Directed Electronics, Inc.

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Directed Electronics, Inc.

EARLY YEARS

MOVING TO LARGER QUARTERS: 1992

TRIVEST BUYING CONTROL OF FIRM IN 1999

RECAPITALIZATION, SIRIUS DEAL IN 2004

INITIAL PUBLIC OFFERING IN LATE 2005

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

EARLY YEARS

Directed Electronics dates its beginnings to 1982, when a bankrupt electronics firm was acquired by Darrell and Kathy Issa. Darrell Issa was a third-generation Lebanese-American who had dropped out of high school at the age of 17 to join the U.S. Army, receiving electronics training to be a bomb disposal technician and later earning a master’s degree in business while on the Army payroll. After being discharged in 1980 and getting married, he drew on his training to cofound a small electronics-manufacturing firm, A.C. Custom, with his former scoutmaster. In 1982 Issa and his wife took control of the business and also bought one of its bankrupt customers, Directed Electronics, Inc. (DEI).

During his decade in the service Issa and an older brother had allegedly been involved with automobile theft (Issa denied the allegations; his brother was later convicted), and such experiences ironically inspired a new business direction. Through DEI Issa soon began to produce antitheft devices, digital keypads, and motion sensors as original equipment for carmakers including BMW, Mazda, General Motors, and Ford of Australia.

With the car alarm business taking off, in 1984 Issa sold A.C. Custom and two years later he moved with DEI to the San Diego area. He had intended to merge with a home security products manufacturer there, but the deal fell through when the firms’ business models turned out to be incompatible.

In 1986 DEI changed direction from making alarms as original equipment to producing its own line of aftermarket models. Over the next several years such brands as Viper, Steal Stopper, and Hornet, with patented features including a shock sensor, would make DEI the largest U.S. manufacturer of aftermarket alarms. In 1990 the company also introduced a remote start system, which allowed users to turn on their vehicle from inside the house. DEI had annual sales of approximately $15 million.

The firm’s products were largely sold through car audio stores, where employees had the skills needed to install them. Unlike some of its competitors, the company paid close attention to customer care, and its sales team was instructed to make sure that dealers provided good follow-up service. The price of a DEI security system ranged from $200 to $600.

MOVING TO LARGER QUARTERS: 1992

In early 1992 DEI more than tripled its available workspace by moving into a 66,000-square-foot facility. The company also filed suit against Chrysler Corporation, which had introduced a new limited-edition car called the Dodge Viper. DEI had been using its Viper trademark on clothing, watches, and coffee mugs, and took action when it discovered that the automaker was planning a similar promotional campaign.

In December a new car alarm option called Back Talk was introduced that played a recorded warning (voiced by Issa himself) which was intended to startle potential thieves. The company also settled its suit against Chrysler, agreeing to license the use of the Viper name to the automaker for an undisclosed amount of money. For 1992 DEI had record sales of $47 million and shipped 400,000 systems, 35 percent more than the year before. In addition to its Vista, California, headquarters, the firm also had operations in Ohio and Connecticut.

In 1993 the company introduced several new products, including four Python midpriced car security systems; Failsafe, which was intended to shut down a car after a theft had taken place; Soft Chirp, a quieter overnight alarm; and Sound-Off, a sound-deadening material that could be installed under vehicles to dampen road noise. DEI had cornered 42 percent of the vehicle security market, and in 1994 Issa was honored by Inc. magazine as its “Entrepreneur of the Year.”

In 1996 the company diversified yet again by introducing the Directed Audio line of automotive speakers, amplifiers, and installation products. When combined with the various offerings in the Viper, Python, Sidewinder, Hornet, and Wasp car security lines, the firm would offer a total of 700 different products. DEI’s share of the competitive auto-security products market was slipping, however, having fallen to 27 percent.

In the fall of 1997 DEI was granted $177,000 by the California Employment Training Panel to cover the costs of a two-year program to train the majority of its 133 workers in team-building, customer service, automation, and technical skills. However, DEI President and CEO Issa had begun campaigning for the Republican nomination for U.S. senator by lambasting “big government,” and after being stung by critics for seeking the handout, he announced the company would not accept it.

The firm was embroiled in a lengthy legal battle with Code-Alarm Inc. over claims of patent infringement by each. In June 1995 the latter had been ordered to pay DEI $5.9 million for violating a patent on a shock-sensor device, while a second suit alleging a similar violation was later settled in DEI’s favor for $2 million. In the spring of 1998 Code-Alarm’s claim that DEI had infringed its starter shut-off patent was dismissed and the patent itself declared invalid, and soon afterward Code-Alarm was ordered to pay DEI $10 million to settle yet another suit over shock-sensor technology, ending the battle between the companies.

COMPANY PERSPECTIVES

Directed Electronics, Inc., holds the number one market share positions in premium home theater loudspeakers, consumer branded vehicle security and remote start systems, and aftermarket satellite radio receivers. Directed is also a major supplier of mobile audio and video whose portfolio of well-known brands includes Viper, Python, Polk Audio, Definitive Technology, Orion, Precision Power, Clifford, Autostart and Astroflex.

TRIVEST BUYING CONTROL OF FIRM IN 1999

Though Issa had lost his bid for the Republican Senate nomination in 1998, a year later he ran for the U.S. House of Representatives, and that December he sold 80 percent of DEI to private equity firm Trivest, Inc., for approximately $160 million. The sale had been made in part to reduce the appearance of conflict of interest, as well as to give DEI funds to make acquisitions. Issa would remain president and CEO of the firm, which had annual sales of about $90 million.

In July 2000 DEI bought the assets of bankrupt Southern California firm Clifford Electronic, Inc., which made the Clifford and Avital brand car alarms, positioned at the high end of the market. Its $42 million in sales boosted DEI’s share of the aftermarket car alarm sector back up to 40 percent. Only 20 of Clifford’s 150 employees would be retained, with their work moving to DEI’s 102,000-square-foot facility in Vista. In addition to aftermarket products, the firm was also producing items for car manufacturers’ own brands.

In November 2000 Darrell Issa was elected to the U.S. Congress to represent California’s 48th District, and he immediately stepped down as head of DEI. His replacement would be Jim Minarik, the president and CEO of vehicle entertainment systems maker Clarion Corp. of America. Minarik received an equity stake in DEI as part of his compensation package.

In the spring of 2001 DEI partnered with Seaguard Electronics to introduce the Valet Car-Com 2, a twoway Global Positioning System (GPS) vehicle location service, which could track stolen vehicles. It required payment of a subscription fee. November saw the firm acquire ADS Technologies, Inc., manufacturer of car audio brands a/d/s, Precision Power, and Orion. ADS head Kurien Jacob was assigned by DEI to run its new car audio unit, based like ADS in Phoenix. The firm was also preparing to offer in-car video screens and DVD players under the Directed Video brand.

In early 2002 the company allied with Ford Motor Co. affiliate Wingcast and auto parts giant Delphi (which would supply components) to develop another new digital GPS-based antitheft tracking device, which was operated via the Internet and offered two-way wireless remote control of vehicle functions. Wingcast would supply live operators to facilitate use of the service. In 2003 an additional web-linked GPS car security system, Directrack, was introduced. It was an option in DEI’s Viper, Python, Clifford, and Automate car security lines.

In August 2003 the company settled lawsuits against six competitors who agreed to license the disputed technology. At year’s end a partnership was formed with Clarion Corp. of America, which would launch the DEI-manufactured Ungo Pro Security product line the following year. Another partnership was formed in the spring of 2004 with famed auto customization firm West Coast Customs (featured on MTV’s hit “Pimp My Ride”), whose line of branded car audio and video products would be produced by DEI.

RECAPITALIZATION, SIRIUS DEAL IN 2004

In May 2004 a $185 million recapitalization of the firm was completed via Wachovia, CIBC World Markets, and Capital Strategies Ltd., with a special $109.4 million dividend paid to investors and the remainder used to pay down debt. In August the company signed a deal with satellite radio broadcaster Sirius to produce and distribute portable radio receivers including the Sirius Sportster that could be used in vehicles and elsewhere.

In September 2004 DEI acquired Definitive Technology LLP, a 14-year-old maker of high-quality home audio speakers, for close to $50 million. Its key management personnel were retained, and Definitive would form the basis of DEI’s new Home Audio Division. For 2004 the company had sales of $206 million, with electronics superstore chain Best Buy accounting for one-fifth of the total.

In early 2005 DEI signed an agreement to become the exclusive supplier of vehicle security equipment to 600-store retail chain Circuit City, which some months earlier had dropped it after a long stretch selling its products. It also opened a new $500,000 educational facility called “The Snake Pit” which offered training for installers.

KEY DATES

1982:: Darrell Issa acquires control of Directed Electronics in Cleveland.
1986:: Company moves to San Diego, California.
1990:: Remote start product is introduced; firm becomes top maker of aftermarket car alarms.
1996:: Car audio products debut.
1998:: Firm is awarded $10 million to end longrunning patent suit with Code-Alarm.
1999:: Issa sells 80 percent of company to Trivest.
2000:: Firm buys bankrupt car alarm maker Clifford Electronics.
2001:: Car audio manufacturer ADS Technologies is acquired.
2002:: Mobile video and GPS security products are added.
2004:: Company buys speaker maker Definitive Technology; sales of Sirius radios begin.
2005:: Company goes public on the NASDAQ.
2006:: Acquisition of Polk Audio makes firm number one U.S. home speaker maker.

DEI’s Vista, California, facility was now 180,000 square feet in size. Three-quarters of the firm’s staff of 240 worked there, designing, testing, and shipping products that were manufactured overseas, primarily in Asia. The company also maintained smaller facilities in Louisville, Kentucky, and the United Kingdom, and operated a 24-hour call center to assist installers, which handled 17,000 to 33,000 calls per month. A database of 5,000 vehicle electronics system blueprints had been created to assist them with installation.

Acquisitions continued in July 2005 with the purchase of DesignTech International’s line of vehicle security products for an undisclosed sum. New products announced during the year included a portable audio/video media player in the Directed Mobile Media line, priced at $449, and iPod and Sirius Sportster docking stations.

INITIAL PUBLIC OFFERING IN LATE 2005

In December 2005 the firm made an initial public offering (IPO) of stock on the NASDAQ, selling 9.38 million shares at $16 to net $84.4 million. The money was primarily used to pay down debt. Trivest and other selling shareholders including Issa kept about half the proceeds.

The company’s sales grew by 60 percent during 2005 to top $304 million, with net earnings reaching nearly $14 million. Sirius satellite radio products accounted for $121 million, or 39 percent of the total. During the year the company had also begun selling do-it-yourself remote start products through retailers including AutoZone, Advance Auto, and NAPA.

In early 2006 a new portable navigation system using GPS technology was introduced, priced at $699, which appeared with some 150 other new products at the annual Consumer Electronics Show. In May the company bought the nonmanufacturing assets of Astroflex, Inc., a 17-year-old Canadian remote vehicle starter company with sales of approximately $5.5 million, and in July the Federal Communications Commission notified the firm that two of its Sirius receivers were out of compliance with regulations. They were quickly redesigned to correct the problem.

In August DEI won a bidding war to buy the third largest home and vehicle audio equipment maker in the United States, Polk Audio, agreeing to pay $136 million. When Polk’s $86 million in sales were combined with those of Definitive Technology, DEI would be the top home audio speaker maker in the country. Polk, founded in 1972, would continue to be based in Baltimore, Maryland. The sale was funded by a new $141 million loan from Canadian Imperial Bank of Commerce and JPMorgan Chase. In the latter half of the year DEI also purchased its longtime Canadian distributor and top Canadian remote starter maker Autostart, while introducing HD Digital Radio receivers for car and home use, priced at between $250 and $300.

For 2006 revenues leaped to nearly $438 million, with a net profit of $21 million. Though Sirius equipment accounted for half the total, such sales were leveling off as regulators sorted out a proposed merger between Sirius and arch-rival XM, and DEI announced it expected them to decline as much as 22 percent over the next year.

In early 2007 the firm introduced a number of new products including an enhanced portable entertainment system and new overhead video monitors for cars, which featured built-in DVD players. In March a new brand, Polk Audio Designs, was introduced, which would be used for lower-priced products such as iPod accessories and radios. In the summer the firm’s Snake Pit training center added Home Theater Residential Integration courses.

After 25 years Directed Electronics, Inc., had grown to become the leading maker of aftermarket car security systems in the United States, as well as the top producer of satellite radio receivers and home speakers. It also made a variety of other security and home and vehicle entertainment products, and with its management still seeking acquisitions, continued growth looked certain.

Frank Uhle

PRINCIPAL SUBSIDIARIES

DEI Sales, Inc.; DEI Headquarters, Inc.; DEI International, Inc.; Polk Holding Corp.; Polk Audio, Inc.; Britannia Investment Corp.; Directed Electronics Hong Kong Ltd.; Directed Electronics Canada, Ltd.; 436678 Canada, Inc.; 4366859 Canada Inc.

PRINCIPAL COMPETITORS

Audiovox Corp.; Clarion Corp. of America; Rockford Corp.; Klipsch LLC; Bose Corp.; Harman International Industries, Inc.; Alpine Electronics of America, Inc.; Mitek Corp.; JL Audio, Inc.; Audiobahn, Inc.; Crimestopper Security Products, Inc.; Paradigm Electronics, Inc.; B&W Group Ltd.; Sanyo Electric Co., Ltd.; Rosen Entertainment Systems; Stillwater Designs; Delphi Corp.