $
    (1,603
    )
    
    $
    (2,768
    )Net income (loss) per common share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.11
    )Weighted average number of common shares:Basic and diluted
    
    
    25,858
    
    
    
    25,955
  2




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DIRECTED ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 Three Months Ended March 31,2008
    
    
    2007Operating activitiesNet income (loss)
    
    $
    (1,603
    )
    
    $
    (2,768
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,592
    
    
    
    2,290Provision for litigation
    
    
    
    
    
    
    5,494Non-cash interest expense
    
    
    457
    
    
    
    280Non-cash stock-based compensation
    
    
    304
    
    
    
    125Deferred taxes
    
    
    340
    
    
    
    157Changes in operating assets and liabilities, net of
effects of acquisitions:Accounts receivable, net
    
    
    29,741
    
    
    
    104,104Inventories, net
    
    
    (3,988
    )
    
    
    52,607Prepaid expenses and other current assets
    
    
    4,779
    
    
    
    (35,598
    )Accounts payable
    
    
    (7,913
    )
    
    
    (83,949
    )Accrued liabilities
    
    
    (1,345
    )
    
    
    (14,625
    )Taxes payable
    
    
    (1,452
    )
    
    
    (7,231
    )Other
    
    
    (2,557
    )
    
    
    1,704Net cash provided by operating activities
    
    
    19,355
    
    
    
    22,590Investing activitiesPurchases of property and equipment
    
    
    (518
    )
    
    
    (592
    )Net cash used in investing activities
    
    
    (518
    )
    
    
    (592
    )Financing activitiesProceeds from senior notes and revolving loan
    
    
    24,000
    
    
    
    56,500Payments on senior notes and revolving loan
    
    
    (28,667
    )
    
    
    (74,267
    )Debt amendment fees
    
    
    (1,808
    )
    
    
    Payments received on shareholder loan
    
    
    
    
    
    
    7Net cash used in financing activities
    
    
    (6,475
    )
    
    
    (17,760
    )Net effect of exchange rates on cash
    
    
    (443
    )
    
    
    38Increase in cash and cash equivalents
    
    
    11,919
    
    
    
    4,276Cash and cash equivalents at beginning of period
    
    
    4,760
    
    
    
    9,861Cash and cash equivalents at end of period
    
    $
    16,679
    
    
    $
    14,137
  3




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited and in thousands, except per share amounts)
 1. Basis of Presentation
  2.  Summary of Significant Accounting Policies
  Revenue Recognition
   Fair Value Measurement
 4




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited and in thousands, except per share amounts)
  3. Warranty Liability
   Three MonthsEnded March 31,2008
    
    
    2007Beginning balance
    
    $
    4,248
    
    
    $
    8,631Increases in reserve
    
    
    1,689
    
    
    
    1,902Decrease charged against reserve
    
    
    (1,226
    )
    
    
    (5,679
    )Ending balance
    
    $
    4,711
    
    
    $
    4,854
 4. Other Comprehensive Income (Loss)
  5




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited and in thousands, except per share amounts)
 Three MonthsEnded March 31,2008
    
    
    2007Net income (loss)
    
    $
    (1,603
    )
    
    $
    (2,768
    )Other comprehensive income (loss):Foreign currency translation effects
    
    
    (1,152
    )
    
    
    (36
    )Unrealized loss on interest rate swap, net of tax
    
    
    (1,969
    )
    
    
    (500
    )Comprehensive income (loss)
    
    $
    (4,724
    )
    
    $
    (3,304
    )
  March 31,
    
    
    December 31,2008
    
    
    2007Foreign currency translation effects
    
    $
    2,636
    
    
    $
    3,788Unrealized loss on interest rate swap, net of tax
    
    
    (4,500
    )
    
    
    (2,531
    )Accumulated other comprehensive income (loss)
    
    $
    (1,864
    )
    
    $
    1,257
 5. Derivative Instruments and Hedging Activities
    Three Months EndedMarch 31, 2008Balance January 1, 2008
    
    $
    (2,531
    )Changes in fair value of derivatives
    
    
    (3,258
    )Deferred income tax provision
    
    
    1,289Balance March 31, 2008
    
    $
    (4,500
    )
  6




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited and in thousands, except per share amounts)
  6. Fair Value
  7. Accounting for Stock-Based Compensation Expense
    8. Net Income (Loss) Per Common Share
  7




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DIRECTED ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited and in thousands, except per share amounts)
   9. Income Taxes
     10. Related Parties
  11. 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, 2007.
 Overview
 (R) (R) (R) (R) (R) (R)
  Critical Accounting Policies and Estimates
   Revenue Recognition
  9




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Results of Operations
  10




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As Reported
    
    
    Reclassification
    
    
    Non-GAAP
    
    
    As ReportedThree Months Ended
    
    
    Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,2008
    
    
    2008
    
    
    2008
    
    
    2007Sales:Security and entertainment product sales, net
    
    $
    57,032
    
    
    $
    
    
    
    $
    57,032
    
    
    $
    61,382Satellite radio product sales, net
    
    
    2,715
    
    
    
    14,865
    
    
    
    17,580
    
    
    
    15,452Net product sales
    
    
    59,747
    
    
    
    14,865
    
    
    
    74,612
    
    
    
    76,834Royalty and other revenues related to
security and entertainment products
    
    
    705
    
    
    
    
    
    
    
    705
    
    
    
    1,060Other revenues related to satellite radio products
    
    
    96
    
    
    
    
    
    
    
    96
    
    
    
    39Royalty and other revenues
    
    
    801
    
    
    
    
    
    
    
    801
    
    
    
    1,099Net sales
    
    $
    60,548
    
    
    $
    14,865
    
    
    $
    75,413
    
    
    $
    77,933Cost of sales:Cost of security and entertainment sales
    
    
    31,144
    
    
    
    
    
    
    
    31,144
    
    
    
    33,295Cost of satellite radio sales
    
    
    
    
    
    
    14,865
    
    
    
    14,865
    
    
    
    13,004Total cost of sales
    
    $
    31,144
    
    
    $
    14,865
    
    
    $
    46,009
    
    
    $
    46,299Security and entertainment gross profit,
including royalty and other revenue
    
    $
    26,593
    
    
    
    
    
    
    $
    26,593
    
    
    $
    29,147Satellite radio gross profit, including other revenue
    
    
    
    
    
    
    
    
    
    
    2,811
    
    
    
    2,487Consolidated gross profit
    
    $
    29,404
    
    
    
    
    
    
    $
    29,404
    
    
    $
    31,634Security and entertainment gross profit margin
    
    
    46.1
    %
    
    
    
    
    
    
    46.1
    %
    
    
    46.7
    %Satellite radio gross profit margin
    
    
    
    
    
    
    
    
    
    
    15.9
    %
    
    
    16.1
    %Consolidated gross profit margin
    
    
    48.6
    %
    
    
    
    
    
    
    39.0
    %
    
    
    40.6
    %
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Net Sales
    11




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Gross Profit and Income from Operations
     Interest Expense
  Provision for (benefit from) Income Taxes
  Liquidity and Capital Resources
  12




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Recent Accounting Pronouncements
  13




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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
  14




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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
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SIGNATURES
  DIRECTED ELECTRONICS, INC.(Registrant)Date: May 8, 2008
    
    By:
Name:
    
    /s/ James E. Minarik

James E. MinarikTitle:
    
    President and Chief Executive OfficerDate: May 8, 2008
    
    By:
Name:
    
    /s/ Kevin P. Duffy

Kevin P. DuffyTitle:
    
    Executive Vice President and Chief Financial Officer
 16




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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