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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-127823
9,375,000 Shares
(DIRECTED ELECTRONICS LOGO)
Common Stock
 
       This is an initial public offering of shares of common stock of Directed Electronics, Inc.
       Directed Electronics is offering 5,937,500 of the shares to be sold in the offering. The selling shareholders identified in this prospectus are offering an additional 3,437,500 shares. Directed Electronics will not receive any of the proceeds from the sale of the shares being sold by the selling shareholders.
       Prior to this offering, there has been no public market for the common stock. The common stock has been approved for quotation on the Nasdaq National Market under the symbol “DEIX.”
       See “Risk Factors” beginning on page 9 to read about factors you should consider before buying shares of the common stock.
 
       Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per Share   Total
         
Initial public offering price
  $ 16.00     $ 150,000,000  
Underwriting discount
  $ 1.12     $ 10,500,000  
Proceeds, before expenses, to Directed Electronics
  $ 14.88     $ 88,350,000  
Proceeds, before expenses, to the selling shareholders
  $ 14.88     $ 51,150,000  
       To the extent the underwriters sell more than 9,375,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,406,250 shares from the selling shareholders at the initial public offering price less the underwriting discount.
 
       The underwriters expect to deliver the shares against payment in New York, New York on December 21, 2005.
Goldman, Sachs & Co. JPMorgan
CIBC World Markets
      Wachovia Securities
Citigroup
 
Prospectus dated December 15, 2005.


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Directed Electronics, Inc. Graphic

 


 

       No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
 
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       Unless otherwise noted, the industry and market data used in this prospectus were obtained from the Consumer Electronics Association. Certain data is also based on our good faith estimates, which are derived from our review of internal surveys and independent sources.
       Directed®, Viper®, Clifford®, Python®, Orion®, Precision Power®, a/d/s/ ®, Xtreme®, Definitive Technology®, Mythos®, ProCinema®, SuperCube®, Avital®, Valet®, Hornet®, Boa®, Automate®, No One Dares Come Close®, and DesignTech® are registered United States trademarks of Directed Electronics, Inc. or one of its wholly owned subsidiaries, and The Science of Securitytm are unregistered trademarks of Directed Electronics, Inc. or one of its wholly owned subsidiaries. Other trademarks, service marks, and trade names appearing in this prospectus are the property of their respective holders.

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PROSPECTUS SUMMARY
       This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors” and our financial statements and related notes.
Our Business
       We are the largest designer and marketer of consumer branded vehicle security and convenience systems in the United States based on sales and a major supplier of home and car audio, mobile video, and satellite radio products. Our strong brand and product portfolio, extensive and highly diversified distribution network, and “asset light” business model have fueled the revenue growth and profitability of our company.
       As the sales leader in the vehicle security and convenience category, we offer a broad range of products, including security, remote start, hybrid systems, GPS tracking, and accessories, which are sold under our Viper, Clifford, Python, and other brand names. Our car audio products include speakers, subwoofers, and amplifiers sold under our Orion, Precision Power, Directed Audio, a/d/s/, and Xtreme brand names. We also market a variety of mobile video systems under the Directed Video and Automate brand names. In 2004, we expanded our presence in the home audio market when we acquired Definitive Technology, adding to our established a/d/s/ brand of premium loudspeakers. In August 2004, we began marketing and selling certain SIRIUS-branded satellite radio products, with exclusive distribution rights for such products to our existing U.S. retailer customer base.
       Our products are sold through numerous channels, including independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, and car dealers. In 2004, we sold to approximately 3,400 customers, representing over 7,500 storefronts. We are the exclusive supplier of professionally-installed vehicle security products to over 45% of our U.S. retailers. We have also built a strong presence in leading national and regional electronics retailers, including Best Buy, Circuit City, Magnolia Audio Video, and Audio Express. We also sell our vehicle security, convenience, and mobile video products through car dealers, and we recently entered the mass merchant and automotive parts retailer channels with do-it-yourself remote start and convenience products. Our international sales comprised approximately 13% of our 2004 gross product sales, and our products are sold in 73 countries throughout the world.
       We have a proven track record of enhancing our existing products and developing innovative new products, as evidenced by the 43 Consumer Electronics Association innovation awards we have earned. We hold an extensive portfolio of patents, primarily in vehicle security and also in audio. We license a number of these patents to leading automobile manufacturers and electronics suppliers, which provides us with an additional source of income. We outsource all of our manufacturing to third parties located primarily in Asia. We believe this manufacturing strategy supports a scalable business model, reduces our capital expenditures, and allows us to concentrate on our core competencies of brand management and product development.
Our Competitive Strengths
       We believe that the following key competitive strengths will contribute to our continued success:
  •  strong market positions;
 
  •  broad portfolio of established brands;
 
  •  highly diverse customer base;
 
  •  attractive retailer proposition;

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  •  strong track record of growth and operating profit;
 
  •  scalable, outsourced manufacturing model; and
 
  •  strong executive team with experience managing growth.
Our Strategy
       We intend to further enhance our position as a leading designer and marketer of innovative, branded consumer electronics products. Key elements of our strategy include the following:
  •  leverage our successful multi-brand strategy;
 
  •  increase the penetration of our products within our existing customer network;
 
  •  develop new and enhanced products;
 
  •  expand our distribution channels; and
 
  •  pursue selective acquisition opportunities.
Our History
       We were founded in 1982 by Darrell and Katherine Issa. During our first 17 years, we established our position in the security and convenience industry by introducing the Viper brand and developing strong supply relationships with an extensive distribution network of local and national specialty retailers. We also diversified beyond security, introducing our first car audio products in 1996.
       We were acquired in December 1999 by investment funds affiliated with Miami-based Trivest Partners, L.P., which we collectively refer to as “Trivest” in this prospectus. Following the completion of this offering, Trivest will beneficially own approximately 44.3% of our common stock. In 2000, our founder, Darrell Issa, was elected to the United States House of Representatives and, as a result, Trivest hired James E. Minarik to be our chief executive officer. During Trivest’s ownership and under Mr. Minarik’s leadership, we have significantly broadened our product portfolio both organically (audio, mobile video, satellite radio, GPS tracking) and through the acquisitions of Clifford Electronics in 2000; ADS Technologies in 2001; and Definitive Technology in 2004.
       In June 2004, we completed a recapitalization in which we raised debt proceeds totaling approximately $185.0 million. In the recapitalization, we entered into a new credit agreement for a total of $136.0 million, consisting of a $111.0 million term loan and an undrawn $25.0 million revolving loan. We also entered into a subordinated note agreement for a total of $74.0 million consisting of $37.0 million of senior subordinated notes and $37.0 million of junior subordinated notes. The proceeds from these borrowings, totaling approximately $185.0 million, plus approximately $10.5 million in cash, were used to (1) repay approximately $78.5 million of outstanding debt and accrued interest, (2) pay approximately $6.3 million of costs, fees, and expenses associated with the recapitalization, (3) pay approximately $1.3 million under an equity participation agreement with our chief executive officer, and (4) pay a special dividend to shareholders and warrantholders of approximately $109.4 million.

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Risk Factors
       There are a number of risks and uncertainties that may affect our financial and operating performance. You should carefully consider the risks discussed in “Risk Factors” before investing in our common stock, which include the following:
  •  the competitive nature of the branded consumer electronics industry;
 
  •  our ability to improve our products and develop new products;
 
  •  our dependence upon certain key customers;
 
  •  any adverse developments affecting SIRIUS Satellite Radio;
 
  •  our ability to service our debt obligations; and
 
  •  changes in discretionary consumer spending.
Our Corporate Information
       We are a Florida corporation with our principal executive offices at 1 Viper Way, Vista, California 92081. Our telephone number is (760) 598-6200. Our primary website is located at www.directed.com. The information contained on our websites or that can be accessed through our websites does not constitute part of this prospectus.

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The Offering
Common stock offered:
 
     By us 5,937,500 shares
 
     By the selling shareholders 3,437,500 shares
 
     Total common stock offered 9,375,000 shares
 
Common stock to be outstanding after this offering 24,769,197 shares
 
Use of proceeds We estimate that our net proceeds from this offering will be approximately $84.4 million after deducting the underwriting discount and estimated offering expenses. We intend to use approximately $76.3 million of such net proceeds to prepay our subordinated notes and accrued interest, which includes a $740,000 prepayment premium. We intend to use the remaining net proceeds, together with available cash or revolving credit borrowings, to terminate certain sale bonus agreements, our management agreement, and our associate equity gain program.
 
We will not receive any proceeds from sales by the selling shareholders in this offering.
 
Nasdaq National Market Symbol DEIX
 
Risk Factors See “Risk Factors” immediately following this prospectus summary to read about factors you should consider before buying shares of our common stock.
       The number of shares of common stock to be outstanding after this offering is based upon our outstanding shares as of September 30, 2005. These shares:
  •  include 1,420,037 shares of common stock issuable upon the exercise of warrants outstanding at September 30, 2005 at a nominal exercise price;
 
  •  exclude 1,005,685 shares subject to restricted stock unit awards to be granted in connection with this offering; and
 
  •  exclude 1,744,315 additional shares of common stock reserved for issuance under our incentive compensation plan.
       Unless otherwise indicated, all information in this prospectus reflects an amendment to our articles of incorporation that was effected on December 1, 2005. Pursuant to the amendment, each share of our previously authorized Class A common stock and Class B common stock was converted into 3.27 shares of a single class of new common stock.

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Summary Consolidated Financial and Other Data
       The following table sets forth our summary consolidated financial data. The pro forma statement of operations data gives effect to our June 2004 recapitalization, our September 2004 acquisition of Definitive Technology, and this offering as if all of such events were consummated January 1, 2004. The financial statements as of and for the years ended December 31, 2002, 2003, and 2004 have been restated, as discussed in Note 2 to our financial statements. You should read this information in conjunction with our financial statements, including the related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the financial statements of Definitive Technology, and “Unaudited Pro Forma Financial Data” included elsewhere in this prospectus.  
       The as adjusted column of the balance sheet data reflects our sale of common stock in this offering at the initial public offering price of $16.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us, and the application of the proceeds as described under “Use of Proceeds.”
                                                           
    Restated            
         
        Nine Months Ended
        September 30,
         
    Year Ended December 31,    
        (Unaudited)
        Pro       Pro
        Forma       Forma
    2002   2003   2004   2004   2004   2005   2005
                             
                (Unaudited)            
    (In thousands, except per share data)
Consolidated Statement of Operations Data:
                                                       
Net sales
  $ 123,709     $ 131,765     $ 189,869 (a)   $ 205,940 (a)   $ 109,791 (a)   $ 169,037     $ 169,037  
Cost of sales
    61,960       69,907       108,525       114,907       58,803       108,305       108,305  
                                           
Gross profit
    61,749       61,858       81,344       91,033       50,988       60,732       60,732  
Total operating expenses
    30,470       31,782       41,105       46,173       28,113       34,991       34,527  
                                           
Income from operations
    31,279       30,076       40,239 (a)     44,860 (a)     22,875 (a)     25,741       26,205  
Interest expense, net (b)
    9,723       9,091       16,523       13,686       11,275       15,647       8,837  
                                           
Income before provision for income taxes
    21,556       20,985       23,716       31,174       11,600       10,094       17,368  
Provision for income taxes
    8,793       8,514       9,754       12,788       4,773       4,109       7,069  
                                           
Net income
    12,763       12,471       13,962       18,386       6,827       5,985       10,299  
Net income attributable to participating securityholders
    19       63       138             66       74        
                                           
Net income available to common shareholders
  $ 12,744     $ 12,408     $ 13,824     $ 18,386     $ 6,761     $ 5,911     $ 10,299  
                                           
Net income per
common share:
                                                       
 
Basic
  $ 1.00     $ 0.97     $ 0.88     $ 0.85     $ 0.46     $ 0.32     $ 0.42  
                                           
 
Diluted
  $ 0.79     $ 0.76     $ 0.80     $ 0.75     $ 0.41     $ 0.32     $ 0.40  
                                           
 
Other Data:
                                                       
Adjusted EBITDA (c)
  $ 35,611     $ 34,491     $ 40,689     $ 45,384     $ 21,849     $ 30,202     $ 30,127  
Capital expenditures
    1,269       1,520       1,317       1,456       679       1,052       1,052  
Depreciation
    475       723       943       1,034       670       886       886  
Amortization of intangibles
    3,286       3,287       3,505       4,040       2,462       3,036       3,036  
Cash taxes paid (d)
    2,482       6,254       3,937       (d)       3,770       6,677       (d)  
Cash interest paid (e)
    9,556       7,210       10,141       8,682       5,552       14,572       8,213  

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    As of
    September 30, 2005
     
    Actual   As Adjusted
         
    (In thousands)
Consolidated Balance Sheet Data:
               
Cash and cash equivalents
  $ 3,497     $ 3,754  
Total assets
    307,032       314,603  
Total debt
    240,610       166,610  
Total shareholders’ equity
    5,986       87,557 (f)
(a) Includes $6.5 million of royalty revenue from a one-time payment from a major automobile manufacturer for a non-exclusive license to use certain of our patented technology. The only expense associated with this payment was a $670,000 special bonus recorded as operating expense.
 
(b) In connection with our June 2004 recapitalization, we incurred approximately $185.0 million of new indebtedness and paid off a total of $76.6 million of existing debt. In addition, we paid a special dividend to shareholders and warrantholders of approximately $109.4 million. Due to the repayment of the existing debt, we wrote off $1.1 million of deferred financing costs and we wrote off $1.7 million of unamortized discount related to the warrants that were issued with the existing debt.
 
(c) In evaluating our business, we consider and use Adjusted EBITDA as a supplemental measure of our operating performance. We define EBITDA as net income before net interest expense, income tax expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus expenses (minus gains) that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA to measure our performance when determining management bonuses, and to measure the performance of potential acquisition candidates. For example, we used EBITDA, as adjusted for certain compensation expenses, rebates, and receivables insurance, to evaluate our acquisition of Definitive Technology in 2004. In addition, we adjust for these expenses in measuring our performance under our senior credit facility. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Discussion” for a discussion of our use of EBITDA and Adjusted EBITDA and certain limitations of EBITDA and Adjusted EBITDA as financial measures. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.

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       Adjusted EBITDA is calculated as follows for the periods presented:
                                                         
    Restated   Nine Months Ended
        September 30,
         
    Year Ended December 31,    
        (Unaudited)
        Pro       Pro
        Forma       Forma
    2002   2003   2004   2004   2004   2005   2005
                             
                (Unaudited)            
    (In thousands)
Net income
  $ 12,763     $ 12,471     $ 13,962     $ 18,386     $ 6,827     $ 5,985     $ 10,299  
Plus: interest expense, net
    9,723       9,091       16,523       13,686       11,275       15,647       8,837  
Plus: income tax expense
    8,793       8,514       9,754       12,788       4,773       4,109       7,069  
Plus: depreciation and amortization
    3,761       4,010       4,448       5,074       3,132       3,922       3,922  
                                           
EBITDA
    35,040       34,086       44,687       49,934       26,007       29,663       30,127  
Plus: equity participation payment (1)
                1,280       1,280       1,280              
Plus: management fees (2)
    571       405       552             392       539        
Less: one-time license fee, net of expenses (3)
                5,830       5,830       5,830              
                                           
Adjusted EBITDA
  $ 35,611     $ 34,491     $ 40,689     $ 45,384     $ 21,849     $ 30,202     $ 30,127  
                                           
 
 
  (1)  We made this payment under an equity participation agreement with our chief executive officer in connection with our June 2004 recapitalization. This payment reduced 2004 net income and pro forma net income, but we do not consider this payment reflective of our ongoing operations. Does not reflect an additional non-recurring, pre-tax charge of approximately $25.6 million that will result from our grant of restricted stock units and payment of approximately $10.3 million in connection with the termination of certain sale bonus, management, and associate equity gain program arrangements concurrently with this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook” and “Unaudited Pro Forma Financial Data.”
 
  (2)  In connection with this offering, our management agreement with Trivest Partners, L.P. will be terminated. For more information, see “Certain Relationships and Related Party Transactions — Management and Advisory Agreements.”
 
  (3)  Reflects a non-refundable, up-front payment from a major vehicle manufacturer for a non-exclusive license to use certain of our patented technology, net of a special $670,000 bonus paid to all employees.
(d) Cash taxes paid differs from the book provision for income taxes primarily because of the difference between the tax treatment and deductibility of our intangible assets and goodwill and the GAAP treatment of these items. Assuming continuing profitability and an effective tax rate of 40.7%, our tax-deductible goodwill and intangible asset amortization will generate approximately $4.1 million of annual incremental after-tax cash flow savings through 2013, with reduced benefits thereafter through 2019 or as a result of an impairment or sale of goodwill or intangible assets. Cash taxes paid are generally higher during the first half of the year relative to our provision for income taxes for that period due to the payment during that period of our tax return extension payment for the prior year. Pro forma cash taxes paid are not presented because Definitive Technology was a disregarded entity for tax purposes and the taxes were paid by the owners on an individual basis and there is no basis for determining when corporate-level taxes would have been paid.

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(e) Cash interest paid differs from interest expense, net due to non-cash interest expense included in interest expense, net. This non-cash interest is related to the amortization of debt issuance costs related to our various debt financings and the amortization of the loan discount related to the subordinated notes that we paid off in 2004, including write-offs of debt issuance costs upon early repayment of debt.
 
(f) Reflects a non-recurring, pre-tax charge to earnings (which would have been approximately $3.4 million as of September 30, 2005) that will result from a prepayment premium and a write-off of deferred financing costs in connection with our prepayment of subordinated notes with a portion of the proceeds of this offering, and an additional non-recurring, pre-tax charge of approximately $25.6 million that will result from our grant of restricted stock units and payment of $10.3 million in connection with the termination of certain sale bonus, management, and associate equity gain program arrangements concurrently with this offering. Does not reflect a non-cash, pre-tax charge for stock-based compensation expense of approximately $2.1 million that will be recognized upon the closing of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook” and “Unaudited Pro Forma Financial Data.”

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RISK FACTORS
       You should carefully consider the following risks and other information set forth in this prospectus before deciding to invest in shares of our common stock. If any of the events or developments described below actually occur, our business, financial condition, and results of operations may suffer. In that case, the trading price of our common stock may decline and you could lose all or part of your investment.
Risks Related to Our Business
We operate in the highly competitive branded consumer electronics industry.
       In certain markets, such as home audio and satellite radio, we compete directly or indirectly with a large number of competitors, including some of the world’s most recognized branded consumer electronics companies. Many of these companies have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess, which afford them competitive advantages over us. Further, the mobile video market is intensely competitive and is characterized by price erosion, rapid technological change, and competition from major domestic and international companies. OEMs offer certain products with which we compete, such as car audio and mobile video, and could attempt to offer additional competing products, or our customers could determine to adopt a private label sales strategy, either of which could reduce our sales.
       Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
  •  our success in designing and developing new or enhanced products;
 
  •  our ability to address the needs of our retailers and consumers;
 
  •  the pricing, quality, performance, reliability, features, ease of installation and use, and diversity of our products;
 
  •  the quality of our customer service; and
 
  •  product or technology introductions by our competitors.
       The success of competing products or technologies could substantially reduce the demand for our products and cause our sales to decline.
If we do not continue to improve our core products or develop new products that meet the constantly changing demands of our customers, our sales may decline.
       Our ability to succeed is based in large part on meeting the demands of the branded consumer electronics market. We must regularly improve our core products and introduce new products and technologies that gain market acceptance, such as our introduction of two-way security and convenience devices, mobile video, and satellite radio products in recent years. Our future operating results will depend to a significant extent on our ability to provide products that compare favorably on the basis of time to introduction, cost, and performance with the products of our competitors.
       We may experience difficulties that delay or prevent the development, introduction, or market acceptance of new products and technologies. Some or all of our products may not achieve commercial success as a result of technological problems, competitive cost issues, and other factors. Our delivery schedules for new products may be delayed due to manufacturing or other difficulties. In addition, our retailers may determine not to introduce or may cease to sell our new products for a variety of reasons, including the following:
  •  unfavorable comparisons with products introduced by others;
 
  •  superior technologies developed by our competitors;

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  •  price considerations; and
 
  •  lack of anticipated or actual market demand for our products.
       We may be unable to recover any expenditures we make relating to one or more new products or technologies that ultimately prove to be unsuccessful for any reason. In addition, any investments or acquisitions made to enhance our technologies may prove to be unsuccessful.
We depend upon certain key customers for a large portion of our sales, and the loss of any of those customers could harm our business.
       For the year ended December 31, 2004 and the nine months ended September 30, 2005, sales to our top five customers, including our international distributors, accounted for 31.1% and 35.5% of our net sales, respectively, of which Best Buy (including its subsidiary Magnolia Audio Video) accounted for 19.6% and 20.7% of our net sales, respectively. In addition, Circuit City accounted for 9.9% of our net sales for the nine months ended September 30, 2005, and we expect that Circuit City will account for more than 10% of our net sales for the year ending December 31, 2005. With the growth of the satellite radio market, we expect our percentage of sales to Best Buy and Circuit City to increase in the future, increasing our dependence on those customers. Reliance on key customers may make fluctuations in revenue and earnings more severe and make business planning more difficult.
       Our customers do not provide us with firm, long-term volume purchase commitments. As a result, customers can cancel purchase commitments or reduce or delay orders on relatively short notice. Any material delay, cancellation, or reduction of orders from any of our key customers could harm our business, financial condition, and results of operations. The adverse effect would be more pronounced if our other customers did not increase their orders or if we were unsuccessful in generating new customers.
Adverse developments affecting SIRIUS Satellite Radio could cause our sales to decline and harm our business.
       In August 2004, we began selling, marketing, and distributing products for SIRIUS Satellite Radio, a subscription-based satellite radio company that provides content to compatible receivers, including the SIRIUS-branded receivers we distribute. The sale of SIRIUS products currently accounts for a significant (approximately 26% for the nine months ended September 30, 2005) and growing portion of our gross product sales. Our agreement with SIRIUS expires in April 2008 unless extended, and our business would be harmed and our sales would decline if it is not extended. The agreement also permits SIRIUS to distribute SIRIUS products directly to consumers.
       The rapid growth in SIRIUS’s subscriber base that has supported the growth in our SIRIUS product sales may not continue.
       The satellite radio business is a relatively new and unproven business, and SIRIUS Satellite Radio has incurred substantial losses since its inception. The satellite radio market in general, and SIRIUS in particular, may fail to develop and may never reach profitability, which could cause SIRIUS to discontinue its business. If SIRIUS is forced to discontinue its operations, our sales would decline and our business would be harmed. In addition, SIRIUS could in the future change its hardware distribution strategy, including entering into arrangements with one or more of our competitors in addition to or instead of us, or could determine to sell the hardware itself.
       To increase satellite radio subscriptions, satellite radio receivers are being heavily promoted by SIRIUS, XM Radio, and retailers at reduced retail prices. While our performance is based on negotiated wholesale prices and manufacturing costs, we must generate higher unit sales volume to maintain revenue and profits from these products in this promotional environment.

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Our pricing and promotional practices could be challenged.
       We maintain various arrangements with our customers concerning pricing and promotional activities. In most cases, these arrangements have been in effect for a number of years. Although these arrangements have not been challenged in the past, federal or state regulatory authorities or private parties could challenge them in the future. Any such challenge could result in significant litigation costs or judgments against us. We have reviewed our customer arrangements and we are making certain changes to them in order to replace our prior rebate program with a co-operative marketing allowance program and to make clear that our dealers do not agree to sell our products at specified prices. We cannot predict whether or to what extent any such changes might adversely affect our relationships with our customers and our operating performance.
We rely on contract manufacturers, and their failure to maintain satisfactory delivery schedules could increase our costs, disrupt our supply chain, and result in our inability to deliver our products, all of which would adversely affect our operating results.
       All of our products are manufactured and assembled by outsourcing partners, which are primarily located in China, Taiwan, and South Korea. Our largest supplier is Nutek Corporation, a private Taiwanese company with manufacturing operations in Taiwan and China. Nutek accounts for a significant portion of our total purchases and a substantial majority of our security and convenience products. We do not have long-term (more than one year) arrangements with any of our contract manufacturers that guarantee production capacity or prices. Certain of our contract manufacturers serve other customers, a number of which have greater production requirements than we do. As a result, our contract manufacturers could determine to prioritize production capacity for other customers or reduce or eliminate services for us on short notice. Qualifying new manufacturers is time-consuming and could result in unforeseen manufacturing and operational problems. The loss of our relationships with our contract manufacturers or their inability to conduct their manufacturing services for us as anticipated in terms of cost, quality, and timeliness could adversely affect our ability to fill customer orders in accordance with required delivery, quality, and performance requirements. Additionally, rapid increases in orders from any of our larger customers could cause our requirements to exceed the capacity of our contract manufacturers. If any of these events were to occur, the resulting decline in revenue would harm our business.
Shortages of components and materials may delay or reduce our sales and increase our costs.
       The inability of our contract manufacturers to obtain sufficient quantities of components and other materials, especially LCD panels and controller chips, necessary to make our products could result in delayed sales or lost orders. We may be faced with increased costs, supply interruptions, and difficulties in obtaining certain components. Materials and components for some of our major products may not be available in sufficient quantities to satisfy our needs because of shortages of these materials and components. Any supply interruption or shortages could harm our reputation with our customers and may result in lost sales opportunities.
A disruption in our ability to import our products could increase our costs, cause our sales to decline, and harm our business.
       Substantially all of our products are manufactured outside of the United States. Transportation delays or interruptions, such as those caused by labor strikes, natural disasters, terrorism, inspection delays, or import restrictions, could impede our ability to timely deliver our products to our customers. These interruptions could also increase our costs, if, for example, we were forced to ship our products from our suppliers via air rather than via ocean carrier.
       Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, limitations on imports or exports, or the expropriation of private enterprises also

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could have a material adverse effect on us or our suppliers. In addition, U.S. trade policies, such as the granting or revocation of “most favored nation” status and trade preferences for certain Asian nations, including China, Taiwan, and South Korea, could affect our business and sales of our products.
       In addition, because a large portion of our products are manufactured by companies located in both China and Taiwan, we are subject to additional risks due to the tense relationship between the Taiwanese and Chinese governments, which has been strained in recent years. Any significant deterioration of relations between Taiwan and China, or between the United States and China, could have far-reaching effects on companies that import major portions of their supplies or finished products from China, including us, and could impact the operations of our suppliers in Taiwan and China. This would adversely affect our ability to obtain a majority of our products on a timely basis, at reasonable costs, or at all.
If we do not successfully maintain the quality of the installation of our automotive products by our retailer partners, our reputation could suffer and our sales could decline.
       The successful use of our automotive products depends substantially upon the proper installation of those products. This installation is generally performed by our retailer customers. Our efforts to improve the installation skills of our third party installers may not succeed. The failure by third parties to properly install our products could harm our reputation, which in turn could cause our sales to decline and could increase warranty claims and costs.
If we become subject to product returns or product liability claims resulting from defects in our products, we may face an increase in our costs, a loss of customers, or a delay in the market acceptance of our products.
       Our products are complex and may contain undetected defects or experience unforeseen failures when first introduced or as new versions are introduced. Despite testing by us and our manufacturers, defects may be found in existing or new products. Any such defects could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts, and cause significant customer relations and business reputation problems. Any such defects could force us to undertake a product recall program, which could cause us to incur significant expenses and could harm our reputation and that of our products. If we deliver products with defects, our credibility and the market acceptance and sales of our products could be harmed.
       Defects could also lead to liability for defective products as a result of lawsuits against us or against our retailers. We agree to indemnify certain of our retailer customers in some circumstances against liability from defects in our products. Potential claims could include, among others, bodily injury due to an obstructed view by a mobile video screen, unintended vehicle ignition or motion from a remote start product, or the failure of our replacement headrests. A product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend. If successful, such claims could require us to make significant damage payments in excess of our insurance limits.
We have identified certain material weaknesses in our internal control over financial reporting. Our efforts to remedy these issues may not be successful or may not be sufficient to prevent similar issues from arising in the future.
       As discussed in Note 2 to our financial statements, we have restated our financial statements for the years ended December 31, 2002, 2003, and 2004 to reflect certain adjustments required in order to conform certain of our historical accounting policies and accounting with U.S. generally accepted accounting principles. The restatement was done, in part, to defer the recognition of revenue on certain shipments made prior to fiscal year end for which risk of loss did not transfer to the customer until the subsequent period, to record expenses and inventory purchases in the proper period, to adjust financial statement entries to agree with underlying account reconciliations, to correct entries relating to the calculation of our tax obligations, to correct our computation of net

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income per common share, and to correct certain other less material errors. In connection with the preparation of this prospectus, we identified the following material weaknesses:
  •  Inadequate Resources in our Accounting and Financial Reporting Functions. We do not currently maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles commensurate with our existing financial reporting requirements and the requirements we will face as a public company. Specifically, we had deficiencies in accounting staff with sufficient depth and skill in the application of U.S. generally accepted accounting principles to meet the objectives that are expected of these roles. This material weakness contributed to the restatements in our financial statements, including adjustments related to revenue recognition, computation and disclosure of earnings per common share, and other adjustments described in Note 2 to our financial statements, and also contributed to the material weaknesses described below.
 
  •  Inability to Appropriately Reconcile and Analyze Certain Accounts. We did not maintain effective controls with respect to the timely analysis and reconciliation of our cash and accrual accounts. As a result, we identified errors at December 31, 2002 and 2003 related to the reconciliation of certain general ledger accounts, including cash and accrual accounts.
 
  •  Failure to Record Expenses and Inventory Purchases in the Proper Period. We did not maintain effective controls with respect to the cut-off for expenses and inventory received by us. Adjustments were required for these cut-off errors in our restated financial statements for 2002 and 2003.
 
  •  Failure to Properly Record Income Tax Obligations. We did not accurately record our tax obligations for each state in which we were required to file returns. Adjustments were made to address these errors in our restated financial statements for 2002 and 2003.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
       We are evaluating these material weaknesses and are in the preliminary stages of developing a plan to remediate such material weaknesses. In connection with our remediation efforts, we expect to review our internal financial control and accounting resources, establish formal technical accounting training for accounting and financial reporting personnel, document our conclusions on technical accounting issues and determinations on a timely basis, and ensure the technical proficiency of the audit committee we are establishing in connection with this offering to oversee our financial reporting function. We also intend to develop formal procedures for financial statement variance analysis and balance sheet reconciliations, establish an internal audit function, initiate a Sarbanes-Oxley Section 404 preparedness project, and implement a disclosure committee that will, among other things, develop a certification and sub-certification process. The steps we intend to take or any additional measures may not remediate the material weaknesses we have identified and we may be unable to implement and maintain adequate internal control over financial reporting in the future.
       As a public company, we will require greater resources in our accounting and financial reporting functions than we have had as a private company. For example, we will need to hire additional employees and further train our existing employees. We will incur substantial expenses relating to the remediation of the material weaknesses in our internal control over financial reporting. Our accounting and financial reporting functions may not have, or may be unable to maintain, adequate resources to ensure that we will not have any future material weaknesses in our system of

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internal control over financial reporting. The effectiveness of our internal control over financial reporting may in the future be limited by a variety of factors including:
  •  faulty human judgment and simple errors, omissions, or mistakes;
 
  •  fraudulent action of an individual or collusion of two or more people;
 
  •  inappropriate management override of policies and procedures; and
 
  •  the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information.
       If we fail to have effective controls and procedures for financial reporting, we could be unable to provide timely and accurate financial information and be subject to delisting from the Nasdaq National Market, Securities and Exchange Commission investigation, and civil or criminal sanctions. Additionally, ineffective internal control over financial reporting would place us at increased risk of fraud or misuse of corporate assets.
If we do not successfully address the risks associated with our international operations, our business could be harmed.
       Our sales and distribution operations in the European and Asian markets create a number of logistical and communications challenges for us. Our international sales were approximately $24.8 million in 2004 and approximately $18.2 million in the first nine months of 2005. We plan to increase our international sales in the future. Selling products internationally exposes us to various economic, political, and other risks, including the following:
  •  management of a multinational organization;
 
  •  the burdens and costs of compliance with local laws and regulatory requirements as well as changes in those laws and requirements;
 
  •  transportation delays or interruptions and other consequences of less developed infrastructures;
 
  •  overlap of tax issues;
 
  •  tariffs and duties;
 
  •  political or economic instability in certain parts of the world; and
 
  •  protectionist trade legislation in either the United States or foreign countries.
       Our revenues and purchases are predominantly in U.S. Dollars. However, we collect a portion of our revenue in non-U.S. currencies, such as British Pounds Sterling. In the future, and especially as we expand our sales in international markets, our customers may increasingly make payments in non-U.S. currencies. In addition, we account for a portion of our costs in our U.K. office, such as payroll, rent, and indirect operating costs, in British Pounds Sterling. Fluctuations in foreign currency exchange rates could affect our sales, cost of sales, and operating margins. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. A majority of our products are made in China, which recently revalued its currency, the yuan, upward against the U.S. Dollar. Appreciation of the yuan against the U.S. Dollar causes certain of our manufacturers’ costs to rise in U.S. Dollar terms. This could pressure our manufacturers to raise prices and thereby adversely affect our profitability. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results.

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Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute shareholder value, and adversely affect our operating results.
       We plan to continue to review opportunities to buy other businesses or technologies that would complement our current product lines, expand the breadth of our markets, enhance our technical capabilities, or otherwise offer growth opportunities. In September 2004, we acquired Definitive Technology, and we have acquired other businesses in the past. We are also likely to buy businesses, assets, brands, or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute the percentage ownership of our existing shareholders, incur substantial debt, or assume contingent liabilities. Our recent acquisition of Definitive Technology, as well as potential future acquisitions, involve numerous risks, including the following:
  •  challenges integrating the purchased operations, technologies, products, systems, or services with our own;
 
  •  potential compliance issues with regard to acquired companies that did not have adequate internal controls;
 
  •  misjudgment by us of revenue and profit potential of acquisition candidates;
 
  •  unanticipated costs or hidden liabilities associated with the acquisition;
 
  •  diversion of management’s attention from our existing businesses;
 
  •  adverse effects on existing business relationships with suppliers and customers;
 
  •  risks associated with entering markets in which we have little or no prior experience; and
 
  •  potential loss of key employees and customers of purchased organizations.
       We may not be successful in overcoming these and other risks encountered in connection with such acquisitions, and our inability to do so could adversely affect our business. In addition, any strategic alliances or joint ventures we enter into may not achieve their strategic objectives, and parties to our strategic alliances or joint ventures may not perform as contemplated. Problems associated with the management or operation of, or the failure of, any strategic alliances or joint ventures could divert the attention of our management team and have a material adverse effect on our operations and financial position.
       Our ability to grow through acquisitions will also depend upon various factors, including the availability of suitable acquisition candidates at attractive purchase prices, our ability to compete effectively for available acquisition opportunities, and the availability of funds or common stock with a sufficient market price to complete acquisitions.
       As a part of our acquisition strategy, we frequently engage in discussions with various companies regarding their potential acquisition by us. In connection with these discussions, we and potential acquisition candidates often exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential acquisition. Potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues, including in some cases, management succession and related matters. As a result of these and other factors, a number of potential acquisitions that from time to time appear likely to occur do not result in binding legal agreements and are not consummated.
If we are unable to protect our intellectual property, our ability to compete effectively in our markets could be harmed.
       We believe that our success depends in part on protecting our proprietary technology. We rely on a combination of patent, trade secret, and trademark laws, confidentiality procedures, and contractual provisions to protect our intellectual property. We also seek to protect certain aspects of

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our technology under trade secret laws, which afford only limited protection. We face risks associated with our intellectual property, including the following:
  •  intellectual property laws may not protect our intellectual property rights;
 
  •  third parties may challenge, invalidate, or circumvent any patents issued to us;
 
  •  unauthorized parties may attempt to copy or otherwise use information that we regard as proprietary despite our efforts to protect our proprietary rights;
 
  •  others may independently develop similar or superior technology, duplicate our technologies, or design around any patents issued to us; and
 
  •  effective protection of intellectual property rights may be limited or unavailable in some foreign countries in which we operate.
       We may not be able to obtain effective patent, trademark, service mark, copyright, and trade secret protection in every country in which we sell our products. We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights, and such action may be unsuccessful. For example, we are currently pursuing our rights in China against an entity we believe is counterfeiting certain of our a/d/s/ products. We have filed an application to register the a/d/s/ mark in China. Our means of protecting our proprietary rights in the United States or abroad may not be adequate, and our competitors may independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the markets for our products.
We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us or prosecuting others for their unauthorized use of our intellectual property.
       The markets in which we compete can involve litigation regarding patents and other intellectual property rights. We sometimes receive notices from third parties, including groups that have pooled their intellectual property, that claim our products infringe their rights. From time to time, we receive notices from third parties of the intellectual property rights such parties have obtained. We cannot be certain that our products and technologies do not and will not infringe issued patents or other proprietary rights of others. Any claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, all of which could have a material adverse effect on our business. We may be unable to obtain such licenses on commercially reasonable terms, or at all, and the terms of any offered licenses may not be acceptable to us. If forced to cease using such intellectual property, we may not be able to develop or obtain alternative technologies. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing, using, or selling certain of our products, which could have a material adverse effect on our business.
       Furthermore, parties making such claims could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to make, use, or sell our products in the United States or abroad. Such a judgment would have a material adverse effect on our business. In addition, we are obligated under certain agreements to indemnify our customers or other parties if we infringe the proprietary rights of third parties. Any required indemnity payments under these agreements could have a material adverse effect on our business.
       Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.

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       We sometimes need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business.
Our substantial indebtedness could adversely affect our business and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flow to satisfy significant debt service obligations.
       In 2004, we recapitalized our business and incurred a significant amount of indebtedness. As of September 30, 2005, our consolidated long-term indebtedness was $240.6 million. We intend to prepay approximately $74.0 million in principal amount of such indebtedness with the proceeds of this offering, which will leave us with $166.6 million of debt immediately after this offering. We may, however, incur substantial additional indebtedness in the future, including additional borrowings under our revolving credit facility.
       Our substantial indebtedness and the fact that a substantial portion of our cash flow from operations must be used to make principal and interest payments on this indebtedness could have important consequences, including:
  •  increasing our vulnerability to general adverse economic and industry conditions;
 
  •  reducing the availability of our cash flow for other purposes;
 
  •  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, which would place us at a competitive disadvantage compared to our competitors that may have less debt;
 
  •  limiting, by the financial and other restrictive covenants in our debt agreements, our ability to borrow additional funds; and
 
  •  having a material adverse effect on our business if we fail to comply with the covenants in our debt agreements, because such failure could result in an event of default which, if not cured or waived, could result in all or a substantial amount of our indebtedness becoming immediately due and payable.
       Our ability to incur significant future indebtedness, whether to finance potential acquisitions or for general corporate purposes, will depend on our ability to generate cash. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us under our senior secured credit facility in amounts sufficient to enable us to fund our liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot make scheduled principal and interest payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. Beginning in September 2009, the principal amortization obligations under our senior credit facility will increase substantially. If we cannot satisfy these obligations from operating cash flow, we will be required to refinance all or a portion of our senior credit facility. If we are unable to refinance this or any of our indebtedness on commercially reasonable terms or at all, or to effect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.

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Our senior secured credit facility contains restrictive terms and our failure to comply with these terms could put us in default, which would have an adverse effect on our business and operations.
       Our senior secured credit facility contains a number of significant covenants. These covenants limit our ability to, among other things, do the following:
  •  incur additional indebtedness;
 
  •  make capital expenditures and other investments;
 
  •  merge, consolidate, or dispose of our assets or the capital stock or assets of any subsidiary;
 
  •  pay dividends, make distributions, or redeem capital stock;
 
  •  change our line of business;
 
  •  enter into transactions with our affiliates; and
 
  •  grant liens on our assets or the assets of our subsidiaries.
       Our senior secured credit facility also requires us to maintain specified financial ratios and satisfy financial condition tests at the end of each fiscal quarter. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those tests. A breach of any of these covenants could result in a default under the senior secured credit facility. If the lenders accelerate amounts owing under the senior secured credit facility because of a default and we are unable to pay such amounts, the lenders have the right to foreclose on substantially all of our assets.
Our debt obligations have variable rates, which makes us vulnerable to increases in interest rates.
       As of September 30, 2005, after giving effect to the use of proceeds from this offering, we would have had approximately $166.6 million of outstanding debt, all of which would have been subject to variable interest rates. We presently hedge only a portion of our variable rate debt against interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. On a pro forma basis, our annual interest expense on our variable rate debt would increase by $1.7 million for each 1% increase in interest rates, assuming no revolving credit borrowings.
Disruption in our main distribution centers may prevent us from meeting customer demand, and our sales and profitability may suffer as a result.
       We manage our product distribution in the continental United States through our operations in Vista, California and a public warehouse in Louisville, Kentucky. A serious disruption, such as an earthquake, flood or fire, at either of our main distribution centers could damage our inventory and could materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost. We could incur significantly higher costs and experience longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a distribution center. As a result, any such disruption could have a material adverse effect on our business.
A decline in discretionary spending would likely cause our sales to decline.
       The consumer products that we sell constitute discretionary purchases. As a result, a recession in the general economy or other conditions affecting disposable consumer income and retail sales would likely reduce our sales. Consumer spending is volatile and is affected by many factors, including interest rates, consumer confidence levels, tax rates, employment levels and prospects, and general economic conditions.

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Our operating results may experience significant periodic and seasonal fluctuations, which could cause our results to fall short of expectations and cause our stock price to decline.
       The consumer electronics industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices, intense competition, and production overcapacity. In addition, the consumer electronics industry is cyclical in nature. We may experience substantial period-to-period fluctuations in operating results, at least in part because of general industry conditions or events occurring in the general economy.
       In addition to the variability resulting from the cyclical nature of the consumer electronics industry, other factors may contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:
  •  the timing and volume of orders relative to the capacity of our contract manufacturers;
 
  •  product introductions or enhancements and market acceptance of product introductions and enhancements by us and our competitors;
 
  •  evolution in the life cycles of our products;
 
  •  timing of expenditures in anticipation of future orders;
 
  •  product mix; and
 
  •  pricing and availability of competitive products.
       For instance, our recent revenue increases are attributable in large part to the growth of the satellite radio and home audio markets. We would experience adverse performance trends or slower growth if we cannot add other products to generate revenue growth when growth trends slow or reverse for these products.
       Historically, our sales have usually been weaker in the first two quarters of each fiscal year and have, from time to time, been lower than the preceding quarter. Our products are highly consumer-oriented, and consumer buying is traditionally lower in these quarters. Sales of our products are usually highest in our fourth fiscal quarter due to increased consumer spending on electronic devices during the holiday season, which will be even more pronounced with the growth of our SIRIUS Satellite Radio business.
       The size, timing, and integration of any future acquisitions may also cause substantial fluctuations in operating results from quarter to quarter. Consequently, operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our common stock.
       Accordingly, you should not rely on the results of any past periods as an indication of our future performance. It is possible that in some future periods, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may decline.
We may seek to raise additional capital in the future to finance our operations in the consumer electronics industry, and our inability to raise such capital could restrict our growth and harm our operating results.
       From time to time, in addition to this offering, we may seek additional equity or debt financing to provide for the capital expenditures required to maintain or expand our facilities and equipment, to meet the changing needs of the consumer electronics market, to finance working capital requirements, or to make acquisitions such as our acquisition of Definitive Technology in 2004. For instance, we recently increased the size of our senior secured credit facility due to our increased working capital needs associated with our increased sales levels. We cannot predict the timing or amount of any additional capital requirements at this time. If our senior secured credit facility is inadequate to provide for these requirements and additional equity or debt financing is not available

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on satisfactory terms, we may be unable to maintain or expand our business or to develop new business at the rate desired and our operating results may suffer.
Our executive officers and key personnel are critical to our business, and these officers and personnel may not remain with us in the future.
       We depend substantially on the efforts and abilities of our senior management and sales personnel, especially our chief executive officer, James E. Minarik. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and we may not be able to retain our personnel or attract additional qualified personnel. The loss of a member of senior management requires the remaining executive officers to divert immediate and substantial attention to fulfilling his or her duties and to seeking a replacement. The inability to fill vacancies in our senior executive positions on a timely basis could adversely affect our ability to implement our business strategy, which would negatively impact our results of operations.
We are subject to various governmental regulations that could adversely affect our business.
       Like many businesses, our operations are subject to certain federal, state, and local regulatory requirements relating to environmental, product disposal, and health and safety matters. We could become subject to liabilities as a result of a failure to comply with applicable laws and incur substantial costs to comply with existing, new, modified, or more stringent requirements. In addition, our past, current, or future operations may give rise to claims of exposure to hazardous substances by employees or the public or to other claims or liabilities relating to environmental, product disposal, or health and safety concerns. For instance, we maintain a paint booth at our Snake Pit training facility, and the training conducted there generates various airborne particulates.
       Our wireless products, including our security and wireless headphone devices, must comply with all applicable regulations of the Federal Communications Commission, or FCC. Any failure or delay in obtaining required FCC licenses could prevent or delay new product introductions. Failure to comply with applicable FCC regulations could result in significant fines or product recalls.
       The use of our products is also governed by a variety of state and local ordinances that could affect the demand for our products. For instance, the passage of new noise ordinances, or stricter enforcement of current noise ordinances, could reduce the demand for our car audio products. Additionally, many states currently have in place laws prohibiting or restricting the running of a motor vehicle without an operator, the enforcement of which could adversely affect the demand for our hybrid and convenience products that contain remote start capabilities.
Risks Related to this Offering
The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.
       Before this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. Many factors could cause the market price of our common stock to rise and fall, including the following:
  •  the gain or loss of significant customers or orders;
 
  •  introductions of new products or new pricing policies by us or by our competitors;

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  •  variations in our quarterly results;
 
  •  announcements of technological innovations by us or by our competitors;
 
  •  acquisitions or strategic alliances by us or by our competitors;
 
  •  recruitment or departure of key personnel;
 
  •  the level and quality of research analyst coverage for our common stock;
 
  •  changes in the estimates of our operating performance or changes in recommendations by any research analysts that follow our stock; and
 
  •  market conditions in our industry, the industries of our customers, and the economy as a whole.
       In addition, public announcements by our competitors concerning, among other things, their performance, strategy, accounting practices, or legal problems could cause the market price of our common stock to decline regardless of our actual operating performance.
Our current principal shareholders will continue to have significant influence over us after this offering, and they could delay, deter, or prevent a change of control or other business combination or otherwise cause us to take action with which you might not agree.
       Upon the closing of this offering, investment funds affiliated with Trivest Partners, L.P. will together beneficially own approximately 44.3% of our outstanding common stock. In addition, five of our directors following this offering will be affiliated with Trivest Partners, L.P. As a result, Trivest Partners, L.P. will have significant influence over our decision to enter into any corporate transaction and may have the ability to prevent any transaction that requires the approval of shareholders regardless of whether or not other shareholders believe that such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination that might otherwise be beneficial to our shareholders.
The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.
       The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may depress the market price. We will have 24,769,197 shares of common stock outstanding immediately after this offering. Of these shares, the common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933. The holders of substantially all of the remaining 15,394,197 shares of common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. The 180-day restricted period referred to in the preceding sentence may be extended under the circumstances described in the “Underwriting” section of this prospectus. After the expiration of the lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144.
       Beginning 180 days after the completion of this offering, shareholders owning 14,373,104 shares will be entitled to require us to register our securities owned by them for public sale. In addition, we intend to file a registration statement to register the 2,750,000 shares issuable under our incentive compensation plan.

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       Sales of common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
You will pay more for our common stock than your pro rata portion of our assets is worth and, as a result, you will likely receive much less than you paid for our stock if we liquidate our assets and distribute the proceeds.
       If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $20.08 per share. This dilution arises because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock, and it exceeds the initial public offering price because we will continue to have a net tangible book deficit after the offering. As of September 30, 2005, there were warrants outstanding to purchase 1,420,037 shares of common stock at a nominal exercise price. All of the warrants were exercised in connection with this offering.
Provisions in our articles of incorporation, our bylaws, and Florida law could make it more difficult for a third party to acquire us, discourage a takeover, and adversely affect existing shareholders.
       Our articles of incorporation, our bylaws, and the Florida Business Corporation Act contain provisions that may have the effect of making more difficult, delaying, or deterring attempts by others to obtain control of our company, even when these attempts may be in the best interests of shareholders. These include provisions limiting the shareholders’ powers to remove directors or take action by written consent instead of at a shareholders’ meeting. Our articles of incorporation also authorize our board of directors, without shareholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Florida law also imposes conditions on the voting of “control shares” and on certain business combination transactions with “interested shareholders.”
       These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which shareholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of shareholders to approve transactions that they may deem to be in their best interests.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
       The statements and information contained in this prospectus that are not purely historical are forward-looking statements. Forward-looking statements include statements regarding our “expectations,” “anticipations,” “intentions,” “beliefs,” or “strategies” regarding the future, and events that “should,” “will,” “may,” or “could” occur, and similar phrases. Forward-looking statements also include statements regarding sales, expenses, margins, and earnings analysis for 2005 and thereafter; future products or product development; our product development strategies; technological innovations; beliefs regarding product and technology performance; potential acquisitions or strategic alliances; the success of particular product or marketing programs; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this prospectus are based on information available to us as of the date of this prospectus, and we assume no obligation to update any such forward-looking statements except as otherwise required by law. Our actual results could differ materially from the results expressed in, or implied by, these forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed under “Risk Factors,” which include, but are not limited to, the following:
  •  the competitive nature of the branded consumer electronics industry;
 
  •  our ability to improve our products and develop new products;
 
  •  our dependence upon certain key customers;
 
  •  any adverse developments affecting SIRIUS Satellite Radio;
 
  •  our pricing and promotional practices;
 
  •  the ability of our contract manufacturers to acquire components, and to produce and deliver our products in a timely manner;
 
  •  our ability to timely import our products;
 
  •  the ability of our retailer partners to meet our quality standards in the installation of our automotive products;
 
  •  the effects of product liability claims resulting from defects in our products;
 
  •  our ability to remediate the material weaknesses we have identified;
 
  •  the economic, political, and other risks associated with our international operations;
 
  •  our ability to successfully acquire companies that would enhance our business;
 
  •  our inability to protect our intellectual property;
 
  •  our ability to service our debt obligations;
 
  •  our ability to comply with the terms of our senior secured credit facility;
 
  •  changes in discretionary consumer spending;
 
  •  seasonal fluctuations in our business;
 
  •  our ability to raise additional capital to finance our operations;
 
  •  our reliance on our executive officers and key personnel; and
 
  •  the effects of government regulation.

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USE OF PROCEEDS
       We estimate that we will receive net proceeds of $84.4 million after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use approximately $76.3 million of the net proceeds of this offering to prepay our outstanding subordinated notes and accrued interest, which includes a $740,000 prepayment premium. Our $37.0 million of senior subordinated notes bear interest at LIBOR plus 8.0% (11.95% at September 30, 2005) and mature June 2011. Our $37.0 million of junior subordinated notes bear interest at 12.0% per annum and mature June 2012. We issued the subordinated notes in connection with our June 2004 recapitalization and special dividend payment.
       We also intend to use approximately $5.9 million of the net proceeds of this offering to terminate our sale bonus agreements with various key employees. We intend to use the remaining net proceeds, together with available cash or revolving credit borrowings, to terminate our management agreement with Trivest Partners, L.P., and our associate equity gain program. See “Certain Relationships and Related Party Transactions.”
       We will not receive any of the net proceeds from the sale of shares of common stock by the selling shareholders, which are approximately $51.2 million, or $72.1 million if the underwriters’ option to purchase additional shares is exercised in full. See “Principal and Selling Shareholders.”
DIVIDEND POLICY
       On June 17, 2004, we paid a special cash dividend of $109.4 million to the holders of our outstanding shares of common stock and our warrants.
       We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital and legal requirements as well as other factors deemed relevant by our board of directors. Our current debt agreements prohibit us from paying dividends without the consent of our lenders.

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CAPITALIZATION
       The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2005, and as adjusted to reflect (1) the issuance of 1,420,037 shares upon the exercise of outstanding warrants, (2) the sale of the 5,937,500 shares of common stock offered by us in this offering at the initial public offering price of $16.00 per share, after deducting the underwriting discount and estimated offering expenses and giving effect to our application of the estimated net proceeds, (3) the termination of certain sale bonus, management, and associate equity gain program arrangements, and (4) the repayment of our subordinated notes plus accrued interest and a prepayment penalty. You should read the capitalization table together with the sections of this prospectus entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.
                       
    As of
    September 30, 2005
     
    Actual   As Adjusted
         
    (Unaudited)
    (In thousands)
Cash and cash equivalents
  $ 3,497     $ 3,754  
             
Total debt:
               
 
Revolving credit facility
  $     $  
 
Term loan
    166,610       166,610  
 
Senior subordinated notes
    37,000        
 
Junior subordinated notes
    37,000        
             
   
Total debt
    240,610       166,610  
Total shareholders’ equity (a)
    5,986       87,557 (b)
             
     
Total capitalization
  $ 246,596     $ 254,167  
             
 
(a) On December 1, 2005, we modified our capital structure to consist of 5,000,000 shares of preferred stock and 100,000,000 shares of common stock, and all of our outstanding shares of Class A common stock and Class B common stock were converted, on a 3.27-for-one basis, into the newly authorized shares of common stock. We do not expect to have any preferred stock outstanding immediately subsequent to this offering.
 
(b) Reflects a non-recurring, pre-tax charge to earnings (which would have been approximately $3.4 million as of September 30, 2005) that will result from a prepayment premium and a write-off of deferred financing costs in connection with our prepayment of subordinated notes with a portion of the proceeds of this offering, and an additional non-recurring, pre-tax charge of approximately $25.6 million that will result from our grant of restricted stock units and payment of $10.3 million in connection with the termination of certain sale bonus, management, and associate equity gain program arrangements concurrently with this offering. Does not reflect a non-cash, pre-tax charge for stock-based compensation expense of approximately $2.1 million that will be recognized upon the closing of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Outlook” and “Unaudited Pro Forma Financial Data.”

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DILUTION
       Our pro forma net tangible book deficit as of September 30, 2005 was $(182.7) million, or $(9.70) per share of common stock. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of outstanding shares of common stock. Pro forma outstanding shares of common stock as of September 30, 2005 gives retroactive effect to the modification of our capital structure on December 1, 2005 in which our Class A common stock and Class B common stock were converted into a single class of common stock on a 3.27-for-one basis and reflects the exercise of warrants to purchase 1,420,037 shares of our common stock in connection with this offering.
       Dilution in net tangible book deficit per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book deficit per share of our common stock immediately after completion of this offering. After giving effect to our sale of 5,937,500 shares at the initial public offering price of $16.00 per share and after deducting the underwriting discount and estimated offering expenses, our adjusted pro forma net tangible book deficit as of September 30, 2005 would have been $(101.1) million, or $(4.08) per share of common stock. This represents an immediate decrease in net tangible book deficit of $5.62 per share to existing shareholders and an immediate dilution in net tangible book deficit of $20.08 per share to purchasers of shares in this offering. The following table illustrates this per share dilution:
                 
Initial public offering price per share
          $ 16.00  
Pro forma net tangible book deficit per share as of September 30, 2005
  $ (9.70 )        
Increase per share attributable to new investors
    5.62          
             
Adjusted pro forma net tangible book deficit per share after the offering
            (4.08 )
             
Dilution per share to new investors
          $ 20.08  
             
       The following table summarizes on a pro forma basis as of September 30, 2005, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing shareholders and by the new investors at the initial public offering price of $16.00 per share before deducting the underwriting discount and estimated offering expenses.
                                           
    Shares Purchased   Total Consideration    
            Average Price
    Number   Percent   Amount   Percent   Per Share
                     
Existing shareholders
    18,831,697       76.0 %   $ 6,049,000 (a)     6.0 %   $ 0.32  
New investors
    5,937,500       24.0 %     95,000,000       94.0 %     16.00  
                               
 
Total
    24,769,197       100.0 %   $ 101,049,000       100.0 %        
                               
 
(a)  Reflects a reduction of $53.3 million in connection with our June 2004 recapitalization.
       If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing shareholders will be reduced to 13,987,947 shares, or 56.5% of the total number of shares of common stock to be outstanding after this offering, and the number of shares held by new investors will increase to 10,781,250 shares, or 43.5% of the total number of shares of common stock to be outstanding after this offering. See “Principal and Selling Shareholders.”
       The discussion and tables also exclude any shares available for future grant under our incentive compensation plan. The issuance of common stock pursuant to such plan will result in further dilution to new investors.

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SELECTED CONSOLIDATED FINANCIAL DATA
       The statement of operations data for the fiscal years ended December 31, 2002, 2003, and 2004 and the balance sheet data as of December 31, 2003 and 2004 have been derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the fiscal years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2004 and 2005, and the balance sheet data as of December 31, 2000, 2001, and 2002 and as of September 30, 2005, have been derived from our unaudited financial statements. The financial statements as of and for the years ended December 31, 2002, 2003, and 2004 have been restated, as discussed in Note 2 to our financial statements. The selected financial data as of and for the years ended December 31, 2000 and 2001 have also been restated. The effect of the restatements for the year ended December 31, 2000 was to reduce revenue and net income by $592,000 and $278,000, respectively, and for the year ended December 31, 2001 was to reduce revenue and net income by $247,000 and $551,000, respectively. Basic and diluted earnings per common share for the years ended December 31, 2000 and 2001 have been restated. In 2000, basic and diluted earnings per common share were $0.40 and $0.31, respectively, as previously reported and are $0.35 and $0.31, respectively, as restated. In 2001, basic and diluted earnings per common share were $0.64 and $0.48, respectively, as previously reported and are $0.56 and $0.47, respectively, as restated. The selected consolidated financial data reflects an amendment to our articles of incorporation that was effected on December 1, 2005. Pursuant to the amendment, each share of Class A common stock and each share of Class B common stock were converted into 3.27 shares of a single class of new common stock. You should read this information in conjunction with our financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
                                                           
    Restated        
         
        Nine Months Ended
    Year Ended December 31,   September 30,
         
    2000   2001   2002   2003   2004   2004   2005
                             
    (Unaudited)               (Unaudited)
    (In thousands, except per share data)
Consolidated Statement of Operations Data:
                                                       
Net sales
  $ 96,603     $ 105,591     $ 123,709     $ 131,765     $ 189,869 (a)   $ 109,791 (a)   $ 169,037  
Cost of sales
    49,238       53,143       61,960       69,907       108,525       58,803       108,305  
                                           
Gross profit
    47,365       52,448       61,749       61,858       81,344       50,988       60,732  
Total operating expenses
    25,004       28,092       30,470       31,782       41,105       28,113       34,991  
                                           
Income from operations
    22,361       24,356       31,279       30,076       40,239 (a)     22,875 (a)     25,741  
Interest expense, net (b)
    14,888       12,486       9,723       9,091       16,523       11,275       15,647  
                                           
Income before provision for income taxes
    7,473       11,870       21,556       20,985       23,716       11,600       10,094  
Provision for income taxes
    3,007       4,695       8,793       8,514       9,754       4,773       4,109  
                                           
Net income
    4,466       7,175       12,763       12,471       13,962       6,827       5,985  
Net income attributable to participating securityholders
          3       19       63       138       66       74  
                                           
Net income available to common shareholders
  $ 4,466     $ 7,172     $ 12,744     $ 12,408     $ 13,824     $ 6,761     $ 5,911  
                                           
Net income per
common share:
                                                       
 
Basic
  $ 0.35     $ 0.56     $ 1.00     $ 0.97     $ 0.88     $ 0.46     $ 0.32  
                                           
 
Diluted
  $ 0.31     $ 0.47     $ 0.79     $ 0.76     $ 0.80     $ 0.41     $ 0.32  
                                           

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    Restated        
         
        Nine Months Ended
    Year Ended December 31,   September 30,
         
    2000   2001   2002   2003   2004   2004   2005
                             
    (Unaudited)               (Unaudited)
    (In thousands, except per share data)
Other Data:
                                                       
Adjusted EBITDA (c)
  $ 29,001     $ 31,546     $ 35,611     $ 34,491     $ 40,689     $ 21,849     $ 30,202  
Capital expenditures
    630       828       1,269       1,520       1,317       679       1,052  
Depreciation
    263       262       475       723       943       670       886  
Amortization of intangibles
    6,096       6,502       3,286       3,287       3,505       2,462       3,036  
Cash taxes paid (d)
    395       3,800       2,482       6,254       3,937       3,770       6,677  
Cash interest paid (e)
    9,599       11,482       9,556       7,210       10,141       5,552       14,572  
                                                 
    Restated    
         
    As of December 31,   As of
        September 30,
    2000   2001   2002   2003   2004   2005
                         
    (Unaudited)                
    (In thousands)
Consolidated Balance Sheet Data:
                                               
Cash and cash equivalents
  $ 308     $ 6,862     $ 14,971     $ 16,284     $ 3,784     $ 3,497  
Total assets
    190,623       191,782       205,860       213,081       293,613       307,032  
Total debt
    123,796       113,590       112,716       95,092       225,610       240,610  
Total shareholders’ equity
    42,531       49,045       61,793       74,814       (276 )     5,986  
 
(a)  Includes $6.5 million of royalty revenue from a one-time payment from a major automobile manufacturer for a non-exclusive license to use certain of our patented technology. The only expense associated with this payment was a $670,000 special bonus recorded as operating expense.
 
(b)  In connection with our June 2004 recapitalization, we incurred approximately $185 million of new indebtedness and paid off a total of $76.6 million of existing debt. In addition, we paid a special dividend to shareholders and warrantholders of approximately $109.4 million. Due to the repayment of the existing debt, we wrote off $1.1 million of deferred financing costs and we wrote off $1.7 million of unamortized discount related to the warrants that were issued with the existing debt.
 
(c)  In evaluating our business, we consider and use Adjusted EBITDA as a supplemental measure of our operating performance. We define EBITDA as net income before net interest expense, income tax expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus expenses (minus gains) that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA to measure our performance when determining management bonuses, we use Adjusted EBITDA per employee to measure our efficiency, and we use Adjusted EBITDA to measure the performance of potential acquisition candidates. For example, we used EBITDA, as adjusted for certain compensation expenses, rebates, and receivables insurance, to evaluate our acquisition of Definitive Technology in 2004. In addition, we adjust for these expenses in measuring our performance under our senior credit facility. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Discussion” for a discussion of our use of EBITDA and Adjusted EBITDA and certain limitations of EBITDA and Adjusted EBITDA as financial measures. Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.

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Adjusted EBITDA is calculated as follows for the periods presented:
                                                         
    Restated    
        Nine Months
        Ended
    Year Ended December 31,   September 30,
         
    2000   2001   2002   2003   2004   2004   2005
                             
                    (Unaudited)
    (Unaudited)                
    (In thousands)
Net income (loss)
  $ 4,466     $ 7,175     $ 12,763     $ 12,471     $ 13,962     $ 6,827     $ 5,985  
Plus: interest expense, net
    14,888       12,486       9,723       9,091       16,523       11,275       15,647  
Plus: income tax expense
    3,007       4,695       8,793       8,514       9,754       4,773       4,109  
Plus: depreciation and amortization
    6,359       6,764       3,761       4,010       4,448       3,132       3,922  
                                           
EBITDA
    28,720       31,120       35,040       34,086       44,687       26,007       29,663  
Plus: equity participation
payment (1)
                            1,280       1,280        
Plus: management fees (2)
    281       426       571       405       552       392       539  
Less: one-time license fee, net of expenses (3)
                            5,830       5,830        
                                           
Adjusted EBITDA
  $ 29,001     $ 31,546     $ 35,611     $ 34,491     $ 40,689     $ 21,849     $ 30,202  
                                           
 
 
  (1)  We made this payment under an equity participation agreement with our chief executive officer in connection with our June 2004 recapitalization. This payment reduced 2004 net income and pro forma net income, but we do not consider this payment reflective of our ongoing operations. Does not reflect an additional non-recurring, pre-tax charge of approximately $25.6 million that will result from our grant of restricted stock units and payment of $10.3 million in connection with the termination of certain sale bonus, management, and associate equity gain program arrangements concurrently with this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook” and “Unaudited Pro Forma Financial Data.”
 
  (2)  In connection with this offering, our management agreement with Trivest Partners, L.P. will be terminated. For more information, see “Certain Relationships and Related Party Transactions — Management and Advisory Agreements.”
 
  (3)  Reflects a non-refundable, up-front payment from a major vehicle manufacturer for a non-exclusive license to use certain of our patented technology, net of a special $670,000 bonus paid to all employees.
(d)  Cash taxes paid differs from the book provision for income taxes primarily because of the difference between the tax treatment and deductibility of our intangible assets and goodwill and the GAAP treatment of these items. Assuming continuing profitability and an effective tax rate of 40.7%, our tax-deductible goodwill and intangible asset amortization will generate approximately $4.1 million of annual incremental after-tax cash flow savings through 2013, with reduced benefits thereafter through 2019 or as a result of an impairment or sale of goodwill or intangible assets. Cash taxes paid are generally higher during the first half of the year relative to our provision for income taxes for that period due to the payment during that period of our tax return extension payment for the prior year.
 
(e)  Cash interest paid differs from interest expense, net due to non-cash interest expense included in interest expense, net. This non-cash interest is related to the amortization of debt issuance costs related to our various debt financings and the amortization of the loan discount related to the subordinated notes that we paid off in 2004, including write-offs of debt issuance costs upon early repayment of debt.

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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 prospectus. 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 “Risk Factors” and elsewhere in this prospectus.
Overview
       We are the largest designer and marketer of consumer branded vehicle security and convenience systems in the United States based on sales and a major supplier of home and car audio, mobile video, and satellite radio products. Our strong brand and product portfolio, extensive and highly diversified distribution network, and “asset light” business model have fueled the revenue growth and profitability of our company. We sell our products through numerous channels, including independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, and car dealers. We also sell our products internationally, primarily through independent distributors.
       Since being acquired by Trivest in December 1999, we have grown our business organically and through acquisitions. Our expansion has resulted in diversifying our product offerings, distribution channels, and base of contract manufacturers. For example, in 2002, we entered the mobile video category through the internal development of a comprehensive product line ultimately resulting in placement at Best Buy as well as regional and independent retailers. We also expanded our business in 2004 by entering into an arrangement with SIRIUS Satellite Radio to sell and market SIRIUS-branded satellite radio products, thus increasing our penetration of national electronics retailers and further diversifying our product mix.
       We outsource all of our manufacturing activities to third parties located primarily in Asia. We believe this manufacturing strategy supports a scalable business model, reduces our capital expenditures, and allows us to concentrate on our core competencies of brand management and product development. Our costs are largely driven by the prices we negotiate with our suppliers. Our expenses are also impacted by such items as personnel, sales and marketing, distribution, and occupancy costs.
Significant Transactions
       We have augmented our organic growth with strategic acquisitions. In 2000, we acquired Clifford Electronics, a maker of premium vehicle security and convenience systems sold under the Clifford and Avital brand names. In the following year, we acquired ADS Technologies, a supplier of car and home audio products. This acquisition expanded our existing car audio product offering with the addition of the a/d/s/, Precision Power, and Orion brand names. In 2004, we significantly expanded our home audio product offering by acquiring Definitive Technology, a designer and marketer of premium home loudspeakers. We financed this acquisition largely with a $45.0 million increase to our senior credit facility which increased our interest expense.
       In June 2004, we recapitalized our company by incurring indebtedness of $185.0 million (including refinancing of outstanding debt) and paid a special cash dividend of $109.4 million to shareholders and warrantholders. This recapitalization significantly increased our interest expense. In addition, our 2004 results of operations reflect the write-off of $2.8 million of unamortized debt fees and discounts related to the debt we repaid and approximately $1.3 million of equity incentive payments related to our special dividend.
       As a result of our acquisitions and June 2004 recapitalization, our results of operations are not necessarily comparable on a period-to-period basis.

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Outlook
       The statements in this section are based on our current expectations. These statements are forward-looking, and actual results may differ materially. Please refer to “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus for more information on what may cause our actual results to differ.
       We experienced several noteworthy events in 2004 and the first nine months of 2005 that will likely continue to impact our financial results for the remainder of 2005 and into 2006. We believe our expansion into satellite radio products, acquisition of Definitive Technology, and exclusive supply relationship for security and convenience products with Circuit City should continue to positively impact our 2005 and 2006 sales. Although other factors will likely impact us, including some we do not foresee, we believe our performance for the remainder of 2005 and for 2006 will be affected by the following:
  •  Satellite Radio. In August 2004, we entered into a strategic supply relationship with SIRIUS Satellite Radio under which we exclusively market and sell certain SIRIUS-branded receivers and other hardware devices to our United States dealer network. For the year ended December 31, 2004 we generated $29.4 million of satellite radio related sales, and for the nine months ended September 30, 2005 we generated $45.0 million of satellite radio related sales. We expect our 2005 total sales to benefit from a full year of selling satellite radio products, which resulted in a comparatively lower gross margin percentage for the first nine months ended September 30, 2005 compared with the same period in 2004. Our gross profit margin on these products is substantially lower than on our other products. Strong satellite radio sales are continuing in the fourth quarter of 2005, and we expect that the increasing proportion of satellite radio sales in our product mix will continue to lower our total gross profit margin for the balance of 2005, and possibly into 2006. We expect that this increase in satellite radio product sales will have less of an impact on our operating margins since we generally have lower operating expenses associated with the sale of these products. In 2004 and the first nine months of 2005, a significant proportion of our satellite radio sales were to national consumer electronics retailers. Because we expect this trend to continue for the remainder of 2005 and into 2006, we expect the proportion of our total sales accounted for by Best Buy and Circuit City to increase.
 
  •  Definitive Technology. In September 2004, we acquired Definitive Technology, a leading supplier of premium loudspeakers, which enhanced our position in the home audio market. For the year ended December 31, 2004 we generated $11.1 million of Definitive Technology related sales. We expect our 2005 total sales and gross profit margin to be favorably impacted by a full year of selling Definitive Technology products, partially offsetting the total gross profit margin compression due to the expected growth in our satellite radio sales. We expect that amortization of intangibles will also increase in 2005 because of the full year impact of amortization expense arising from the Definitive Technology acquisition. Because 2005 will include a full year of Definitive Technology results, continued growth from this acquisition will depend on continued expansion of Definitive product sales.
 
  •  Exclusive Circuit City Supply Relationship. Circuit City selected us as their exclusive supplier of security and convenience products under the Python, Valet, and Hornet brands for 2005. Due to selling through of a competitor’s existing inventory, Circuit City’s initial orders of our products began in late March 2005. We expect our security and convenience product sales to benefit from this relationship for the remainder of 2005 and into 2006. As a result, we also expect the proportion of our total sales accounted for by Circuit City to increase in 2005 and 2006.
 
  •  Interest Expense. As of September 30, 2005, the outstanding principal balance of our senior credit facility was $166.6 million. In February 2005, we negotiated a reduction in the interest rate on this debt by 1.0%, from LIBOR plus 4.25% to LIBOR plus 3.25%. In

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  connection with this offering and the repayment of our subordinated notes with a portion of the proceeds from this offering, we negotiated a further 1.0% reduction in the interest rate on this debt to LIBOR plus 2.25% that becomes effective in February 2006. We presently hedge only a portion of our variable rate debt, and our actual interest expense will be largely determined by trends in LIBOR. Our 2005 results will reflect the full year impact of interest expense from our current senior credit facility, which we entered into in June 2004 and increased in September 2004 and again in September 2005. In connection with this offering, we intend to repay $74.0 million of our outstanding subordinated notes. The subordinated notes consist of $37.0 million of senior subordinated notes that bear interest at LIBOR plus 8.0% and $37.0 million of junior subordinated notes that bear interest at 12.0%. We incurred $4.4 million of interest related to this debt from June 19, 2004 to December 31, 2004. We expect the repayment of this debt to slightly reduce our 2005 interest expense, which may be offset by higher term loan and revolving credit balances to support our growth. In connection with repaying the subordinated notes, we also expect to incur a pre-tax charge of approximately $3.4 million related to a debt prepayment premium and the write-off of deferred financing fees.
 
  •  Termination of Sale Bonus, Management, and Associate Equity Gain Program Arrangements. We expect to record a non-recurring, pre-tax charge of approximately $25.6 million from our grant of restricted stock units and payment of approximately $10.3 million in connection with the termination of sale bonus agreements, our management agreement with Trivest, and our associate equity gain program concurrently with this offering. See “Certain Relationships and Related Party Transactions.”
 
  •  Deferred Stock-Based Compensation. From July 19, 2001 through July 20, 2005, we issued 161,695 shares of our common stock and $18,667 aggregate principal amount of convertible promissory notes to certain of our employees for gross proceeds of $747,005. Both the stock and the notes are subject to repurchase by our company upon termination of employment, but these repurchase rights lapse upon an initial public offering of our common stock. Upon the consummation of this initial public offering, we must recognize as stock-based compensation expense the difference between the purchase price of the stock (or conversion price of the notes) and the fair value of the stock. As a result, we expect to record a non-cash, pre-tax charge for stock-based compensation expense of approximately $2.1 million upon the closing of this initial public offering. We do not expect to recognize any additional expense in any future periods with respect to these issuances.
 
  •  Public Company Expenses. We expect an increase in our general and administrative expenses related to the costs of operating as a public company, such as increased legal and accounting expenses, insurance premiums, and investor relations costs of approximately $2.5 million on an annual basis.
 
  •  Working Capital Requirements. Historically, we have required minimal working capital investment in order to operate our business. However, with the initiation of our satellite radio sales and the addition of Definitive Technology in late 2004, our inventory and accounts receivable increased over historical levels. As these products and sales to national retailers represent a higher portion of our overall sales, we will be required to maintain an appropriate level of working capital to support these sales, which will likely include higher revolving credit borrowings. In anticipation of these sales, in September 2005 we increased our term loan by a total of $15.0 million and increased the amount available under our revolving credit facility from $25.0 million to $50.0 million. As of November 30, 2005, we had drawn $11.9 million on our revolving credit facility.
 
  •  Senior Secured Credit Facility Covenants. Our senior secured credit facility contains negative covenants that limit our ability to take various actions customarily restricted in such agreements. For additional information on these covenants, see “Description of

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  Indebtedness.” We are currently in compliance with these covenants and do not expect these covenants to limit our ability to conduct our business as currently anticipated.
 
  •  Effective Tax Rate. Our effective tax rate for 2004 was 41.1%. In 2005, we expect our tax rate to be similar to our tax rate in 2004.

Results of Operations
       The following table sets forth, for the periods indicated, the percentage of net sales of certain items in our financial statements:
                                         
    Restated    
        Nine Months
        Ended
    Year Ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    50.1 %     53.1 %     57.2 %     53.6 %     64.1 %
                               
Gross profit
    49.9 %     46.9 %     42.8 %(a)     46.4 %(a)     35.9 %
Total operating expenses
    24.6 %     24.1 %     21.6 %(a)     25.6 %(a)     20.7 %
                               
Income from operations
    25.3 %     22.8 %     21.2 %(a)     20.8 %(a)     15.2 %
Interest expense
    7.9 %     6.9 %     8.7 %     10.3 %     9.3 %
                               
Income before provision for income taxes
    17.4 %     15.9 %     12.5 %     10.5 %     5.9 %
Provision for income taxes
    7.1 %     6.4 %     5.1 %     4.4 %     2.4 %
                               
Net income
    10.3 %     9.5 %     7.4 %     6.1 %     3.5 %
                               
 
(a)  Our 2004 performance was affected by $6.5 million of royalty revenue from a one-time payment from a major automobile manufacturer for a non-exclusive license to use certain of our patented technology and a related $670,000 special bonus. Excluding this payment and the related bonus, 2004 gross profit, total operating expenses, and income from operations would have been 40.8%, 22.1%, and 18.8% of net sales, respectively, and for the nine months ended September 30, 2004, gross profit, total operating expenses, and income from operations would have been 43.1%, 26.6%, and 16.5% of net sales, respectively.
       The net sales that we report represent gross product sales to customers less rebates and payment discounts, plus royalty and other revenue. We do not allocate these rebate or discount payments to specific product categories. As a result, in the discussion below we discuss gross sales by product category. The following table sets forth our gross and net sales information:
                                           
    Restated        
         
        Nine Months Ended
    Year Ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
Gross product sales
  $ 127,626     $ 136,927     $ 189,318     $ 106,558     $ 173,369  
Rebate/payment discount
    5,560       7,895       8,647       5,435       6,343  
                               
 
Net product sales
    122,066       129,032       180,671       101,123       167,026  
Royalty and other revenue
    1,643       2,733       9,198       8,668       2,011  
                               
 
Net sales
  $ 123,709     $ 131,765     $ 189,869     $ 109,791     $ 169,037  
                               

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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Net Sales
       Our net sales increased approximately $59.2 million, or 54.0%, to $169.0 million for the nine months ended September 30, 2005 from $109.8 million for the comparable period in 2004 primarily due to our expansion into satellite radio products, which we began selling in August 2004, and our expansion into Definitive Technology home audio products, which we began selling in September 2004 after our acquisition of that company. Our net sales in the first nine months of 2004 were also favorably impacted by a $6.5 million intellectual property license payment from a major automobile manufacturer received in June 2004.
       Approximately $40.2 million of our total gross sales increase was attributable to satellite radio product sales, which we began selling in August 2004. We primarily sell these products to national and regional consumer electronics retailers, including Best Buy and Circuit City, as well as to an increasing number of our independent specialty retailers. Home audio sales accounted for $21.7 million of the gross sales increase due to our acquisition of Definitive Technology in September 2004, with particularly strong sales of this brand to Magnolia Audio Video, a growing home audio specialty retailer. Security and convenience sales increased primarily due to renewed shipments of these products to Circuit City, partially offset by lower sales to an international distributor. Car audio sales also increased modestly. These sales increases were partially offset by a slight decrease in our mobile video sales attributable to falling average selling prices in a competitive market.
       Royalty and other revenue decreased by approximately $6.7 million from $8.7 million for the nine months ended September 30, 2004 to $2.0 million for the comparable period in 2005. This decline is due primarily to the collection of a $6.5 million intellectual property license payment in June 2004 from a major automobile manufacturer. Although we routinely collect license revenues for our intellectual property, we do not consider the size and nature of this payment to be reflective of our ongoing operations.
       Rebates for the nine months ended September 30, 2005 were 3.1% of gross product sales compared to 4.8% of gross product sales for the comparable period in 2004 due to increases in sales of products not eligible for rebates.
Gross Profit and Income from Operations
       Our gross profit increased approximately $9.7 million, or 19.1%, to $60.7 million for the nine months ended September 30, 2005 from $51.0 million for the comparable period in 2004, as our sales increase more than offset the impact of lower gross margins. Our total gross profit margin decreased from 46.4% for the nine months ended September 30, 2004 to 35.9% for the comparable period in 2005 primarily due to product mix, as an increased proportion of our sales in 2005 was attributable to lower margin satellite radio products, and to a lesser extent increased product warranty claims on our mobile video products. In addition, the June 2004 $6.5 million intellectual property license payment with no associated cost of sales resulted in an unusually high gross profit margin for the nine months ended September 30, 2004. Without this intellectual property license payment in the 2004 results, gross profit margin would have been 43.1% for the first nine months of 2004, compared to 35.9% for the comparable period in 2005.
       Income from operations increased by $2.9 million, or 12.5%, to $25.7 million for the nine months ended September 30, 2005 from $22.9 million for the comparable period in 2004. This increase was due to higher gross profit partially offset by an increase in operating expenses of $6.9 million. The operating expense increase was attributable primarily to the inclusion in the 2005 period of Definitive Technology’s operating expenses and costs associated with the sale of satellite radio products. Operating expenses in 2004 include a one-time bonus of $670,000 paid to all employees in connection with the intellectual property license payment from a major vehicle

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manufacturer discussed above. Without the income from the license payment and the related bonus expense in the 2004 results, operating income would have increased by $8.7 million, or 51.0%, to $25.7 million for the nine months ended September 30, 2005 from $17.0 million for the comparable period in 2004.
       Amortization of intangibles increased approximately $574,000 to $3.0 million for the nine months ended September 30, 2005 from $2.5 million for the comparable period in 2004 due to the September 2004 acquisition of Definitive Technology. We expect amortization of intangibles will also increase for the full year of 2005 due to the amortization expense resulting from intangibles acquired in the Definitive Technology transaction.
Interest Expense
       Net interest expense increased approximately $4.4 million to $15.7 million for the nine months ended September 30, 2005 from $11.3 million for the comparable period in 2004 primarily due to the increase in outstanding indebtedness in connection with our June 2004 recapitalization and the Definitive Technology acquisition in September 2004. In February 2005, we successfully negotiated a reduction in the interest rate on our senior credit facility by 1.0%, which lowered the rate on that debt from LIBOR plus 4.25% to LIBOR plus 3.25%. The interest expense savings from this rate reduction have been partially offset by increases in LIBOR during 2005. Our June 2004 recapitalization resulted in the write-off of $2.8 million of deferred financing fees and unamortized loan discount associated with the repayment of our then outstanding debt, and this non-cash write-off is included in our interest expense for the nine-month period ended September 30, 2004. Without this write-off, our interest expense would have increased by $7.2 million in the 2005 period.
     Provision for Income Taxes
       Our effective tax rate decreased slightly from 41.1% for the nine-month period ended September 30, 2004 to 40.7% for the comparable period in 2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
     Net Sales
       Our net sales increased approximately $58.1 million, or 44.1%, to $189.9 million in 2004 from $131.8 million in 2003 due primarily to our entry into the satellite radio market, strong growth in mobile video sales, and our expansion into Definitive Technology home audio products, which we began selling in September 2004 after our acquisition of that company. With this net sales increase, we have now increased revenue every year for over 15 years.
       Approximately $29.4 million of our total gross sales increase was attributable to satellite radio product sales, which began in August 2004. These products were primarily sold through national and regional consumer electronics retailers, including Best Buy and Circuit City. Mobile video products experienced rapid growth in volume as a result of a broadened product assortment and placement with retailers such as Best Buy. Our acquisition of Definitive Technology, which was completed in September 2004, accounted for $11.1 million of the increase in gross sales. Car audio product sales also increased modestly due to the introduction of our value-priced car audio line, which we believe improved our market share as the overall market for speakers, amplifiers, and subwoofers declined during this period. Security and convenience product sales declined slightly in 2004 as compared with 2003, as a result of the temporary discontinuation of sales to Circuit City in 2004, which was partially offset by an overall increase in security and convenience sales increases to our other retailer customers. We have since regained the Circuit City business and become their exclusive supplier of security and convenience products, and initial shipments began in March 2005.
       Royalty and other revenue increased by $6.5 million from $2.7 million in 2003 to $9.2 million in 2004. Also in 2004, we collected a $6.5 million intellectual property license payment from a major

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vehicle manufacturer and paid a special $670,000 bonus to all employees resulting from this payment. Although we routinely collect license revenues for our intellectual property, we do not expect the size and nature of this payment to recur in the future.
       Rebates decreased to 4.1% of gross product sales in 2004 compared to 5.5% of gross product sales in 2003 due to increases in sales of products not eligible for rebates.
     Gross Profit and Income from Operations
       Our gross profit increased by $19.5 million, or 31.5%, from 2003 to 2004, due to an increase in our net sales. Our gross profit margin decreased from 46.9% in 2003 to 42.8% in 2004 primarily due to our introduction of satellite radio products, which provide a significantly lower margin than our other products. Additionally, the rapid increase in sales of our mobile video products, which generate lower gross margins than our other security and entertainment products, negatively impacted our overall gross margin.
       Income from operations increased by $10.1 million, or 33.8%, from $30.1 million in 2003 to $40.2 million in 2004. This increase was due to higher gross profit partially offset by an increase in operating expenses of $9.3 million. Nearly half of the operating expense increase resulted from the inclusion of Definitive Technology’s operating expenses and costs associated with the sales of satellite radio products. An additional $1.3 million of the operating expense increase was related to the equity incentive payments made in connection with our June 2004 recapitalization. Additionally, operating expenses increased by $670,000 related to a one-time bonus paid in connection with the $6.5 million license payment from a major vehicle manufacturer discussed above. Amortization of intangibles increased approximately $218,000 to $3.5 million in 2004 due to the Definitive Technology acquisition.
     Interest Expense
       Net interest expense increased approximately $7.4 million, or 81.8%, from $9.1 million in 2003 to $16.5 million in 2004 primarily as a result of the significant increase in outstanding indebtedness in connection with our recapitalization and Definitive Technology acquisition in 2004. To a lesser extent, our interest expense was affected by general increases in interest rates, which impacted the interest costs on our variable rate debt. The recapitalization resulted in the write-off of $2.8 million of deferred financing fees and unamortized loan discount associated with the repayment of our then-outstanding debt, and this non-cash write-off is included in our interest expense for 2004. Additionally, our 2004 interest expense includes amortization of financing fees related to the new debt incurred in connection with the recapitalization and Definitive Technology acquisition totaling $595,000.
     Provision for Income Taxes
       Our effective tax rate increased from 40.6% in 2003 to 41.1% in 2004. Our cash taxes paid in 2004 were $3.9 million, representing 16.6% of income before provision for income taxes. This difference results from the amortization of goodwill for tax purposes over 15 years resulting from our original acquisition by Trivest in 1999, when we made an election under Section 338(h)(10) of the Internal Revenue Code, and from the structure of our subsequent acquisitions.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
     Net Sales
       Our net sales increased approximately $8.1 million, or 6.5%, from $123.7 million in 2002 to $131.8 million in 2003. This increase was due primarily to a $5.1 million increase in gross sales of security and convenience products, and expansion of our mobile video business, partially offset by a $1.6 million decline in car audio sales due to reduced sales of amplifiers resulting from the

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discontinuation of certain product lines in 2003. Our security and convenience gross sales increased due to increased sales of our remote start products and the introduction of our two-way hybrid devices. We entered the mobile video business in late 2002, which led to an increase in gross sales in 2003 as our products gained acceptance with certain of our specialty retailer customers.
       Total royalty and other revenue increased by $1.1 million from $1.6 million in 2002 to $2.7 million in 2003 due to additional royalty revenue from a new agreement signed in 2003 and a full year of royalties from an agreement signed in 2002.
       Rebates increased to 5.5% of gross product sales in 2003 from 4.0% of gross product sales in 2002 due to a new rebate program in 2003 and a larger number of products qualifying for rebates in that year.
     Gross Profit and Income from Operations
       Our gross profit increased slightly from 2002 to 2003. As a percentage of net sales, our gross profit margin decreased from 49.9% in 2002 to 46.9% in 2003. This gross margin decline was primarily due to increases in sales of our mobile video products, which generated lower margins than the other products we sold in 2003. Our gross margins in our other product lines remained relatively constant from 2002 to 2003.
       Income from operations totaled $30.1 million in 2003, compared to $31.3 million in 2002. This decrease was primarily due to a $1.3 million increase in operating expenses. Operating expenses during 2003 were impacted by increased legal fees associated with enforcing our intellectual property rights, expenses related to the closure of a facility we had acquired in connection with our acquisition of ADS Technologies, and increased marketing expenses.
 Interest Expense
       Net interest expense decreased approximately $632,000, or 6.5%, from $9.7 million in 2002 to $9.1 million in 2003 primarily due to lower average debt balances.
 Provision for Income Taxes
       Our effective tax rate decreased slightly from 40.8% in 2002 to 40.6% in 2003. Our cash taxes paid in 2003 were $6.3 million.
Liquidity and Capital Resources
       Our principal uses of cash are for operating expenses, working capital, servicing long-term debt, capital expenditures, acquisitions, and payment of income taxes. Due to our business model, our capital expenditures are generally low. In addition, our working capital needs have also generally historically been low due to our outsourced manufacturing model and C.O.D./ credit card payment policies in place with our independent retailers. We maintain stringent collection policies, resulting in approximately 75% of our customers paying either C.O.D. or by credit card. This profile has recently changed with our introduction of satellite radio products and our acquisition of Definitive Technology, which have caused a significant increase in the proportion of our sales to national and regional customers on commercial payment terms, increasing our accounts receivable and inventories. The increase in working capital in the later part of 2004 was also influenced by the seasonal demand for satellite radio and, to a lesser extent, home audio products. As a result of this seasonal demand, we expect that our receivables and payables will typically peak near year-end due to high fourth quarter volume and will typically be reduced in the first quarter of the year. Historically, we have financed these requirements from internally generated cash flow and borrowings from our credit facility. Furthermore, our cash flow benefits from a difference in our cash taxes paid and our income tax expense. This difference between our effective tax rate and our cash taxes paid results from the amortization of goodwill for tax purposes over 15 years resulting from our original acquisition by

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Trivest in 1999 via a 338(h)(10) election and from the structure of our subsequent acquisitions. Assuming continuing profitability and an effective tax rate of 40.7%, our tax-deductible goodwill and intangible asset amortization will generate approximately $4.1 million of annual incremental after-tax cash flow savings through 2013, with reduced benefits thereafter through 2019 or as a result of an impairment or sale of goodwill or intangible assets.
       Net cash provided by operating activities was approximately $8.9 million in 2004, compared to $21.3 million in 2003. The decline in our operating cash flow from 2003 to 2004 occurred primarily because the increase in our net income (which benefited from our $6.5 million pretax licensing receipt) and the increase in accounts payable associated with our satellite radio and Definitive Technology product sales were more than offset by the $27.3 million increase in accounts receivable and $4.2 million increase in inventory primarily associated with those product sales and the growth in our national retailer accounts. These trends continued in the first nine months of 2005, as net cash used in operating activities was $12.7 million, which was primarily due to an $18.9 million increase in inventories and a $7.1 million decrease in accounts payable, partially offset by a $5.6 million decrease in accounts receivable.
       Net cash used in investing activities was approximately $51.1 million in 2004 compared with $1.5 million in 2003. The increase was a result of our acquisition of Definitive Technology in September 2004. Our business model requires minimal capital expenditures, and purchases of property and equipment were $1.3 million in 2004 compared with $1.5 million in 2003. In the first nine months of 2005, our net cash used in investing activities was $1.9 million.
       Net cash provided by financing activities was approximately $29.7 million in 2004 compared with net cash used in financing activities of $18.7 million in 2003. Our 2004 financing cash flow reflects approximately $230.0 million of borrowings in connection with the recapitalization and acquisition of Definitive Technology, which more than offset our payment of a $109.4 million special dividend to our shareholders and warrantholders in connection with our recapitalization and our repayment of the existing debt. Our 2003 use of cash reflects repayment of debt out of operating cash flow. In the first nine months of 2005, net cash provided by financing activities was $14.2 million, which primarily represents our $15.0 million in additional borrowings under our senior credit facility to support the continued growth of our business.
       Cash and cash equivalents were $3.5 million as of September 30, 2005 compared with $3.8 million as of December 31, 2004.
       The following table summarizes key cash flow information:
                                         
    Restated        
         
        Nine Months Ended
    Year Ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
    (In thousands)
Net cash provided by (used in) operating activities
  $ 12,080     $ 21,250     $ 8,924     $ (2,200 )   $ (12,698 )
Net cash (used in) investing activities
    (1,751 )     (1,520 )     (51,140 )     (48,502 )     (1,876 )
Net cash provided by (used in) financing activities
    (2,240 )     (18,744 )     29,734       36,527       14,150  
       As discussed above, we intend to use the net proceeds of this offering to prepay all of our outstanding subordinated notes, which will reduce our interest expense. On a pro forma basis, the prepayment of our outstanding subordinated notes would have resulted in a reduction of interest expense of $4.4 million for the year ended December 31, 2004.
       Our principal sources of liquidity are cash from operations and funds available for borrowing under our senior credit facility. Our senior credit facility provides for aggregate borrowings of up to

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$221.0 million and consists of a $50.0 million revolving credit facility due June 2009 and a $171.0 million term loan due June 2010, with significant quarterly amortization beginning in September 2009. As of September 30, 2005, the current balance on the term loan was $166.6 million. A portion of the revolving credit facility is available as a letter of credit sub-facility and as a swingline facility. Borrowings under the revolving credit facility are used to finance working capital, capital expenditures, acquisitions, certain expenses associated with the bank credit facilities, and letter of credit needs. As of September 30, 2005, we had no amounts drawn on our revolving credit facility to fund working capital requirements. We plan to continue to utilize our revolving credit facility, including higher outstanding balances than we have historically experienced, and cash generated from operations to fund working capital requirements and capital expenditure needs, including during the fourth quarter of 2005. As of November 30, 2005, we had drawn $11.9 million on our revolving credit facility. In the future, the growth of our business, including faster than anticipated growth of our satellite radio business, may require us to seek additional sources of liquidity such as a larger revolving credit facility. In addition, if we pursue significant acquisitions in the future, this will likely necessitate additional borrowings and, potentially, additional equity. Our ability to use operating cash flow to increase our growth is limited by requirements in our credit agreement to repay debt with excess cash flow as defined therein. As discussed under “Description of Indebtedness,” our senior secured credit facility contains various financial and restrictive covenants. We are currently in compliance with all of the covenants under our senior secured credit facility.
       Capital expenditures are expected to be approximately $2.0 million for each of 2005 and 2006. We believe, based on our current revenue levels, that our existing and future cash flows from operations, together with borrowings available under our revolving credit facility, will be sufficient to fund our working capital needs, capital expenditures, and to make interest and principal payments as they become due under the terms of our senior credit facility for the foreseeable future. We have minimal required principal payments until September 2009. We expect to refinance or extend our senior credit facility before that time, but we may not be able to obtain such refinancing on acceptable terms or at all.
Quarterly Results of Operations
       Our business experiences modest quarterly fluctuations in net sales and operating income, and from time to time our sales have been lower than the preceding quarter. These fluctuations are primarily a result of consumer shopping patterns. Sales typically increase in the third quarter due to stronger consumer demand for car audio and mobile video products driven by the summer season, when consumers typically spend more time in their cars, coupled with retail customers purchasing remote start, home audio, and satellite radio products in advance of the holiday selling season. Sales of our products are usually highest in our fourth fiscal quarter due to increased consumer spending during the holiday season, which will be even more pronounced with the growth of our satellite radio product sales.
       Our quarterly results are also influenced by the timing of acquisitions and product introductions. For example, our results for the fourth quarter of 2004 were significantly higher due to the impact of our September 2004 acquisition of Definitive Technology and sales of our satellite radio products, which began in August 2004. Quarterly performance comparisons can also be affected by product life cycles.

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       The following table presents unaudited consolidated statement of operations data for each of the eleven quarters in the period ended September 30, 2005. We believe that all necessary adjustments have been included to fairly present the quarterly information when read in conjunction with our annual financial statements and related notes. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.
                                                                                           
    Quarter Ended
     
    2003   2004   2005
             
    March 31   June 30   Sept. 30   Dec. 31   March 31   June 30   Sept. 30   Dec. 31(a)   March 31(a)   June 30(a)   Sept. 30(a)
                                             
    (Unaudited)(In thousands, except per share data)    
Consolidated Statement of Operations Data:
                                                                                       
Net sales
  $ 30,397     $ 26,254     $ 33,838     $ 41,276     $ 33,914     $ 37,534 (b)   $ 38,343     $ 80,078     $ 52,065     $ 55,656     $ 61,316  
Cost of sales
    15,507       14,416       18,301       21,683       18,754       17,862       22,187       49,722       33,106       35,891       39,308  
                                                                   
Gross profit
    14,890       11,838       15,537       19,593       15,160       19,672       16,156       30,356       18,959       19,765       22,008  
Total operating expenses
    8,174       7,563       7,726       8,319       8,594       10,207       9,312       12,992       11,535       11,809       11,647  
                                                                   
Income from operations
    6,716       4,275       7,811       11,274       6,566       9,465 (b)     6,844       17,364       7,424       7,956       10,361  
Interest expense, net (c)
    2,270       2,272       2,276       2,273       2,094       5,037       4,144       5,248       5,010       5,052       5,585  
                                                                   
Income before provision for income taxes
    4,446       2,003       5,535       9,001       4,472       4,428       2,700       12,116       2,414       2,904       4,776  
Provision for income taxes
    1,804       812       2,246       3,652       1,841       1,822       1,110       4,981       983       1,182       1,944  
                                                                   
Net income
    2,642       1,191       3,289       5,349       2,631       2,606       1,590       7,135       1,431       1,722       2,832  
Net income attributable to participating securityholders
    8       4       20       39       21       24       18       76       16       22       37  
                                                                   
Net income available to common shareholders
  $ 2,634     $ 1,187     $ 3,269     $ 5,310     $ 2,610     $ 2,582     $ 1,572     $ 7,059     $ 1,415     $ 1,700     $ 2,795  
                                                                   
Net income per common share:
                                                                                       
 
Basic
  $ 0.21     $ 0.09     $ 0.26     $ 0.42     $ 0.20     $ 0.19     $ 0.09     $ 0.38     $ 0.08     $ 0.09     $ 0.15  
                                                                   
 
Diluted
  $ 0.16     $ 0.08     $ 0.20     $ 0.32     $ 0.16     $ 0.16     $ 0.09     $ 0.38     $ 0.08     $ 0.09     $ 0.15  
                                                                   
 
(a)  Includes sales attributable to the Definitive Technology acquisition and sales of SIRIUS Satellite Radio products. The fourth quarter of 2004 was our first full quarter that included sales of Definitive Technology products and SIRIUS products.
 
(b)  Includes $6.5 million of royalty revenue from a one-time payment from a major automobile manufacturer for a non-exclusive license to use certain of our patented technology. The only expense associated with this payment was a $670,000 special bonus recorded as operating expense.
 
(c)  In connection with our June 2004 recapitalization, we incurred approximately $185.0 million of new indebtedness and paid off a total of $76.6 million of existing debt. In addition, we paid a special dividend to shareholders and warrantholders of approximately $109.4 million. Due to the repayment of the existing debt, we wrote off $1.1 million of deferred financing costs and we wrote off $1.7 million of unamortized discount related to the warrants that were issued with the existing debt.

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Aggregate Contractual Obligations
       The following table lists our commercial commitments as of December 31, 2004:
                                         
        Payments Due by Period
    Total    
    Amounts   Less than       6 Years
Commercial Commitments   Due   1 Year   1-3 Years   4-5 Years   and Over
                     
    (In thousands)
Long-term debt, including current portion
  $ 225,610     $     $ 4,617     $ 146,993     $ 74,000  
Operating leases
  $ 15,509     $ 1,597     $ 4,940     $ 3,492     $ 5,480  
       Contractual obligations for long-term debt include required principal payments. The table does not reflect our planned repayment of $74.0 million of indebtedness with the proceeds of this offering. Interest obligations on our long-term debt are all at variable rates. At December 31, 2004, the weighted average interest rate on our long-term debt was 7.92%. The operating leases relate to our Vista, California headquarters lease, our Definitive Technology sales office located in Owings Mills, Maryland, and our Epsom, England office, which expire in 2013, 2006, and 2008, respectively.
Off-Balance Sheet Arrangements
       We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.
Non-GAAP Discussion
       In addition to our GAAP results, we also consider non-GAAP measures of our performance for a number of purposes. We use EBITDA, adjusted as described below, referred to in this prospectus as “Adjusted EBITDA,” as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.
       EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA represents EBITDA plus expenses (minus gains) that we do not consider reflective of our ongoing core operations, as further described below. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance. All of the adjustments made in our calculation of Adjusted EBITDA, as described below, are adjustments that would be made in calculating our performance for purposes of coverage ratios under our senior credit facility. In addition, we determine management bonuses based in significant part on our performance measured by Adjusted EBITDA. Measures similar to Adjusted EBITDA are also widely used by us and others in our industry to evaluate and price potential acquisition candidates. For example, we used EBITDA, as adjusted for certain compensation expenses, rebates, and receivables insurance, to evaluate our acquisition of Definitive Technology in 2004. We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the book amortization of intangibles (affecting relative amortization expense). We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance.

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       In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments described below. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring items.
       EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
  •  they do not reflect our cash expenditures for capital expenditures or contractual commitments;
 
  •  they do not reflect changes in, or cash requirements for, our working capital requirements;
 
  •  they do not reflect our significant interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness;
 
  •  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect the cost or cash requirements for such replacements;
 
  •  Adjusted EBITDA does not reflect the impact on our reported results of earnings or charges resulting from equity participation payments, management fees, and one-time licensing revenue; and
 
  •  other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
       Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a substitute for our net income as reported under GAAP, or as measures of discretionary cash available to us to invest in the growth of our business or reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. For more information, see our consolidated financial statements and the notes to those statements included elsewhere in this prospectus.
       The following table presents data relating to EBITDA and Adjusted EBITDA, both of which are non-GAAP measures, for the periods indicated:
                                         
    Restated    
        Nine Months
        Ended
    Year Ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
    (In thousands)
Net income
  $ 12,763     $ 12,471     $ 13,962     $ 6,827     $ 5,985  
Plus: interest expense, net
    9,723       9,091       16,523       11,275       15,647  
Plus: income tax expense
    8,793       8,514       9,754       4,773       4,109  
Plus: depreciation and amortization
    3,761       4,010       4,448       3,132       3,922  
                               
EBITDA
    35,040       34,086       44,687       26,007       29,663  
Plus: equity participation
payment (1)
                1,280       1,280        
Plus: management fees (2)
    571       405       552       392       539  
Less: one-time license fee, net of expenses (3)
                5,830       5,830        
                               
Adjusted EBITDA
  $ 35,611     $ 34,491     $ 40,689     $ 21,849     $ 30,202  
                               
 
(1)  We made this payment under an equity participation agreement with our chief executive officer in connection with our June 2004 recapitalization. This payment reduced 2004 net income, but we do not consider this payment reflective of our ongoing operations.

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(2)  In connection with this offering, our management agreement with Trivest Partners, L.P. will be terminated. For more information, see “Certain Relationships and Related Party Transactions — Management and Advisory Agreements.”
 
(3)  Reflects a non-refundable, up-front payment from a major vehicle manufacturer for a non-exclusive license to use certain of our patented technology, net of a special $670,000 bonus paid to all employees.
Quantitative and Qualitative Disclosures About Market Risk
       Our exposure to interest rate risk is primarily the result of borrowings under our existing bank credit facilities. At September 30, 2005, $166.6 million was outstanding under our senior credit facility. Borrowings under our senior credit facility are secured by first priority security interests in substantially all of our tangible and intangible assets. Our results of operations are affected by changes in market interest rates on these borrowings. A 1% increase in the interest rate would result in additional annual interest expense of $1.7 million on our senior credit facility, assuming no revolving credit borrowings. As required by our credit agreement, we have entered into an agreement to cap the interest rate on a portion of our term loans. Pursuant to that agreement, the interest rate on an aggregate of $78.0 million of our senior debt may not exceed 9.25% on LIBOR rate loans before June 17, 2007.
       We will continue to monitor changing economic conditions. Based on current circumstances, we do not expect to incur a substantial increase in costs or a material adverse effect on cash flows as a result of changing interest rates.
       Our revenues and purchases are predominantly in U.S. Dollars. However, we collect a portion of our revenue in non-U.S. currencies, such as British Pounds Sterling. In the future, and especially as we expand our sales in international markets, our customers may increasingly make payments in non-U.S. currencies. In addition, we account for a portion of our costs in our U.K. office, such as payroll, rent, and indirect operating costs, in British Pounds Sterling. Fluctuations in foreign currency exchange rates could affect our sales, cost of sales, and operating margins. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency and could cause losses to our contract manufacturers. Although we plan to expand internationally, we do not expect to be materially affected by foreign currency exchange rate fluctuations in the near future, as the transactions denominated in non-U.S. currencies are not material to our consolidated financial statements. Therefore, we do not currently use derivative financial instruments as hedges against foreign currency fluctuations.
Recently Issued Accounting Pronouncements
       In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We are currently evaluating the effect that the adoption of SFAS 151 will have on our consolidated statements of income and our financial condition but do not expect SFAS 151 to have a material impact.

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       In December 2004, the FASB issued SFAS No. 123R, “Share — Based Payment.” This statement is a revision of SFAS Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R addresses all forms of share based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will be reflected as compensation expense in the financial statements. In addition, this statement will apply to unvested options granted prior to the effective date. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC Staff’s interpretation of SFAS No. 123R, which provides the Staff’s view regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides interpretation of the valuation of SBP for public companies. In April 2005, the SEC approved a rule that delays the effective date of SFAS No. 123R for annual, rather than interim, reporting periods that begin after June 15, 2005. We will adopt Statement 123R effective January 1, 2006 and are still evaluating the effect that the adoption of this statement will have on our consolidated financial condition and results of operations, which will depend, in part, on the type of equity-based compensation arrangements we adopt in the future.
       In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principles. SFAS No. 154 applies to all voluntary changes in accounting principles as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. A change in accounting estimate continues to be accounted for in the period of change and future periods if necessary. A correction of an error continues to be reported by restating prior period financial statements. SFAS No. 154 is effective for the Company for accounting changes and correction of errors made on or after January 1, 2006.
Impact of Inflation
       We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2002, 2003, or 2004. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of operations.
Controls and Procedures
       A material weakness is “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” A restatement of previously issued financial statements to reflect the correction of a misstatment is a strong indicator that a material weakness in internal control over financial reporting exists.
       We have restated our financial statements for the years ended December 31, 2002, 2003, and 2004, in order to conform certain of our historical accounting policies and accounting with U.S. generally accepted accounting principles. The restatements resulted in the deferral of the recognition of revenue on certain shipments made prior to fiscal year end for which risk of loss did not transfer to the customer until the subsequent period, to record expenses and inventory purchases in the proper period, to adjust the financial statement entries to agree with underlying account reconciliations, to correct entries relating to the calculation of our tax obligations, to correct our computation of net income per common share, and to correct certain other less material errors.

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       In connection with the preparation of this prospectus, we identified the following material weaknesses:
  •  Inadequate Resources in our Accounting and Financial Reporting Functions. We do not currently maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles commensurate with our existing financial reporting requirements and the requirements we will face as a public company. Specifically, we had deficiencies in accounting staff with sufficient depth and skill in the application of U.S. generally accepted accounting principles to meet the objectives that are expected of these roles. This material weakness contributed to the restatements in our financial statements, including adjustments related to revenue recognition, computation and disclosure of earnings per common share, and other adjustments described in Note 2 to our financial statements, and also contributed to the material weaknesses described below.
 
  •  Inability to Appropriately Reconcile and Analyze Certain Accounts. We did not maintain effective controls with respect to the timely analysis and reconciliation of our cash and accrual accounts. As a result, we identified errors at December 31, 2002 and 2003 related to the reconciliation of certain general ledger accounts, including cash and accrual accounts.
 
  •  Failure to Record Expenses and Inventory Purchases in the Proper Period. We did not maintain effective controls with respect to the cut-off for expenses and inventory received by us. Adjustments were required for these cut-off errors in our restated financial statements for 2002 and 2003.
 
  •  Failure to Properly Record Income Tax Obligations. We did not accurately record our tax obligations for each state in which we were required to file returns. Adjustments were made to address these errors in our restated financial statements for 2002 and 2003.
       As discussed above, these control deficiencies resulted in adjustments that were included in the restatement of our financial statements for the years ended December 31, 2002, 2003, and 2004, as well as adjustments to our financial statements for the interim periods ended June 30, 2004 and 2005. Additionally, each of these control deficiencies could result in a misstatement of account balances or disclosures that would result in a material misstatement to our financial statements that would not be prevented or detected. Accordingly, we have determined that each of the control deficiencies described above constitutes a material weakness.
       We may in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. We plan to refine our internal control over financial reporting to meet the internal control reporting requirements included in Section 404 of the Sarbanes-Oxley Act. The efficacy of the measures we implement in this regard will be subject to ongoing management review supported by confirmation and testing by management and by our internal auditors, as well as audit committee oversight. As a result, we expect that additional changes could be made to our internal control over financial reporting and disclosure controls and procedures.
     Plan for Remediation of Material Weaknesses
       We are evaluating these material weaknesses and are in the preliminary stages of developing a plan to remediate such material weaknesses. In connection with our remediation efforts, we expect to review our internal accounting and financial reporting resources, establish formal technical training for accounting and financial reporting personnel, document our conclusions on technical accounting issues and determinations on a timely basis, and ensure the technical proficiency of the audit committee we are establishing in connection with this offering to oversee our financial reporting function.

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       We are also in the process of implementing a system of disclosure controls and procedures that is designed to ensure that information required in our future Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
       In September 2005, we hired a new Chief Financial Officer and appointed our prior Chief Financial Officer to the newly created position of Vice President — Internal Audit and Compliance. We further intend to implement the following initiatives as part of our efforts to prepare for our public reporting obligations, which we believe will contribute to our remediation efforts:
  •  We intend to initiate a Sarbanes-Oxley Section 404 preparedness project with the assistance of a reputable international accounting firm.
 
  •  We will implement a disclosure committee that will include the development of a certification and sub-certification process. The committee, certifications and other components of our disclosure controls and procedures will be designed to ensure that we are able to timely record, process, and report both financial and other information to our senior management team.
 
  •  We intend to significantly increase the number and skills of management and staff personnel in our accounting and finance organization to increase our depth of experience in accounting and SEC reporting matters.
 
  •  We expect to continue to review and revise a number of our accounting policies and procedures, including internal employee training, in order to strengthen such policies and procedures and establish greater uniformity in their application.
Critical Accounting Policies and Estimates
       Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States. During preparation of these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, investments, fixed assets, intangible assets, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
       We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
       Revenue from sales of products to customers is generally recognized when title and risk of ownership are transferred to the customer; when persuasive evidence of an arrangement exists; when the price to the customer is fixed or determinable; and when collection is reasonably assured, in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements.”
       In accordance with Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When a Right of Return Exists,” estimated product returns are deducted from revenue

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upon shipment, based on historical return rates, the product stage relative to its expected life cycle, and assumptions regarding the rate of sell-through to end users from our various channels based on historical sell-through rates.
       Our royalty revenue is recognized as earned in accordance with the specific terms of each agreement, which is generally when we receive payment.
       We account for payments to customers for volume rebates and cooperative advertising as a reduction of revenue, in accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” Reductions to revenue for expected and actual payments to resellers for volume rebates and cooperative advertising are based on actual or anticipated customer purchases, and on fixed contractual terms for cooperative advertising payments. Certain of our volume incentive rebates offered to customers include a sliding scale of the amount of the sales incentive with different required minimum quantities to be purchased. We make an estimate of the ultimate amount of the rebate our customers will earn based upon past history with the customer and other facts and circumstances. We have the ability to estimate these volume incentive rebates, as there does not exist a relatively long period of time for a particular rebate to be claimed. We have historical experience with these sales incentive programs and a large volume of relatively homogenous transactions. Any changes in the estimated amount of volume incentive rebates are recognized immediately on a cumulative basis.
       In accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” we account for the proceeds received for sales of SIRIUS-related hardware products as revenue on a gross basis, as we are the primary obligor to our customers, have discretion in pricing with our customers, have discretion in the selection and contract terms with our supplier, and have substantial inventory and credit risk.
Accounts Receivable
       A significant percentage of our customers pay C.O.D. or by credit card. For other customers, we perform ongoing credit evaluations and adjust credit limits based upon payment history and the customer’s current creditworthiness. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. We record charges for estimated credit losses against operating expenses and charges for price adjustments against net sales in our consolidated financial statements. While such credit losses have historically been within management’s expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past.
Inventories
       Inventories are valued at the lower of cost or market value. Cost is substantially determined by the first-in, first-out method, including material, labor and factory overhead. We record adjustments to our inventory for estimated obsolescence or diminution in market value equal to the difference between the cost of the inventory and the estimated market value, based on market conditions from time to time. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual experience if future economic conditions, levels of consumer demand, customer inventory levels or competitive conditions differ from expectations. At the point of the loss recognition, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Intangible Assets
       Intangible assets consist of the excess of cost over the fair value of assets acquired (goodwill) and other identifiable intangible assets, such as patents, customer relationships, and

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trademarks. We amortize our identifiable intangible assets over their useful lives, which for patents is 8 to 11 years, for customer relationships is 15 years, for licensing agreements is 12 years, and for non-compete covenants is 4 years. Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. Goodwill and other intangible assets that have an indefinite useful life are not amortized.
       On an annual basis, we test goodwill and other indefinite-lived intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose. To mitigate undue influence, we establish criteria that are reviewed and approved by various levels of management. These impairment tests may result in impairment losses that could have a material adverse impact on our results of operations.
Warranties
       We offer warranties of various lengths depending upon the specific product. Our standard warranties require us to repair or replace defective product returned to us by both end users and our retailer customers during specified warranty periods at no cost to the end users or retailer customers. We record an estimate for warranty related costs in cost of sales based upon our actual historical return rates and repair costs at the time of sale. The estimated liability for future warranty expense has been included in accrued expenses. While our warranty costs have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same warranty return rates or repair costs that have been experienced in the past. A significant increase in product return rates, or a significant increase in the costs to repair our products, could have a material adverse impact on our operating results for the period or periods in which such returns or additional costs materialize.
Income Taxes
       We provide tax reserves for Federal, state and international exposures relating to potential tax examination issues, planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing and is a subjective critical estimate. We determine our tax contingency reserves in accordance with SFAS No. 5, “Accounting for Contingencies.” We record estimated liabilities to the extent the contingencies are probable and can be reasonably estimated.

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BUSINESS
Introduction
       We are the largest designer and marketer of consumer branded vehicle security and convenience systems in the United States based on sales and a major supplier of home and car audio, mobile video, and satellite radio products. Our strong brand and product portfolio, extensive and highly diversified distribution network, and “asset light” business model have fueled the revenue growth and profitability of our company. For the year ended December 31, 2004, we generated total net sales of $189.9 million, which represents an 18.4% compound annual growth rate since 2000. For the 12-month period ended September 30, 2005, we generated total net sales of $249.1 million.
       As the sales leader in the vehicle security and convenience category, we offer a broad range of products, including security, remote start, hybrid systems, GPS tracking, and accessories, which are sold under our Viper, Clifford, Python, and other brand names. Our car audio products include speakers, subwoofers, and amplifiers sold under our Orion, Precision Power, Directed Audio, a/d/s/, and Xtreme brand names. We also market a variety of mobile video systems under the Directed Video® and Automate brand names. In 2004, we expanded our presence in the home audio market when we acquired Definitive Technology, adding to our established a/d/s/ brand of premium loudspeakers. In August 2004, we began marketing and selling certain SIRIUS-branded satellite radio products, with exclusive distribution rights for such products to our existing U.S. retailer customer base.
       Our products are sold through numerous channels, including independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, and car dealers. In 2004, we sold to approximately 3,400 customers, representing over 7,500 storefronts. We are the exclusive supplier of professionally-installed vehicle security products to over 45% of our U.S. retailers. We have also built a strong presence in leading national and regional electronics retailers, including Best Buy, Circuit City, Magnolia Audio Video, and Audio Express. We also sell our vehicle security, convenience, and mobile video products through car dealers, and we recently entered the mass merchant and automotive parts retailer channels with do-it-yourself remote start and convenience products. Our international sales comprised approximately 13% of our 2004 gross product sales, and our products are sold in 73 countries throughout the world. No single foreign country accounted for more than 3% of our net sales in 2004.
       We have a proven track record of enhancing our existing products and developing innovative new products, as evidenced by the 43 Consumer Electronics Association innovation awards we have earned. We hold an extensive portfolio of patents, primarily in vehicle security and also in audio. We license a number of these patents to leading automobile manufacturers and electronics suppliers, which provides us with an additional source of income. We outsource all of our manufacturing to third parties located primarily in Asia. We believe this manufacturing strategy supports a scalable business model, reduces our capital expenditures, and allows us to concentrate on our core competencies of brand management and product development.
Industry
       We compete within the wholesale consumer electronics industry, which in 2004 was estimated to be approximately $113 billion in the United States.
       In general, the proliferation of television programs and other media formats featuring car customization and home improvement have led to increased consumer awareness and desire for products in the markets in which we compete. Programs driving this interest include MTV’s “Pimp My Ride” and “Cribs,” Discovery Channel’s “Monster Garage,” and ABC’s “Extreme Makeover: Home Edition.” We believe this exposure has led to increasing consumer acceptance and demand for our products.

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       Security and Convenience. Security products consist of alarm systems designed to prevent theft of both vehicles and vehicle contents. Convenience products allow drivers to perform various functions remotely, such as starting a vehicle in order to heat or cool it prior to driving. Hybrid devices contain both security and convenience functions.
       These markets continue to be characterized by technical innovation. Recent product introductions include two-way security systems, which report vehicle status to the user via an LCD screen on the remote, and GPS tracking systems, which allow for vehicle locating and tracking. We estimate that wholesale spending on aftermarket vehicle security and convenience products in the United States was approximately $300 million in 2004. We believe that this market is generally stable, with growth prospects based on the following:
  •  Continued Focus on Security. Drivers are installing an increasing amount of aftermarket accessories in their vehicles. According to the Specialty Equipment Market Association, over the last decade annual retail spending on aftermarket car parts and accessories has doubled to $28.9 billion a year. We believe this has increased demand for security products needed to protect those valuable contents. According to the 2004 FBI Uniform Crime Report:
  •  In 2004, content theft from vehicles amounted to approximately $1.8 billion in the United States. Aftermarket security systems address this type of theft with sophisticated sensor technology.
 
  •  In 2004, an estimated 1.2 million vehicles were stolen in the United States, amounting to an estimated $7.6 billion in value.
  •  Increased Product Features. The vehicle security aftermarket increasingly features sophisticated products that incorporate security, convenience, and other advanced features. Examples of these features include two-way capabilities, which provide information back to the user such as confirmation of alarm activation or vehicle ignition; GPS applications, which allow for stolen vehicle recovery and monitoring a vehicle’s location; and remote operation of windows, sunroofs, and audio systems.
 
  •  Low OEM Penetration. Vehicle manufacturers have historically focused primarily on basic security and keyless entry devices, while aftermarket participants generally offer more complex products and systems. We estimate that OEMs have installation rates of only approximately 8% with sensor alarms, no installation of two-way capabilities, and limited availability of remote start features. We believe the automobile industry’s cost-driven manufacturing environment and emphasis on standardization are not conducive to increased OEM adoption of sophisticated aftermarket features. However, if OEMs decide to offer features such as remote start on their new vehicles more broadly, we believe the aftermarket industry could be influenced by the attendant advertising and increase in product awareness.
 
  •  Broadening Distribution Channels. Vehicle security and convenience products have migrated from primarily a specialty, niche item sold primarily by local mobile electronics specialists to a standard product category for a diverse set of retailers, including national and regional electronics chains, mass merchants, and national automotive parts retailers.
       Home Audio. We participate in the premium home loudspeaker market, which represented approximately $445 million of an estimated $1.3 billion separate home audio components wholesale market in 2004. Several technologies and industry developments have continued to drive the growth of this market, including:
  •  Home Theater. The emergence of home theater — the integration of audio and video systems to recreate the movie theater experience — has been an important driver of home speaker sales in recent years. Advances such as Dolby Digital technology and 5.1 Audio have led to important changes in the home speaker category, most notably the use of

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  surround sound technology. These developments in home entertainment are driving growth in premium speaker sales, as many consumers upgrade their home loudspeaker systems.
 
  •  Flat Panel Displays. Flat panel televisions have experienced extraordinary sales growth due to superior picture quality, high-definition capabilities, and the continuing decline in retail prices. Flat panel television sales grew to an estimated 2.7 million units in 2004, an increase of approximately 70% compared to 2003. We expect strong continued sales of flat panel televisions in 2006. Consumer spending on flat panel televisions is driving growth in premium speaker systems, as many consumers upgrade their home loudspeaker systems to match the sophistication of their video displays. In addition, with the continued decline in the prices of flat panel televisions, we believe consumers are more likely to allocate spending to other components such as speakers.
 
  •  Architectural Loudspeakers. Architectural loudspeakers (in-wall/in-ceiling speakers) appeal to consumers seeking to integrate their entertainment systems into their homes. These speakers are typically used in distributed audio applications or home theater systems. The desire for appealing aesthetics, the space efficiency of in-wall and in-ceiling speakers, and the increasing penetration of structured wiring have all resulted in an increasing consumer demand for architectural loudspeakers. Additionally, the recent increases in new home construction and home remodeling, coupled with the low existing market penetration of architectural loudspeakers, have led to increased demand in this market.

       Car Audio. The total U.S. car audio wholesale aftermarket was an estimated $2.1 billion in 2004. We participate in the portion of this market that consists of speakers, subwoofers, and amplifiers, an approximately $660 million market in 2004, which generally offers higher margins than the “head units” used to control the audio system and play CDs and tapes. More than 100 companies participate in this portion of the market.
       Although the market for speakers, subwoofers, and amplifiers has fluctuated, we believe that the following developments provide prospects for growth of this market:
  •  Sound Quality and Format. Sound quality has increased greatly in recent years due to the development of digital transmission, storage, and playback, including satellite radio. In addition, new music formats have been developed, such as MP3. We believe the increases in both sound quality and storage should drive additional car audio purchases, as consumers seek to upgrade sound quality in their vehicles.
 
  •  Increased Customization. We believe the growing popularity of vehicle customization should help increase car audio sales. Television programs, hit movies, and other media formats have brought increased visibility to custom car audio systems, which we believe support demand in our core car audio demographic.
       Mobile Video. The U.S. mobile video and navigation wholesale aftermarket generated an estimated $782 million in 2004. This category consists of overhead systems, stand alone and headrest-mounted monitors, in-vehicle DVD players, and in-dash and portable navigation units. We offer all of these products other than in-dash and portable navigation units. Mobile video has gained in popularity particularly due to the adoption of rear seat entertainment units, which allow passengers to watch movies and play video games, as well as from increased consumer awareness and declining retail prices.
       The mobile video market has benefited from the following developments:
  •  Larger Vehicles. Minivan and sport utility vehicle owners have more room for video screens and more passengers to entertain. As a result, mobile video systems are especially prevalent in these vehicle categories.

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  •  Children’s Entertainment. The adoption of mobile video has been especially prevalent among families with small children. The ability to occupy and entertain children while on longer drives has led to strong demand from consumers in that demographic.
 
  •  Gaming. The ability to connect videogame players to mobile video screens has also led to the popularity of mobile video. Videogame players enjoy the ability to play while traveling, and mobile video offers those players a superior gaming experience from what they receive with handheld units.
       Satellite Radio. Satellite radio service provides music, entertainment, and information programming on a subscription basis. There are currently two satellite radio service providers operating in the United States, SIRIUS Satellite Radio and XM Radio. These companies focus on providing the programming and have partnered with hardware suppliers to sell the hardware used to receive satellite broadcasts. The target market for satellite radio includes more than 200 million registered vehicles and over 100 million households in the United States. Satellite radio has experienced dramatic subscription growth. As of September 30, 2005, SIRIUS reported more than 2.1 million subscribers and SIRIUS has projected that the number of its subscribers will increase to 3.0 million by December 31, 2005.
       The primary drivers of growth in the satellite radio market include the following:
  •  Programming Content. Satellite radio programming consists of nearly commercial free music, talk shows, sports, and other entertainment content. In much the same way that cable television offers expanded viewing choices over traditional broadcast television, satellite radio offers greatly enhanced listening options over traditional broadcast radio. Satellite radio offers listeners a much broader selection of programming formats and even allows listeners to customize their own content.
 
  •  Consumer Awareness. Satellite radio service has only recently become available to consumers, and both SIRIUS and XM Radio are rapidly adding new subscribers to their customer base. This growth in subscribers is driving the attendant growth in hardware sales.
       In 2004, sales of plug-and-play satellite radio hardware totaled approximately $415 million. Both satellite radio service providers continue to aggressively market their services, and have formed various alliances with automobile manufacturers and consumer electronics companies in order to continue expanding their subscriber base. Most radio manufacturers now offer products that either receive, or are compatible with, SIRIUS and/or XM broadcasts.
Our Competitive Strengths
       We believe that the following key competitive strengths will contribute to our continued success:
Strong Market Positions
       We enjoy the #1 market position in vehicle security and convenience products based on sales. We have established this position over the course of two decades by focusing on quality, innovation, and customer relationships. Over time, we have leveraged our security and convenience platform to enter other complementary product categories in which we have also built strong market positions. For example, we have been successful in developing and selling our mobile video products to existing customers. Our product development capabilities and extensive retail distribution network have allowed us to grow into a major mobile video supplier in approximately three years. In the home audio category, we have enhanced our market position through our acquisitions of ADS Technologies and Definitive Technology. Finally, we have achieved a leading market share in satellite radio hardware through our relationship with SIRIUS Satellite Radio to distribute SIRIUS-branded receivers.

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       We believe our extensive portfolio of 87 patents and 126 U.S. and 153 foreign trademark registrations, and our proprietary database of over 5,000 vehicle wiring diagrams, protect our position in the security and convenience market. Furthermore, we believe that the customer service and technical service we provide contribute to maintaining our strong market positions. We also believe our extensive distribution network and relationships with specialty and national retailers give us an advantage over most competitors.
Broad Portfolio of Established Brands
       We believe our portfolio of established brands is a significant competitive strength. We believe our core brands are well-known and desired by important retailers of consumer electronics as well as by consumers. Our Viper, Python, and Clifford brands enjoy a high-quality reputation and substantial consumer awareness. We have expanded our broad portfolio of brands to include Definitive Technology, Orion, a/d/s/, Precision Power, Directed Video and Automate to target specific product categories or distribution channels within our markets. In the satellite radio market, SIRIUS enjoys high brand recognition among consumers as one of only two national satellite radio content providers. We believe this diverse portfolio of brands positions us to compete effectively in the most attractive segments of our various markets.
       As a result of the strength of our brands, we are generally able to sell our security and convenience products at higher price points than similar products sold by other companies. For example, more than 75% of our surveyed retailers position our Viper brand at a premium price point. Our multi-brand portfolio also allows us to sell different brands through different channels and avoid the brand dilution and channel conflict experienced by some of our competitors.
Highly Diverse Customer Base
       Our products are sold through numerous channels, including independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, and car dealers. We believe our diverse network of approximately 3,400 customers, over 45% of whom utilize us as their exclusive supplier of security products, is a competitive strength. We have built strong relationships with the larger national and regional electronics retailers, and we have well-established relationships with more than 3,000 independent retailers. Except for Best Buy (including Magnolia Audio Video, a subsidiary of Best Buy) and Circuit City, no customer accounted for more than 3% of our net sales in 2004 or the first nine months of 2005, with our top 25 and top 100 customers representing only 44.8% and 58.5% of net sales, respectively, in 2004. Moreover, our efforts to diversify our revenue stream into areas such as home and car audio and mobile video have diversified our customer base by adding retailers such as Magnolia Audio Video, Audio Express, and others who specialize in these market segments.
       Our products also appeal to a broad demographic base of consumers, who are widely distributed across age, gender, marital status, income, and educational levels. Of the more than 48,000 consumers who completed our warranty cards in 2004, approximately 50% indicated they were over 44 years old. In addition, consumers install our security and convenience, car audio, and mobile video products into a wide range of vehicle makes, models, and model years. We believe that our broad and diverse retailer and consumer bases limit our exposure to any particular segment of our markets and provide a strong platform for continued growth.
Attractive Retailer Proposition
       Most of our brands provide retailers with attractive gross margins, which can range as high as 60-70% on our security and convenience products. In addition, a majority of our products (including approximately 96% of our security and convenience products) are professionally installed, which provides retailers with additional revenue opportunities.

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       Other key elements of our attractive retailer proposition include:
     
Element   Benefit
     
Efficient Inventory Execution
  Approximately 93% average fill rate on our mobile products, with approximately 91% of all orders shipped on time in 2004
Installer-Friendly Design Philosophy
  Easy installation with minimal return rates
Commitment to Training
  More than 4,000 installers trained
       We believe our attractive retailer proposition is a critical competitive advantage because retailers typically have significant influence on customer buying decisions in our markets.
Strong Track Record of Growth and Operating Profit
       We have a consistent track record of delivering growth and profitability through various economic cycles. In fact, we have increased revenue every year for the last 15 years. We have driven this growth organically, through product innovation and expansion of our customer base, as well as through acquisitions. We believe that our consistent history of operational performance instills confidence in our retailer customers and is an important source of competitive strength. In addition, our lean organization and cost structure, disciplined approach to business and capital management, and attractive margins have enabled us to consistently generate strong operating profit. Our operating profit has given us the flexibility to invest in our operations, bolster our growth through acquisitions, and pay our debt obligations ahead of schedule.
Scalable, Outsourced Manufacturing Model
       We outsource 100% of our manufacturing activities to third parties located primarily in Asia. This outsourced manufacturing model requires minimal capital expenditures, which have averaged approximately 1% of sales annually over the past five years. By outsourcing manufacturing, we have the ability to scale our business appropriately in response to changing market conditions. We believe this “asset-light” business model also allows us to focus on our core competencies of brand management and product development while maintaining attractive financial metrics such as high sales per employee.
Strong Executive Team with Experience Managing Growth
       Our employees are led by an experienced, proven management team, which has been instrumental in directing our growth over the past several years. Our senior management team has over 100 years of collective consumer electronics industry experience. Our chief executive officer, James E. Minarik, is a member of the Board of Industry Leaders for the Consumer Electronics Association and a governor of the Electronic Industries Alliance. Over the past five years, our management team has more than doubled our net sales, completed four acquisitions, and established a solid platform for continued growth.
Our Strategy
       We have built our company around simple, straightforward principles, which will continue to be the foundation of our future as a public company. These include high quality, innovative, and reliable products designed “by installers for installers”; outstanding technical support; same day shipping on most orders; a relentless focus on company and dealer profitability; and easy-to-understand and customer-friendly practices in warranty, service, training, and installation support.

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       We intend to further enhance our position as a leading designer and marketer of innovative, branded consumer electronics products. Key elements of our strategy include:
Leverage Successful Multi-Brand Strategy
       Our successful multi-brand strategy is a key component of our future growth plans. In security and convenience products, we believe our Viper, Python, Clifford, and other brands position us to increase our sales in this profitable market across multiple distribution channels. In our home and car audio and mobile video businesses, we believe it will be critical for us to manage and enhance our brand portfolio. As we grow these businesses and increase their penetration within our distribution channels, we intend to utilize the multi-brand approach that has been successful for us in our security and convenience category. For example, in the mobile video area, we have introduced the Automate brand into the car dealer channel to differentiate these products from the Directed Video brand that we currently sell into the national, regional, and specialty retail channels. Likewise, with our differentiated offerings consisting of the Orion, Precision Power, Directed Audio, a/d/s/ and Xtreme brands, we address different segments of the car audio market. We believe this multi-brand strategy should allow us to grow our existing brands and leverage them into new product categories and distribution channels.
Increase Product Penetration
       We intend to continue increasing the penetration of our products within our existing network of approximately 3,400 customers. A key element of this strategy is our “Power of One” marketing program, which facilitates cross-selling by creating incentives for our security and convenience retailers to also purchase our car audio and mobile video products. In addition, we plan to capitalize on our successful introduction of SIRIUS-branded satellite radio receivers to further increase our shelf space in Best Buy, Circuit City, and elsewhere.
Develop New and Enhanced Products
       We plan to leverage our expertise in product design and development, our strong intellectual property platform, and our diverse distribution network by continuing to develop and introduce new and enhanced products in our current and complementary categories. For example, we intend to capitalize on our technology base to develop and introduce enhanced two-way technologies, GPS/ telematics systems, and additional LCD menu products. We have also recently introduced a car audio amplifier integrated with a security device, which can impose limits on amplifier use when the alarm is put in valet mode and can prevent the amplifier from being used if it is stolen.
       The development of our car audio and mobile video businesses illustrate our strategy of expanding into complementary categories. We see opportunity to increase our sales of these products by cross-selling them within our existing retail distribution network.
       We initially entered the home audio market in 2001 with our acquisition of ADS Technologies, a marketer of home and car audio equipment sold under the a/d/s/ brand name. We subsequently augmented our home entertainment platform with the acquisition of Definitive Technology in 2004. We expect that the market expansion occurring in the home theater industry, coupled with our relationships with leading specialty retailers and our ability to develop high-quality product offerings, should provide strong growth opportunities for our existing and new home audio products, such as our recently developed Mythos speakers designed for use with flat panel televisions.
Expand Distribution Channels
       We intend to broaden the distribution of our products by expanding our distribution channels, both domestically and internationally.

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  •  Domestic. We intend to continue adding some of the largest and fastest growing retailers in the United States to our distribution network. In 2004, we entered the mass merchant channel for the first time with our line of do-it-yourself remote start and convenience products. We also intend to increase our presence in the car dealer channel. There are more than 21,500 car dealers in the United States, and we have designed our Automate line of products specifically for that market. We have recently begun targeting this market and believe that it represents a significant growth opportunity. In the automotive parts retailer channel, we are working with Pep Boys as it tests a new format geared at specialty products. We are currently selling our Avital security products, Directed Video mobile video products, and Orion car audio products in those stores. In the car video category, we intend to expand our relationship with Best Buy as well as continue our penetration of our dealer base. We intend to capitalize on both our well-recognized brand names and strong distribution network to continue to expand our dealer base.
 
  •  International. We believe there is a significant opportunity to expand our international distribution. We believe that many of the same factors — increased awareness of the value of security and convenience products, the need for additional security due to the increased value of accessories installed in cars, and widening consumer interest in premium home theater systems — that have driven the growth of our business in the United States could also benefit our international business. We plan to use our current U.K. office as a base for expansion into additional European markets. Our international growth plan includes appointing new distributors and working with our security and convenience customers to sell additional product categories. We are also considering establishing a direct sales force in selected foreign countries. Additionally, we believe that the emerging Chinese automotive market represents a promising long-term consumer market opportunity for our products.
Pursue Selective Acquisition Opportunities
       We operate in a number of fragmented markets, and we regularly evaluate opportunities to acquire companies, brands, and technologies. We believe acquisitions enable us to leverage our distribution and brand management capabilities and our strengths in product design and development. We plan to continue to pursue acquisition opportunities in a disciplined fashion and to consummate acquisitions that offer attractive synergies and valuations. Our acquisitions of ADS Technologies and Definitive Technology enabled us to quickly develop a strong position in the premium home loudspeaker category. In turn, this allowed us to increase our penetration into national retailers such as Best Buy via its Magnolia Audio Video specialty home audio business.

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Product Lines
       We categorize our products as security and entertainment products and satellite radio products. Within the security and entertainment category, we sell products in security and convenience, home and car audio, and mobile video. Over the course of our history, we have continuously expanded our product offerings through a combination of internally developed product innovation and acquisitions. The table below highlights selected key product introductions:
         
Product   Year
     
Anti-Theft, Digital Keypads, Motion Sensors
    1983  
Radio Frequency Remote Control and Shock Sensors
    1987  
Remote Start
    1990  
Hybrid
    1995  
Car Audio
    1996  
Home Audio
    2001  
Mobile Video / Two-Way Security and Convenience
    2002  
Do-It-Yourself Security and Remote Start
    2003  
Satellite Radio
    2004  
Security and Entertainment
       Within the security and entertainment category, we sell products in vehicle security and convenience, home and car audio, and mobile video.
       Security and Convenience. We are the largest designer and marketer of consumer branded vehicle security and convenience systems in the United States. As the leader in the security and convenience market, we offer a full range of products and accessories at various price points. Major products include the following:
         
        Representative
Product   Description   Retail Price Points
         
Security
  Designed to deter theft of vehicles and vehicle contents.   $99 - $399
 
Remote Start
  Permits users to start a vehicle’s ignition from up to one-half mile away from the vehicle.   $159 - $399
 
DIY Remote Start   Remote start systems designed for do-it-yourself installation.   $59 - $199
 
Hybrid
  Contains security, remote start, and other convenience capabilities.   $349 - $499
 
GPS Tracking
  Remote locating and tracking to recover a stolen vehicle and for fleet management.   $499 - $799
 
Accessories
  Selection of components to facilitate vehicle installation.   Broad Range
       Our convenience products offer consumers significant benefits over traditional keyless entry devices, including two-way communication, advanced LCD and LED monitoring devices, high-range Responder® transmitting technology, and more comprehensive control of vehicle systems (such as climate control, locks, diagnostics, and audio systems).

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       Our vehicle security and convenience products are marketed under the following brands:
         
• Viper
  • Avital   • Boa
• Clifford
  • Valet   • Automate
• Python
  • Hornet   • DesignTech
       Home Audio. We sell a full line of high-end home loudspeakers under the Definitive Technology brand name and a premium line of custom-installed home audio products under the a/d/s/ brand name. Definitive’s patented acoustic technology, consumer advertising, and product reviews have created a premium brand position among leading retailers. Additionally, we have capitalized on the growth of flat panel television screens with our Mythos product line, an on-wall audio system specifically designed to complement flat panel displays. Our a/d/s/ line of architectural loudspeakers has a solid reputation established over more than 30 years and is generally used in custom installations.
       We currently market a comprehensive line of home audio loudspeakers:
         
        Representative
Product   Description   Retail Price Points
         
ProCinema
  Packaged speaker systems that include surround speakers, a center channel speaker and a powered subwoofer designed for music and movie surround sound applications.   $199 - $699 (package)
 
Tower Speakers
  Patented “bipolar” speakers designed for three dimensional sound with built-in subwoofers marketed under the SuperTower trade name.   $299 - $2,499
(each)
 
Mythos
  On-wall and stand-alone speakers designed to complement flat panel televisions.   $499 - $799
(each)
 
Powered Subwoofers
  Ultra-compact subwoofers marketed primarily under the SuperCube trade name.   $699 - $1,699
(each)
 
Architectural & Outdoor Loudspeakers   A wide range of in-wall, in-ceiling, and outdoor speakers engineered to achieve superior sound quality.   $259 - $649
(each)
 
Center Channel, Surround, and Bookshelf Speakers   Smaller speakers designed for specific applications.   $175 - $799
(each)

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       Car Audio. We sell car audio products under the Orion, Precision Power, Directed Audio, a/d/s/, and Xtreme brands. This multi-brand strategy provides us with the ability to offer products at a variety of price points and to target consumers in a number of distinct demographic groups. We offer an extensive selection of high-performance car audio products and concentrate on the higher margin categories of the car audio market:
         
        Representative
Product   Description   Retail Price Points
         
Amplifiers
  Power amplifiers increase the voltage and current coming from the source unit, providing more power than possible from a source unit alone.   $99 - $1,499
(each)
 
Speakers
  Aftermarket speakers provide improved sound quality compared to most factory-installed car audio systems.   $39 - $499
(each)
 
Subwoofers
  Speakers that are eight inches or greater in diameter, which are designed to play lower (bass) frequencies.   $49 - $699
(each)
 
Accessories
  Power capacitors, distribution blocks, audio interconnects, and amplifier wiring kits for a variety of installation applications.   Broad Range
       Mobile Video. We market a variety of mobile video systems and accessories. We have distinguished our video offerings through the design of desirable features such as detachable and larger screens, headrest units that simplify installation, “all-in-one” overhead units, and a “dockable” DVD player for use in both a vehicle overhead unit and in the home. Our mobile video products are sold in mobile specialty retailers and Best Buy under our Directed Video brand and to car dealers under our Automate brand. We currently offer the following products:
         
        Representative
Product   Description   Retail Price Points
         
Overhead Entertainment Systems   Flip-down video displays combined with DVD players and wireless headphones that are installed inside the roof of SUVs and minivans.   $449 - $1,199
(package)
 
Replacement Headrest Packages   Aftermarket headrests that contain video screens and are designed to easily replace existing OEM headrests, packaged with a DVD player and headphones.   $999
(package)
 
Stand-Alone Video Monitors   Active matrix LCD screens designed for vehicle installation.   $229 - $1,199
(each)
 
Media Players   DVD players designed for vehicle installation.   $129 - $179
(each)
 
Accessories   Wireless headphones, control modules, trim rings, and antennas designed for installation convenience.   Broad Range

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Satellite Radio
       SIRIUS, a satellite radio company providing over 120 channels of primarily commercial-free music, sports, information, and entertainment, selected us in 2004 as a strategic partner to exclusively market, sell and distribute certain SIRIUS-branded products to our existing customer base in the United States. SIRIUS provides and delivers the satellite radio content, and we market and distribute SIRIUS-branded electronic devices that receive and play that content. SIRIUS-branded satellite radio receivers are designed and developed by SIRIUS and manufactured by our contract manufacturers to specifications provided by SIRIUS. The announcement of popular radio personality Howard Stern’s upcoming move to SIRIUS in January 2006, the exclusive satellite radio availability of NFL coverage, and the availability of NASCAR coverage beginning in 2007 have strengthened the SIRIUS lineup and have propelled SIRIUS’ growth to over 2.1 million subscribers as of September 30, 2005.
       We have a multi-year agreement with SIRIUS pursuant to which we have exclusive U.S. distribution rights for certain SIRIUS-branded products to our existing U.S. retailer customer base through 2008. The SIRIUS-branded products that we distribute include the following:
         
        Representative
Product   Description   Retail Price Points
         
Portable Plug-and-Play Receivers   Portable units that can be attached in a vehicle, boombox, or at home.   $49 - $359
 
Docking Kits   Docking stations to allow users to utilize receivers in vehicles, at home, or at work.   $39 - $149
 
Home Receivers   Satellite radio reception units for use with home audio equipment.   $269
 
Down Link Processors   Receivers designed to add to any existing car stereo.   $99 - $169
 
Accessories   Signal combiners, distribution systems, antennas, and related items to assist with vehicle and home installations.   $10 - $70
Distribution
       Our products are sold through numerous channels, including independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, and car dealers.
Specialty Retailers
       Mobile specialty retailers are the primary distribution channel for mobile electronics products in the United States. The majority of our independent retailers operate two or fewer locations. We are the exclusive supplier of professionally-installed vehicle security products to over 45% of our U.S. retailers. We supply mobile specialty retailers with a wide range of security brands from premium Viper, Python, and Clifford products to promotional and do-it-yourself devices under the Valet, Hornet, Avital, and Boa brands. We believe that these retailers should remain an attractive distribution channel for us due to our long-term relationships and their focus on customer service.
       We provide home audio specialty retailers with a variety of premium home loudspeakers. Similar to our relationship with our mobile retailer network, we are an important supplier to our home audio specialty retailers due to the relatively healthy margins they earn on Definitive and a/d/s/ products. With the acquisition of Definitive Technology, we solidified our position in the home audio specialty channel. In a survey of retailers that carry Definitive Technology products, 56% cited

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Definitive Technology as their “most important” packaged loudspeaker supplier, six times more often than our nearest competitor.
National and Regional Electronics Chains
       We believe that national and regional electronics chains enable us to efficiently broaden our distribution and scale our business. Accordingly, we have devoted significant resources to increase our penetration with large national and regional chains such as Best Buy, Circuit City, Magnolia Audio Video, and Audio Express. We believe that our history with both Best Buy and Circuit City illustrates the opportunities that are available in this channel.
  •  Best Buy. We have supplied Best Buy with security and convenience products since 1994 and have helped them sell more premium, higher-priced products in this category. In 2004, we increased our product offerings with Best Buy through the addition of mobile video and SIRIUS Satellite Radio products. We believe that the significant sales of these products at Best Buy should strengthen our relationship and provide additional cross-selling opportunities.
 
  •  Circuit City. We have served as a vendor to Circuit City since 1986. We were recently named Circuit City’s exclusive provider for mobile security, remote start, convenience systems, and related accessories. The products we sell to Circuit City consist of the latest technologies available in our Python, Valet, Hornet, Boa, and Directed Installation Accessories lines. Circuit City is also one of our largest customers of SIRIUS Satellite Radio products.
Mass Merchants and Automotive Parts Retailers
       We believe that mass merchants and automotive parts retailers represent an important opportunity to expand our sales. As a result, we have begun to focus on these channels and introduced our line of do-it-yourself remote start and convenience products under our Boa brand name in 2004. In addition, we began selling DesignTech products in 2005, primarily through the automotive parts retailer channel. As consumer awareness of our products increases, we believe that the mass merchant and automotive parts retailer channels will become an increasingly important part of our distribution strategy. We plan to pursue additional opportunities with mass merchants and automotive parts retailers, while preserving brand differentiation of our premium products to protect our existing retailer base.
Car Dealers
       We market a wide range of security and convenience products to car dealers both directly and through expeditors contracted to perform installation. Our car dealer customers are generally able to realize higher profit margins when they install our aftermarket products compared to their margins on OEM-installed options. We intend to achieve further penetration of this channel through our new Automate line of security and convenience products and, beginning in 2005, new mobile video products.
International Distribution
       We sell our products internationally through our U.K. office as well as to over 100 distributors in 73 countries. We believe there is a significant opportunity to expand our international distribution and that many of the same factors that have driven the growth of our business in the United States could also benefit our international business. We plan to use our current U.K. office as a base for expansion into additional European markets. Our international growth strategy includes appointing new distributors and working with our security and convenience customers to sell additional product categories. We are also considering establishing a direct sales force in selected foreign countries.

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Additionally, we believe that the emerging Chinese automotive market represents a promising long-term consumer market opportunity for our products.
       Our international sales were approximately $24.8 million in 2004 and approximately $18.2 million in the first nine months of 2005.
Customers
       We sell our products to independent specialty retailers, national and regional electronics chains, mass merchants, automotive parts retailers, car dealers, and international distributors. Our top 25 and top 100 customers accounted for approximately 44.8% and 58.5%, respectively, of our net sales in 2004. For the year ended December 31, 2004 and the nine months ended September 30, 2005, other than sales to Best Buy (and Magnolia Audio Video, a subsidiary of Best Buy), which together accounted for approximately 19.6% and 20.7% of our net sales, respectively, and Circuit City, no customer accounted for more than 3% of our revenue. In addition, our independent Canadian distributor sells to Best Buy and its Future Shop subsidiary in Canada. We expect that Circuit City will account for more than 10% of our net sales for the year ending December 31, 2005.
Sales and Marketing
       We market our products through a direct sales force and through third-party sales representatives. At September 30, 2005, we employed 59 sales and marketing staff members and also used 22 outside independent sales representative groups that had a total of 42 individuals selling our products. Our extensive in-house marketing operation supports our sales force with a comprehensive advertising campaign that includes tradeshows, public relations, point-of-purchase displays, co-marketing and cross-selling initiatives, advertising, and product placement. One of our most important marketing events is our participation in the annual Consumer Electronics Show in Las Vegas, Nevada. We advertise our Definitive Technology brand extensively in consumer specialty magazines, including Home Theater and Sound and Vision. In 2004, our brands received over 600 million impressions in the news media.
       Our direct employees generated approximately 78% of our sales in 2004, and our chief executive officer and our senior vice president of sales and marketing directly manage our relationships with Best Buy and Circuit City. We utilize direct employees except where the geography or lack of retailer density in a particular area makes the use of independent sales representatives more cost effective. We also maintain our own credit staff that reviews new customers for suitability and monitors customer accounts.
       Our sales force consists of personnel employed by our company as well as independent sales representatives. Our employee sales force compensation plan consists of a base salary and monthly commissions, as well as the opportunity to earn a quarterly and annual bonus. The commissions and bonuses are paid based on actual sales performance as compared to a pre-determined sales targets. Our independent sales representatives are paid a straight commission based on net sales. Our independent sales representatives also have the opportunity to earn a quarterly and annual bonus based on actual sales performance as compared to a pre-determined sales target.
       Our sales force is focused on encouraging retailers to carry a wide selection of our products and has successfully sold new product categories to our existing retailer base. For example, the introduction of cross-selling programs such as the “Power of One” has promoted significant growth within the mobile specialty channel. This marketing campaign has been developed to encourage increased sales of our mobile video and audio products through a variety of discounts and promotions.
       We have developed the slogan “The Brand Above” to describe the Directed Electronics name and connote our multi-brand strategy. We use “The Brand Above” slogan to market our company to current and potential retailer partners.

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       We believe that consumer awareness of products is important to our future growth and, therefore, we also devote significant effort and expense on consumer education. We believe that relatively few consumers are aware of the limitations of factory-installed security devices, such as kill switches and keyless entry, or the benefits of the more advanced security and convenience features available in the aftermarket. We have established our “False Sense of Security” educational program to educate consumers on the limitations of factory-installed alarms. Additionally, we believe our Snake Pit training center should help our reputation among installers and lead to additional word-of-mouth referral business for our brands.
       Our corporate website, located at www.directed.com, and our brand websites such as www.clifford.com, www.orioncaraudio.com, and www.definitivetech.com, offer consumers and retailers reliable and comprehensive information about our product offerings and consumer services.
Outsourced Manufacturing and Assembly
       We outsource the manufacturing and assembly of our products to contract manufacturers primarily located in Asia. We perform regular on-site inspections and quality audits of these manufacturers. We believe our manufacturing strategy supports a scalable business model, reduces our capital expenditures, and allows us to concentrate on our core competencies of brand management and product development.
       We have built an extensive and mutually beneficial supply relationship with our largest supplier that has lasted nearly 20 years, and we believe that we are by far their largest customer. That supplier accounts for a significant portion of our total purchases. As a result of our growth in other product categories and the increased diversity of our supplier base, purchases from our largest supplier as a percentage of our total purchases have declined in recent years. We currently receive products from and are engaged in ongoing discussions with numerous other offshore suppliers in order to further expand our outsourcing relationships.
       We do have written agreements with most of our contract manufacturers that specify lead times and delivery schedules but do not have long-term (more than one year) arrangements with any of our contract manufacturers that guarantee production capacity or prices.
       During our product development process, we identify and directly negotiate directly with the suppliers who will provide the necessary materials to our contract manufacturers. We often pay those suppliers directly at the outset of a product’s manufacturing lifecycle. In this way, we are able to better control the cost of our products while simultaneously reducing our dependence on our contract manufacturers through the establishment of direct relationships with suppliers of raw materials.
Product Development and Engineering
       We focus our product development and engineering efforts primarily on enhancing existing products and creating new products. At September 30, 2005, we employed 25 in-house staff who specialize in product development, specifically within the areas of radio frequency, bypass/data-bus module, and industrial, mechanical and audio circuit design. We have earned 43 Consumer Electronics Association innovation awards and have consistently maintained ISO 9001 certification.
       Our product development and engineering efforts are a collaborative enterprise between our in-house product development personnel, our sales and marketing staff, our suppliers, and certain third-party design firms. This model allows us to minimize research and development expenditures, as our suppliers dedicate resources on our behalf.
       SIRIUS-branded satellite radio receivers are designed and developed by SIRIUS, and we are developing accessories for SIRIUS products under our own brands or co-branded with SIRIUS.

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Technical Support and Warranty
       We maintain and make available to our customers a proprietary database of over 5,000 vehicle wiring diagrams to assist our retailer customers with the installation of our products. On a secured part of our website, we also provide additional comprehensive and valuable information for dealers and distributors, including product schematics and ad layouts.
       Our products carry standard warranties against defects in material and workmanship, and we will either repair or replace any product that contains such defects. Repair services are also available for products that are no longer covered under the original warranty. We provide a rapid factory direct repair program for our U.S. customers under which we repair and ship products generally within 48 hours of receipt, reducing retailer and consumer inconvenience if our products fail to perform properly. Our international distributors generally assume the warranty obligations on the products they sell for us.
Training
       Our Snake Pit technical training center, one of the most advanced of its kind in our industry, opened in 2005. The Snake Pit encompasses approximately 11,000 square feet at our Vista, California headquarters and is designed to educate both novice and experienced installation personnel. We organized the Snake Pit similar to a vocational school, and we charge a separate fee for these classes. Our goal is to train the best installers in the industry. The Snake Pit facility contains state-of-the-art classrooms with individual work stations equipped with down-force ventilation. The facility also contains vehicle installation bays and a fully equipped paint booth capable of accommodating virtually all passenger cars and SUVs. We offer a variety of classes including advanced security, remote start, and accessory installation; car audio design, sound theory, and system analysis; and advanced construction with fiberglass, metal, and exotic materials. The Snake Pit uses field-trained experts and dedicated engineers as instructors and has the capacity to train approximately 880 student installers per year.
Intellectual Property
       We rely on a variety of intellectual property protections, including patents, trade secrets, trademarks, confidentiality agreements, licensing agreements, and other forms of contractual provisions, to protect and advance our intellectual property. We hold patents in various technological arenas, primarily in vehicle security, and home and car audio. We also own the intellectual property developed by our contract manufacturers on our behalf. In total, we hold 87 issued U.S. patents, which expire at various times between the year 2007 and the year 2020, and have 16 U.S. patents pending. Of our issued U.S. patents, 11 have also been issued as patents in foreign jurisdictions. We consider our patent portfolio to be a key competitive advantage for our business, and we license a number of patents to leading automobile manufacturers and electronics suppliers, which provides us with an incremental source of revenue. These licenses generally extend for the life of the patent.
       The intellectual property associated with the SIRIUS-branded products we sell is owned by SIRIUS and we have a license from SIRIUS for this technology. For co-branded SIRIUS products that we develop, we license the SIRIUS brand name.
       We have registered many trademarks and trade names both in the United States and internationally and are committed to maintaining and protecting them. These registrations will continue to provide exclusive rights in perpetuity provided that we continue to use the trademarks and maintain the registrations. We believe certain of our trademarks and trade names are material to

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our business and are well known among consumers in our principal markets. Our principal trademarks and trade names include:
         
• Viper
  • Definitive Technology   • Automate
• Clifford
  • a/d/s/   • Orion
• Python
  • Directed Video   • Precision Power
• No One Dares Come Close
  • The Science of Security   • DesignTech
Competition
       Our security and convenience products face competition from a limited number of electronics companies. Certain of our other markets, such as mobile video, are very competitive, rapidly changing, and characterized by price competition and rapid product obsolescence. Additionally, certain markets, such as satellite radio, are characterized by rapidly changing technologies and evolving consumer usage patterns. We compete on the basis of brand recognition, quality and reliability, customer service and installation support, distribution capabilities, and, in certain markets, price. Our competitors come predominantly from two categories:
  •  Specialty Audio Suppliers. These companies generally compete in specific market niches on the basis of brand image, quality and technology.
 
  •  Large Consumer Electronics Companies. These companies offer a wide range of products as part of their broad consumer electronics offerings. These companies tend to focus on large, high-volume product categories and generally have not focused on the smaller product segments, such as component speakers, security and convenience products, car amplifiers, and mobile video units, in which we compete. Although consumers may purchase complete audio systems or “theater-in-a-box” made by these consumer electronics companies instead of systems with premium component speakers, we do not compete directly with these products at most of the retailers carrying our speakers. We do, however, compete with a few of these companies with respect to certain car audio speaker products. We plan to continue our focus on product categories that do not compete directly with these consumer electronics companies at the wholesale level. To the extent that these companies choose to focus on our product categories, they would be formidable competitors.
       We consider our principal competitors within our product lines to be those listed below:
  •  Security and convenience: Audiovox and Crimestopper
 
  •  Premium loudspeakers: Klipsch, Paradigm, B&W, Harman (JBL and Infinity), and Bose
 
  •  Satellite radio: Delphi (XM Radio), Audiovox, Clarion, and Sanyo
 
  •  Mobile video: Audiovox and Rosen
 
  •  Car audio: Rockford Fosgate, Kicker, Alpine, MTX, JL Audio, and Audiobahn
       We also compete indirectly with automobile manufacturers, who may improve the quality of the security, convenience, audio and video equipment they install, which could reduce demand for aftermarket car products. However, if OEMs decide to offer features such as remote start or mobile video on their new vehicles more broadly, we believe the aftermarket industry could be influenced by the attendant advertising and increase in product awareness. OEMs may also change the designs of their cars to make installation of our products more difficult or expensive. Finally, retailer customers such as Best Buy and Circuit City could develop their own private label brands to compete with our products.
       Some of our competitors have greater financial, technical, and other resources than we do, and many seek to offer lower prices on competing products. To remain competitive, we believe we must regularly introduce new products, add additional features to existing products, and limit increases in prices or even reduce prices.

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Government Regulation
       Our operations are subject to certain federal, state, and local regulatory requirements relating to environmental, product disposal, health, and safety matters. Material costs and liabilities may arise from our efforts to comply with these requirements. In addition, our operations may give rise to claims of exposure to hazardous materials by employees or the public or to other claims or liabilities relating to environmental, product disposal, or health and safety concerns.
       Our operations, including the paint booth at our Snake Pit training facility, create a small amount of hazardous waste, including various epoxies, gases, inks, solvents, and other wastes. The amount of hazardous waste we produce may increase in the future depending on changes in our operations. The disposal of hazardous waste has received increasing focus from federal, state, and local governments and agencies and has been subject to increasing regulation.
       Our products, particularly our car security and wireless headphone devices, must comply with applicable FCC regulations. We are also subject to various other regulations, including consumer truth-in-advertising laws, warranty laws, and product import/ export restrictions.
       The use of our products is also governed by a variety of state and local ordinances, including noise ordinances and laws prohibiting or restricting the running of a motor vehicle without an operator. We do not believe that such laws have had a material effect on our business or the demand for our products to date. However, the passage of new ordinances, or stricter enforcement of current ordinances, could adversely affect the demand for our products.
Facilities
       We occupy approximately 163,000 square feet in a leased facility in Vista, California, which houses our corporate headquarters. We utilize approximately 33,000 square feet for our sales, marketing, engineering, customer service, technical support, legal, finance, and administrative functions. We utilize approximately 119,000 square feet for our principal distribution facility. Finally, we utilize approximately 11,000 square feet for our recently opened training facility known as the Snake Pit. We lease this facility under an agreement that extends through 2013, and have an option to renew the lease for an additional five years.
       We also use public warehouses to distribute certain of our products, as well as the following leased facilities:
         
Location   Purpose   Size
         
Owings Mills, Maryland
  Sales and Marketing Office   4,500 sq. ft.
Epsom, England
  Sales and Distribution Center   10,000 sq. ft.
Employees
       At September 30, 2005, we employed a total of 248 persons. At that date, 13 were engaged in customer service, 50 in engineering and technical support, 74 in shipping and operations, 59 in sales and marketing, and 52 in administration. We consider our relationship with our employees to be good, and none of our employees are represented by a union in collective bargaining with us.
Legal Proceedings
       From time to time, we are involved in routine litigation and proceedings in the ordinary course of our business. We are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business or financial condition.

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MANAGEMENT
Directors and Executive Officers
       The following table sets forth certain information regarding our directors and executive officers:
             
Name   Age   Position
         
James E. Minarik
    52     President, Chief Executive Officer, and Director
Glenn R. Busse
    43     Senior Vice President — Sales and Marketing
John D. Morberg
    41     Vice President — Finance, Chief Financial Officer, and Treasurer
Richard J. Hirshberg
    51     Vice President — Internal Audit and Compliance
Mark E. Rutledge
    35     Vice President — Engineering and Product Development
Kevin P. Duffy
    30     Vice President — Strategy and Corporate Development
Michael N. Smith
    39     Vice President — Operations and Management Information Systems
KC Bean
    41     Vice President, General Counsel, and Secretary
Troy D. Templeton
    45     Chairman of the Board
Earl W. Powell
    66     Director
Jon E. Elias
    36     Director
Darrell E. Issa
    52     Director
Andrew D. Robertson
    63     Director
Victor J. Orler
    48     Director
S. James Spierer
    61     Director
Kevin B. McColgan
    49     Director
Edmond S. Thomas
    52     Director
       James E. Minarik has served as our Chief Executive Officer since January 2001. From 1992 to December 2000, Mr. Minarik was employed by business units of the publicly traded and Japan-based Clarion Company Limited, a supplier of audio equipment to global car manufacturers and retailers, including as the Chief Executive Officer of Clarion Corporation of America from 1997 to December 2000. Mr. Minarik currently serves both as a member of the Board of Industry Leaders of the Consumer Electronics Association (CEA) and as a governor of the Electronics Industry Alliance (EIA) Board. Mr. Minarik serves on the board of directors of Escort Inc., a privately held radar detector company; and Corvest Promotional Products, Inc., a privately held promotional products company. Mr. Minarik received both a Bachelors Degree and a Masters of Business Administration from the Pennsylvania State University.
       Glenn R. Busse has served as our Senior Vice President — Sales and Marketing since January 2001. Mr. Busse has served our company in various capacities since joining our company in 1986 as Vice President of Sales and Marketing. Prior to joining our company, Mr. Busse served as the National Sales Manager of Black Bart Systems, a vehicle security company. Mr. Busse received his baccalaureate certification from Lycée Paul Langevin in Surenes, France and is fluent in French.
       John D. Morberg has served as our Vice President — Finance, Chief Financial Officer, and Treasurer since September 2005. From June 1997 until July 2005, Mr. Morberg served as Vice President and Controller of Petco Animal Supplies, Inc., a publicly traded national retailer of premium pet food, supplies, and services. From 1990 to 1997, Mr. Morberg served in various capacities, including Chief Financial Officer and Corporate Counsel, for two retail automobile dealership groups. From 1986 to 1990, Mr. Morberg worked for KPMG LLP in its audit group. Mr. Morberg received a Juris Doctor from the University of the Pacific, McGeorge School of Law, and a Bachelor of Business Administration in accounting from the University of San Diego. Mr. Morberg is an attorney at law licensed to practice in the State of California and is a Certified Public Accountant.

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       Richard J. Hirshberg has served as our Vice President — Internal Audit and Compliance since September 2005. Prior to his appointment to this position, Mr. Hirshberg served as our Chief Financial Officer and Vice President — Finance from March 2001 to September 2005. From January 1998 to March 2001, Mr. Hirshberg worked for several start-up companies in the capacity of Chief Financial Officer. From January 1991 to December 1997, Mr. Hirshberg served in various capacities, culminating in the position of Chief Financial Officer, for McGaw, Inc., a publicly traded pharmaceutical manufacturer. Mr. Hirshberg is a Certified Public Accountant and spent over 11 years at Arthur Andersen & Co. in various capacities. Mr. Hirshberg received a Bachelors Degree from Northwestern University and a Masters of Business Administration from Northwestern University’s Kellogg Graduate School of Management.
       Mark E. Rutledge has served as our Vice President — Engineering and Product Development since January 2001 and has been employed with our company in various capacities since 1994. Prior to joining our company, Mr. Rutledge served as a mobile electronics specialist in both retail sales and installations. Mr. Rutledge received a Bachelors of Science and Masters in Electrical Engineering from the University of California at San Diego. Mr. Rutledge also received a Masters of Science in Executive Leadership from the University of San Diego.
       Kevin P. Duffy has served as our Vice President — Strategy and Corporate Development since June 2003. From July 2002 to June 2003, Mr. Duffy served as a consultant to our company. From August 2001 to June 2003, Mr. Duffy attended the Stanford Graduate School of Business where he received a Masters of Business Administration. From August 2000 to January 2002, Mr. Duffy worked for ThinkTank Holdings LLC, a private venture capital firm located in Southern California, and one of its portfolio companies, as Vice President of Business Development and then as Executive Vice President. Mr. Duffy’s previous experience includes serving as Director of Strategy at Clarion Corporation of America, as well as consulting with Bain & Company and Deloitte & Touche. Mr. Duffy holds an A.B. in Economics from Princeton University.
       Michael N. Smith has served as our Vice President — Operations and Management Information Systems since February 2005 and as a Vice President from April 2002 until February 2005. From 1990 until April 2002, Mr. Smith served in various capacities for Ford Motor Company, including information technology, mergers and acquisitions, business strategy, and the Wingcast division. Mr. Smith holds a Bachelors Degree, with Highest Honors, in Business Administration/ Operations Management from Auburn University and a Masters Degree in Business Administration/ Information Technology from the University of Texas at Austin.
       KC Bean has served as our Vice President and General Counsel since July 2004 and as our Secretary since November 2005. From August 2003 to July 2004, Mr. Bean served as our General Counsel, and from September 2000 to August 2003, Mr. Bean served as our Director of Intellectual Property. From September 1997 to September 2000, Mr. Bean attended Thomas Jefferson School of Law, where he earned his Juris Doctor. Mr. Bean holds a Bachelor of Science Degree from Boise State University and is licensed to practice law in the State of California and before the United States Patent and Trademark Office.
       Troy D. Templeton has served as our Chairman of the Board since December 1999. Mr. Templeton is a partner and the Chief Operating Officer of Trivest Partners, L.P., a private investment firm that specializes in management services and acquisitions, dispositions and leveraged buy-outs, and has served in various capacities with Trivest since 1989. Mr. Templeton currently serves as Chairman of the Board of Jet Industries, Inc., a privately held manufacturer of injection molded disposable plastic cutlery; Corvest Promotional Products, Inc., a privately held supplier of promotional products; and Schoor DePalma, Inc., a privately held design and engineering firm. Mr. Templeton received a Bachelor of Business Administration, magna cum laude, and a Masters of Business Administration from Stetson University.
       Earl W. Powell has served as a director of our company since December 1999. Mr. Powell serves as Chairman of the Board, President, and Chief Executive Officer of Trivest Partners, L.P., a

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private investment firm he founded in 1981. Mr. Powell also serves as Chairman of the Board of Atlantis Plastics, Inc., a publicly traded manufacturer of specialty and custom plastic products, and Brown Jordan International, Inc., a privately held designer, manufacturer and marketer of fine contract and retail furnishings. From 1971 to 1985, Mr. Powell was a partner with KPMG Peat Marwick, certified public accountants, where his positions included serving as managing partner of Peat Marwick’s Miami office.
       Jon E. Elias has served as a director of our company since December 1999. Mr. Elias has served as a Managing Director of Trivest Partners, L.P. since April 2004 and has served in various capacities with Trivest since 1997. Mr. Elias currently serves on the board of directors of Schoor DePalma, Inc., a privately held design and engineering firm. Mr. Elias, a certified public accountant, received his Bachelor of Science, magna cum laude, from Boston College and his Masters of Business Administration from the Harvard Business School.
       Congressman Darrell E. Issa has served as a director of our company since December 1999. Mr. Issa founded our company in 1982 and also served as President and Chief Executive Officer until December 2000. Mr. Issa was elected to Congress in 2000 and serves on the House Energy and Commerce Committee. Mr. Issa previously served on the Board of Governors for the Electronics Industry Alliance and as Chairman of the Consumer Electronics Association. Mr. Issa attended Kent State University and Siena Heights College and earned a degree in business.
       Andrew D. Robertson has served as a director of our company since January 2001. Mr. Robertson has served as the President of Robertson, LLC, a private mergers and acquisitions advisory firm, since February 2001. From 1991 until February 2001, Mr. Robertson served in various capacities for Merrill Lynch, culminating in his position as Managing Director of Mergers and Acquisitions in the Exclusive Sales Group, Investment Banking Division. Mr. Robertson holds a Bachelor of Arts from Westminster College, a Juris Doctor from Northwestern University Law School, and a Masters of Business Administration from Northern Illinois University.
       Victor J. Orler has been a member of our board of directors since November 2005. Prior to retiring in September 2002, Mr. Orler was a Partner at Accenture Ltd, a public consulting firm, from 1990 to September 2002. Currently, Mr. Orler serves as a guest lecturer teaching financial analysis and shareholder value management for Accenture Ltd’s Management Training Program. Mr. Orler holds a Bachelor of Science degree in marketing from Pennsylvania State University and a Masters of Business Administration in finance and marketing from the University of Chicago.
       S. James Spierer has been a member of our board of directors since November 2005. Mr. Spierer has served as President and Chief Executive Officer of Jet Plastica Industries, Inc., a privately held manufacturer of plastic foodservice disposables and an affiliate of Trivest Partners, L.P., since 1987. Prior to that, Mr. Spierer held various positions with Exxon Mobil Corporation, a publicly traded petroleum and petrochemical company, for 18 years, serving most recently as Vice President of Planning and General Manager in the company’s plastics division. Mr. Spierer holds a Bachelor of Science in mathematics from Brooklyn College and a Master of Science from New York University.
       Kevin B. McColgan has been a member of our board of directors since November 2005. Mr. McColgan has served as President and Chief Executive Officer of Corvest Promotional Products Inc., a privately held supplier of promotional products and an affiliate of Trivest Partners, L.P., since February 2005. Prior to that, he served as Chairman and Chief Executive Officer of Wellington Cordage, LLC, a privately held manufacturer and retailer of consumer and commercial cordage, from March 2004 to February 2005. Mr. McColgan previously served as President and Chief Executive Officer of Aero Products International, Inc., a privately held manufacturer of adjustable air mattresses and beds, from July 1997 to February 2004. Mr. McColgan holds a Bachelor of Arts in business economics from the State University of New York.

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       Edmond S. Thomas has been a member of our board of directors since November 2005. Mr. Thomas has served as President and Co-Chief Executive Officer of Tilly’s, Inc., a privately held men and women’s apparel retailer, since September 2005. Mr. Thomas also has served as Managing Partner of The Evans Thomas Company, LLC, a privately held consumer goods advisory firm, and AXIS Capital Fund I, LP, an investment fund, since 2000. Prior to that, Mr. Thomas served as President, Chief Operating Officer, and director of The Wet Seal, Inc., a publicly traded women’s apparel retailer, from 1992 to 2000. From 1991 to 1992, Mr. Thomas served as President, Chief Operating Officer, and director of Domain, Inc., a privately held home furnishings retailer. Mr. Thomas is currently a member of the board of directors of Trans World Entertainment Corp., a publicly traded retailer of music, video, and video game products, and Comark, Inc., a privately held Canadian apparel retailer. Mr. Thomas is a certified public accountant and holds a Bachelor of Science degree in accounting from Villanova University.
       There are no family relationships among any of our directors or executive officers.
Board Composition and Committees
       Our articles of incorporation provide for a board of directors consisting of three classes serving three-year staggered terms. Class I directors consist of Messrs. Elias, Issa, and McColgan, with the initial term of office of the Class I directors expiring at the annual meeting of shareholders in 2006. Class II directors consist of Messrs. Powell, Orler, and Spierer, with the initial term of office of Class II directors expiring at the annual meeting of shareholders in 2007. Class III directors consist of Messrs. Templeton, Minarik, Thomas, and Robertson, with the initial term of office of Class III directors expiring at the annual meeting of shareholders in 2008.
       Upon completion of this offering, we expect to have a board of directors consisting of ten members. In accordance with the transitional rules of the SEC and the Nasdaq National Market, the composition of our board of directors will satisfy the independence requirements of the SEC and the Nasdaq National Market. Our board of directors has determined, after considering all the relevant facts and circumstances, that Messrs. Robertson, Orler, Spierer, McColgan, and Thomas are independent directors, as “independence” is defined by Nasdaq National Market listing standards, because they have no relationship with us that would interfere with their exercise of independent judgment. Mr. Minarik is an employee director, Messrs. Templeton, Powell, and Elias are not independent because of their relationships with Trivest, and Mr. Issa is not independent by virtue of his position with Greene Properties.
       Our bylaws authorize our board of directors to establish one or more committees, each consisting of one or more directors. Upon the completion of this offering, our board of directors will have three standing committees: an audit committee, a nominations committee, and a compensation committee. Our audit, nominations, and compensation committees each consist entirely of independent directors. In November 2005, our board of directors adopted charters for the audit committee, nominations committee, and compensation committee describing the authority and responsibilities delegated to each committee by our board of directors substantially as set forth below.
Audit Committee
       The primary purpose of the audit committee, among other functions, is to assist our board of directors in the oversight of:
  •  the integrity of our financial statements;
 
  •  our compliance with legal and regulatory requirements;
 
  •  our independent auditors’ qualifications and independence; and
 
  •  the performance of our internal audit function and our independent auditors.

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       Our audit committee currently consists of Messrs. Thomas, Orler, and Robertson, each of whom is an independent director of our company under Nasdaq National Market listing standards as well as under rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. Our board of directors has determined that Mr. Thomas (whose background is detailed above) qualifies as an “audit committee financial expert” in accordance with applicable rules and regulations of the SEC. Mr. Thomas serves as the chairman of the audit committee.
Nominations Committee
       The principal duties and responsibilities of our nominations committee, among other things, is to:
  •  identify candidates qualified to become members of our board of directors, consistent with criteria approved by our board of directors;
 
  •  select, or recommend that our board of directors select, the director nominees for the next annual meeting of shareholders;
 
  •  develop and recommend to our board of directors a set of corporate governance guidelines applicable to our company; and
 
  •  oversee the evaluation of our board of directors and management.
       Our nominations committee currently consists of Messrs. Orler and McColgan, each of whom is an independent director of our company under Nasdaq National Market listing standards as well as under rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. Mr. Orler serves as the chairman of the nominations committee.
Compensation Committee
       The primary responsibilities of the compensation committee, among other things, is to:
  •  review and approve corporate goals and objectives relevant to the compensation of our chief executive officer;
 
  •  evaluate our chief executive officer’s performance in light of those goals and objectives, and determine and approve our chief executive officer’s compensation level based on this evaluation; and
 
  •  make recommendations to our board of directors with respect to the compensation of other executive officers, and also with respect to incentive compensation plans and equity-based plans that are subject to board approval.
       Our compensation committee currently consists of Messrs. Robertson and Spierer, each of whom is an independent director of our company under Nasdaq National Market listing standards as well as under rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. Mr. Robertson serves as the chairman of the compensation committee.
       Prior to the establishment of the audit, compensation, and nominations committees in November 2005, these functions were performed by our board of directors.
Code of Conduct and Code of Ethics for CEO and Senior Financial Officers
       In November 2005, our board of directors adopted a Code of Conduct and a Code of Ethics for the Chief Executive Officer and Senior Financial Officers. We will post on our website at www.directed.com, our Code of Conduct and Code of Ethics for the Chief Executive Officer and Senior Financial Officers, and any amendments or waivers thereto; and any other corporate governance materials contemplated by SEC or Nasdaq National Market regulations. These

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documents will also be available in print to any shareholder requesting a copy in writing from our corporate secretary at our executive offices set forth in this prospectus.
Compensation Committee Interlocks and Insider Participation
       Prior to the closing of this offering, we did not have a compensation committee. Compensation for Mr. Minarik for 2004 was established pursuant to the terms of his employment agreement with us. Compensation decisions regarding our other executive officers were made by our board of directors. Mr. Minarik participated in discussions with the board of directors concerning executive officer compensation. Following the closing of this offering, the compensation committee is expected to be comprised of at least two non-employee directors (as defined in Rule 16b-3 under the Securities Exchange Act), who do not have “interlocking” or other relationships with us that would detract from their independence as committee members.
Director Compensation and Other Information
       We will pay each independent director an annual retainer fee of $15,000, plus $1,000 for each board meeting attended, $1,000 for each audit committee meeting attended, and $500 for each other committee meeting attended, with all meeting fees reduced by 50% if attendance is by teleconference. The chairman of the audit committee will receive an extra $10,000 per year over the standard independent director compensation and each other audit committee member will receive an extra $5,000 per year. The chairman of the compensation committee will receive an extra $10,000 per year over the standard independent director compensation and each other compensation committee member will receive an extra $2,500 per year. The chairman of the nominations committee will receive an extra $5,000 per year over the standard independent director compensation and each other nominations committee member will receive an extra $2,500 per year. We will also reimburse each director for travel and related expenses incurred in connection with attendance at board and committee meetings. Messrs. Minarik, Templeton, Powell, Elias, and Issa will not receive any fees for membership on our board of directors.
       Each independent director will receive an automatic grant of options to acquire 10,000 shares of our common stock on the later of the date of this offering and the date of his or her first appointment or election to our board of directors. Independent directors will also receive an automatic grant of options to purchase 5,000 shares of our common stock at the time of the meeting of our board of directors held immediately following each annual meeting of shareholders. One-third of such options will vest on the first, second, and third annual anniversary of the grant date.

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EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
       The following table sets forth, for the periods indicated, the total compensation for services in all capacities to us received by our chief executive officer and our four other most highly compensated executive officers whose aggregate compensation exceeded $100,000 for the fiscal year ended December 31, 2004.
Summary Compensation Table
                                           
                Long-Term    
                Compensation    
                     
                Payouts    
             
    Annual Compensation(1)       All Other
Name and       LTIP Payouts   Compensation
Principal Position   Year   Salary($)(2)   Bonus($)(3)   ($)   ($)(4)
                     
James E. Minarik
    2005     $ 500,000       (5 )     (5 )     (5 )
  President, Chief Executive     2004     $ 451,922     $ 449,200     $ 1,280,000 (6)   $ 223,595 (7)
  Officer, and Director     2003     $ 423,142     $ 110,000           $ 123,095  
        2002     $ 373,845     $ 157,500           $ 11,095  
 
Glenn R. Busse
    2005     $ 210,000       (5 )     (5 )     (5 )
  Senior Vice President —     2004     $ 200,577     $ 169,750     $     $ 7,500  
  Sales and Marketing     2003     $ 189,438     $ 47,500           $ 6,000  
        2002     $ 174,038     $ 73,500           $ 5,000  
 
Richard J. Hirshberg
    2005     $ 187,500       (5 )     (5 )     (5 )
  Vice President — Internal     2004     $ 180,384     $ 132,775     $     $ 6,828  
  Audit and Compliance(8)     2003     $ 174,615     $ 43,751           $ 6,165  
        2002     $ 164,423     $ 69,300           $ 6,000  
 
Mark E. Rutledge
    2005     $ 172,500       (5 )     (5 )     (5 )
  Vice President —     2004     $ 171,096     $ 148,794     $     $ 7,500  
  Engineering and Product     2003     $ 161,185     $ 40,000           $ 7,000  
  Development     2002     $ 149,039     $ 63,000           $ 6,000  
 
Kevin P. Duffy
    2005     $ 165,000       (5 )     (5 )     (5 )
  Vice President — Strategy     2004     $ 145,000     $ 136,819     $     $ 6,500  
  and Corporate     2003     $ 67,384 (9)   $ 19,100           $ 10,000  
  Development                                        
 
(1)  Certain executive officers also received certain perquisites, including a car allowance or use of a company car, the value of which did not exceed the lesser of $50,000 or 10% of the annual salary and bonus paid to each such executive officer.
 
(2)  The 2005 annual base salaries are annualized and are calculated assuming each named executive officer’s completion of employment through December 31, 2005.
 
(3)  Amounts shown for each fiscal year include bonuses earned in such fiscal year, but not paid until the following fiscal year. Amounts shown for 2004 also include special bonuses earned in 2004 and paid in 2004.
 
(4)  Unless otherwise indicated, amounts include payments made pursuant to our deferred compensation/salary continuation agreements and matching contributions to our 401(k) plan.
 
(5)  Amounts cannot be calculated until completion of our 2005 fiscal year.

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(6)  Represents payments pursuant to an equity participation agreement with Mr. Minarik in connection with our June 2004 recapitalization and special dividend.
 
(7)  Amount includes $110,000 of loan forgiveness and $100,000 we paid in connection with Mr. Minarik’s relocation agreement.
 
(8)  Mr. Hirshberg was our chief financial officer and vice president — finance until September 2005.
 
(9)  Mr. Duffy became an executive officer of our company in June 2003. The amount includes compensation received from us by Mr. Duffy as a consultant prior to becoming an executive officer.
Stock Options
       Prior to November 2005, we had not adopted any stock option plans. Consequently, none of our executive officers were granted or exercised any options during 2004 or held any options as of December 31, 2004.
Employment and Other Agreements
       We amended and restated our employment agreement with Mr. Minarik in January 2004. Under this three-year agreement, Mr. Minarik receives an annual base salary of $500,000, which increases $25,000 each year that our Adjusted EBITDA increases. Mr. Minarik is also entitled to receive annual incentive compensation, in an amount up to his base salary, based on our achievement of specified profitability, cash flow and debt reduction goals. If we terminate Mr. Minarik without cause, we must pay him 12 months of base salary (24 months if the termination is after a change in control).
       We have no other written employment contracts with any of our executive officers. We do have, however, employment letters and signed terms-and-conditions agreements with certain employees. We offer our employees medical, dental, life, and disability insurance benefits. Our executive officers and other key personnel are eligible to receive incentive bonuses and are eligible to receive equity-related awards under our incentive compensation plan. Our executive officers are party to certain change in control severance agreements pursuant to which they are entitled to receive certain compensation if their employment is terminated following a change in control of our company. Our executive officers are also party to certain sale bonus agreements. See “Certain Relationships and Related Party Transactions.”
2005 Incentive Compensation Plan
       Our board of directors has adopted and our shareholders have approved our 2005 incentive compensation plan. The incentive plan will terminate no later than (1) November 23, 2015, or (2) 10 years after the board approves an increase in the number of shares subject to the plan (so long as such increase is also approved by the shareholders). The incentive plan provides for the grant of nonstatutory stock options, restricted stock awards, stock appreciation rights, phantom stock, dividend equivalents, other stock-related awards and performance awards. Awards may be granted to employees, including officers, non-employee directors, and consultants.
Share Reserve
       An aggregate of 2,750,000 shares of common stock have been reserved for issuance under the incentive plan. As of the date hereof, no shares of common stock have been issued under the incentive plan.
       The following types of shares issued under the incentive plan may again become available for the grant of awards under the incentive plan:
  •  restricted stock that is repurchased or forfeited prior to it becoming fully vested;
 
  •  shares withheld for taxes;

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  •  shares that are not issued in connection with an award, such as upon the exercise of a stock appreciation right;
 
  •  shares used to pay the exercise price of an option in a net exercise; and
 
  •  shares that are not issued because the award is settled in cash.
In addition, shares subject to stock awards that have expired or otherwise terminated without having been exercised in full may be subject to new equity awards. Shares issued under the incentive plan may be previously unissued shares or reacquired shares bought on the market or otherwise.
Administration
       Our board of directors has the authority to administer the incentive plan as the plan administrator. However, our board of directors has the authority to delegate its authority as plan administrator to one or more committees, including its compensation committee. Subject to the terms of the incentive plan, the plan administrator will determine recipients, grant dates, the numbers and types of equity awards to be granted and the terms and conditions of the equity awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted, the purchase price for rights to purchase restricted stock and, if applicable, phantom stock and the strike price for stock appreciation rights.
Grant Limits
       To the extent that Section 162(m) applies to the incentive plan, no participant will receive an award for more than 2,000,000 shares in any calendar year. In addition, no participant will receive a performance bonus for more than $5,000,000 per twelve month period (as adjusted on a straight line basis for the actual length of the performance period).
Stock Options
       Each stock option granted pursuant to the incentive plan must be set forth in a stock option agreement. The plan administrator determines the terms of the stock options granted under the incentive plan, including the exercise price, vesting schedule, the maximum term of the option and the period of time the option remains exercisable after the optionee’s termination of service. However, the exercise price of a stock option may not be less than the fair market value of the stock on its grant date and the maximum term of a stock option may not be more than ten years. All options granted under the incentive plan will be nonstatutory stock options.
       Acceptable consideration for the purchase of common stock issued under the incentive plan will be determined by the plan administrator and may include cash, common stock previously owned by the optionee, a deferred payment arrangement, a broker assisted exercise, the net exercise of the option and other legal consideration approved by the board of directors.
       Generally, an optionee may not transfer a stock option other than by will or the laws of descent and distribution unless the stock option agreement provides otherwise. However, an optionee may designate a beneficiary who may exercise the option following the optionee’s death.
Restricted Stock Awards
       Restricted stock awards are granted pursuant to a restricted stock award agreement. The plan administrator determines the terms of the restricted stock award, including the purchase price, if any, for the restricted stock, and the vesting schedule, if any, for the restricted stock award. The plan administrator may grant shares fully vested as a bonus for the recipient’s past services performed for us. The purchase price for a restricted stock award may be payable in cash, the recipient’s past services performed for us, or any other form of legal consideration acceptable to the board of

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directors. Shares under a restricted stock award may not be transferred other than by will or by the laws of descent and distribution until they are fully vested or unless otherwise provided for in the restricted stock award agreement.
Stock Appreciation Rights
       Each stock appreciation right granted pursuant to the incentive plan must be set forth in a stock appreciation rights agreement. The plan administrator determines the terms of the stock appreciation rights granted under the incentive plan, including the strike price, vesting schedule, the maximum term of the right and the period of time the right remains exercisable after the recipient’s termination of service.
       Generally, the recipient of a stock appreciation right may not transfer the right other than by will or the laws of descent and distribution unless, the stock appreciation rights agreement provides otherwise. However, the recipient of a stock appreciation right may designate a beneficiary who may exercise the right following the recipient’s death.
Stock Units
       Stock unit awards are granted pursuant to stock unit award agreements. The plan administrator determines the terms of the stock unit award, including any performance or service requirements. A stock unit award may require the payment of at least par value. Payment of any purchase price may be made in cash, the recipient’s past services performed for us, or any other form of legal consideration acceptable to the board of directors. Rights to acquire shares under a stock unit award agreement may not be transferred other than by will or by the laws of descent and distribution, unless otherwise provided in the stock unit award agreement.
Dividend Equivalents
       Dividend equivalents are granted pursuant to a dividend equivalent award agreement. Dividend equivalents may be granted either alone or in connection with another award. The plan administrator determines the terms of the dividend equivalent award.
Other Stock-related Awards
       The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the award, the purchase price, if any, the timing of exercise and vesting, and any repurchase rights associated with such awards. Unless otherwise specifically provided for in the award agreement, such awards may not be transferred other than by will or by the laws of descent and distribution.
Performance Awards
       Performance awards are granted pursuant to a performance award agreement. The plan administrator determines the terms of the performance awards, including the specific performance criteria which must be met to receive payment, any additional vesting and the form of payment, which may be cash, stock or other property. In order to qualify performance awards as “performance-based” awards under Section 162(m) of the Code, the incentive plan provides a specific list of the performance criteria which may be used for such awards.
Changes in Control
       In the event of certain corporate transactions, all outstanding options and stock appreciation rights under the incentive plan either will be assumed, continued or substituted for by any surviving or acquiring entity. If the awards are not assumed, continued, or substituted for, then such awards shall become fully vested and, if applicable, fully exercisable and will terminate if not exercised prior

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to the effective date of the corporate transaction. In addition, at the time of the transaction, the plan administrator may accelerate the vesting of such equity awards or make a cash payment for the value of such equity awards in connection with the termination of such awards. Other forms of equity awards such as restricted stock awards may have their repurchase or forfeiture rights assigned to the surviving or acquiring entity. If such repurchase or forfeiture rights are not assigned, then such equity awards may become fully vested. The vesting and exercisability of certain equity awards may be accelerated on or following a change in control transaction if specifically provided in the respective award agreement.
Adjustments
       In the event that certain corporate transactions or events (such as a stock split or merger) affects our common stock, our other securities or any other issuer such that the plan administrator determines an adjustment to be appropriate under the incentive plan, then the plan administrator shall, in an equitable manner, substitute, exchange, or adjust (i) the number and kind of shares reserved under the incentive plan, (ii) the number and kind of shares for the annual per person limitations, (iii) the number and kind of shares subject to outstanding awards, (iv) the exercise price, grant price, or purchase price relating to any award and/or make provision for payment of cash or other property in respect of any outstanding award, and (v) any other aspect of any award that the plan administrator determines to be appropriate.
401(k) Plan
       We maintain a retirement and deferred savings plan for our employees. The retirement and deferred savings plan is intended to qualify as a tax-qualified plan under Section 401 of the Code. The retirement and deferred savings plan provides that each participant may contribute up to 20% of his or her pre-tax compensation, up to a statutory limit, which is $14,000 in calendar year 2005 except for employees over 50 years of age, for whom the limit is $18,000. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. There is an employer match of 50% of the employee’s contribution up to an annual maximum of $1,500. In 2004, we made approximately $137,000 of matching contributions to the retirement and deferred savings plan on behalf of participating employees.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Management and Advisory Agreements
       Since 1999, we have had a management agreement with Trivest Partners, L.P., pursuant to which Trivest Partners provides management, consulting, and financial services to us. These services include rendering advice and assistance concerning our operations, strategic and capital planning, and financing, including conducting relations on our behalf with accountants, attorneys, financial advisors, and other professionals, as well as advice and expertise in connection with acquisitions and dispositions. As base compensation, we paid Trivest Partners management fees of $281,000, $426,000, $571,000, $405,000, and $552,000 in 2000, 2001, 2002, 2003, and 2004, respectively. Trivest Partners is also entitled to additional fees for assisting with acquisitions, dispositions, and financings. In 2002, 2003, and 2004, we paid Trivest Partners aggregate fees and expenses of $571,000, $584,000 and $699,000. In connection with the closing of this offering, the management agreement will be terminated in exchange for a payment to Trivest Partners of $3.5 million. Three of our directors are affiliated with Trivest Partners, which is also an affiliate of our largest shareholders.
       Upon consummation of this offering, we will enter into an advisory agreement with Trivest Partners. The new agreement provides that for each acquisition or disposition of any business operation by us that is introduced or negotiated by Trivest Partners, Trivest Partners will generally receive a fee of between 1% and 3% of the purchase price. In addition, we will pay Trivest Partners a fee of 1.5% of the amount of any equity or debt financing or refinancing negotiated by Trivest Partners. However, if we engage another financial advisor to provide services in connection with such an acquisition, disposition, or financing, the fees payable to Trivest Partners may be reduced to an amount (determined in good faith by our board of directors) that reflects the relative contribution of Trivest Partners. The agreement further provides that our obligation to pay financial advisory fees will terminate when affiliates of Trivest Partners, on a combined basis, own less than 20% of our outstanding voting securities. There will not be any fee payable to Trivest Partners in connection with such termination.
Sale Bonus Agreements
       In December 2004 and early 2005, we entered into sale bonus agreements with 21 key employees, including our executive officers. These agreements were designed to provide an incentive to increase our value by making a payment upon certain liquidity events. The agreements provide that, in connection with this offering, our board of directors will negotiate in good faith with each key employee to determine a fair compensation arrangement to compensate the key employee in accordance with the purpose of the agreement. As a result of that negotiation, we have agreed to pay an aggregate of approximately $5.8 million and grant restricted stock unit awards for an aggregate of 897,748 shares of our common stock to the 21 key employees in exchange for the termination of the sale bonus agreements upon this offering. The restricted stock unit awards will generally provide for the delivery of one-third of the underlying common stock on each of the first three anniversaries of this offering, with delivery of stock on a quarterly basis to four of our named executive officers. Delivery of the underlying common stock is not contingent on our continued employment of the key employees. The termination payments and restricted stock unit awards were determined by applying each employee’s applicable sale bonus agreement percentage to the amount by which an agreed-upon valuation for our company exceeded a pre-established amount. Each employee’s percentage of that net equity amount will generally be paid 20% in cash and 80% in restricted stock units. Prior to this offering, no amounts had ever been paid to any employee under the sale bonus agreements. Under a previous equity participation agreement, Mr. Minarik received $1,280,000 in connection with our June 2004 recapitalization and special dividend.

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       Our named executive officers will receive the following:
                 
        Number of Shares
        Subject to
Name   Cash Amount   Restricted Stock Units
         
James E. Minarik
  $ 4,121,007       471,259  
Glenn R. Busse
  $ 282,755       70,689  
Richard J. Hirshberg
  $ 141,378       35,344  
Mark E. Rutledge
  $ 282,755       70,689  
Kevin P. Duffy
  $ 282,755       70,689  
       In addition, in connection with this offering, we intend to grant to four other key employees restricted stock units for 45,437 shares and make a $94,250 cash payment to two of those employees. All of such restricted stock units will provide for the delivery of one-third of the underlying common stock on each of the first three anniversaries of this offering, subject in the case of 21,874 shares to the continued employment of the recipient on such date.
       Upon the closing of this offering, we will recognize a compensation expense equal to the cash payments plus the value of the restricted stock units. That value will be computed by multiplying the initial public offering price by the number of shares subject to the restricted stock units. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook.”
Associate Equity Gain Program
       In October 2001, we adopted an associate equity gain program to provide an incentive for employees who were not eligible for our key employee equity purchase plan. The associate equity gain program provides that participants, none of whom are executive officers, will receive aggregate payments of up to $2.0 million upon certain liquidity events, including this offering. The specific amount will be based on the per share payment to our shareholders from that liquidity event. Prior to this offering, no amounts had ever been paid to participants under this program. In connection with this offering, and in full satisfaction of all obligations under the associate equity gain program, we will pay the approximately 165 current participants an aggregate of $1.0 million in cash and grant restricted stock units for an aggregate of 62,500 shares of our common stock. Delivery of the underlying common stock is not contingent on continued employment by us. As a result, the associate equity gain program will be terminated immediately following this offering. No individual employee will receive more than $14,000 in cash or restricted stock units for more than 875 shares in satisfaction of the program. Upon the closing of this offering, we will recognize a compensation expense of $2.0 million.
Deferred Compensation/Salary Continuation Agreements
       We have entered into deferred compensation/ salary continuation agreements with each of our executive officers. These agreements were designed to provide these officers with retirement benefits in the form of deferred compensation, which amounts accrue for as long as the officer remains a full-time employee of our company. Under the agreements, for each year during which an executive officer remains a full-time employee of our company, we accrue as deferred compensation for that executive officer a set amount (which ranges from approximately $2,500 to $15,000 per officer) plus any additional amount we may elect to contribute. The amounts accrued are deposited into a deferred compensation account and, upon the executive officer’s retirement, we are obligated to pay the executive officer the balance of the deferred compensation account. The balance of the deferred compensation account will be paid in five annual installments commencing on January 1 of the year following an executive officer’s retirement. If an executive officer dies while employed by our company, we will pay that executive officer’s designated beneficiary a salary continuation benefit equal to the balance of the deferred compensation account. If an executive officer’s employment

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terminates for any reason other than death or retirement, that executive officer is entitled to a severance benefit equal to the value of the deferred compensation account.
Real Estate Lease Agreement
       On July 14, 2003, we entered into a lease agreement for our headquarters facility with Greene Properties, Inc., a corporation owned by Darrell Issa, one of our current directors and our former owner. Under the lease agreement and an amendment to the lease dated September 8, 2004, we lease an aggregate of 162,771 square feet of office and distribution space. The initial term of the amended lease expires December 31, 2013, and we have one five-year renewal option exercisable upon at least six months advance written notice of our election to exercise the option. Our current fixed monthly rent under the lease is approximately $118,000, plus 100% of the common area costs. We paid annual rent under the lease of $994,000, $1.1 million, and $1.3 million during the years ended December 31, 2002, 2003, and 2004, respectively.
Registration Rights Agreement
       In connection with our purchase by Trivest in 1999, we entered into a registration rights agreement with Darrell Issa, one of our current directors and our former owner, as well as certain other shareholders that provided financing for that acquisition. In connection with this offering, we entered into an amended and restated agreement pursuant to which Trivest became a party. The agreement provides that, if Mr. Issa, Trivest, or the other shareholders party to the agreement so request, we will register under the Securities Act any shares of our common stock currently held or later acquired by Mr. Issa, Trivest, or the other shareholders. Mr. Issa, Trivest, and the other shareholders will also have the right to include the shares of our common stock that they own in registrations that we initiate on our own behalf or on behalf of other shareholders. See “Description of Capital Stock — Registration Rights.”
Convertible Notes
       Between May 2000 and July 2001, we issued an aggregate of $156,666 principal amount of our convertible notes to certain of our executive officers to provide these officers with the opportunity to increase their proprietary interest in our company. Messrs. Minarik, Busse, Rutledge, Hirshberg, and Bean were issued notes in principal amounts of $61,111, $33,333, $33,333, $22,222, and $6,667, respectively. In June 2004, all of such notes were converted into an aggregate of 67,843 shares of common stock in connection with our recapitalization, including 26,001, 14,989, 14,989, 9,135, and 2,729 shares to Messrs. Minarik, Busse, Rutledge, Hirshberg, and Bean, respectively.
       Between December 1999 and October 2001, we issued an aggregate of $9,511,111 principal amount of our convertible notes to certain of our shareholders owning 5% or greater of our outstanding capital stock. We issued an aggregate of $7,922,222 principal amount of convertible notes to Trivest, $500,000 principal amount of convertible notes to the MassMutual Entities, and $1,088,889 principal amount of convertible notes to the Issa Family Foundation, a foundation in which Darrell E. Issa is a controlling shareholder. In June 2004, all of such notes were converted into an aggregate of 4,394,949 shares of common stock in connection with our recapitalization, including 3,660,762 shares to Trivest, 231,037 shares to the MassMutual Entities, and 503,150 shares to the Issa Family Foundation. See Note 12 to our consolidated financial statements for a discussion of the convertible notes.

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PRINCIPAL AND SELLING SHAREHOLDERS
       The following table sets forth certain information regarding the beneficial ownership of our common stock on December 1, 2005 by the following:
  •  each person known by us to own more than 5% of our common stock;
 
  •  each shareholder selling shares in this offering;
 
  •  each of our directors and named executive officers; and
 
  •  all of our directors and executive officers as a group.
       Except as otherwise indicated, each person named in the table has sole voting and investment power with respect to all common stock beneficially owned, subject to applicable community property law. None of the selling shareholders are registered broker-dealers. Except as otherwise indicated, each person may be reached as follows: c/o Directed Electronics, Inc., 1 Viper Way, Vista, California 92081.
       The percentages shown are calculated based on 18,831,697 shares of common stock outstanding on December 1, 2005 (which includes 1,420,037 shares issued pursuant to the exercise of warrants prior to the closing of this offering). There were no other outstanding rights to acquire our common stock as of December 1, 2005.
                                           
    Shares Beneficially       Shares Beneficially
    Owned Prior to the   Shares   Owned after the
    Offering   Offered   Offering
        for    
Name   Number   Percent   Sale(1)   Number   Percent
                     
5% and Selling Shareholders:
                                       
 
Trivest Funds(2)
    13,605,990       72.3 %     2,626,250       10,979,740       44.3 %
 
MassMutual Entities(3)(4)
    1,991,375       10.6 %     385,000       1,606,375       6.5 %
 
BancBoston Investments, Inc.(4)(5)
    663,791       3.5 %     127,188       536,603       2.2 %
 
555 Madison Investors, LLC(6)
    133,185       *       24,062       109,123       *  
 
HVB U.S. Finance, Inc.(4)(7)
    89,254       *       17,187       72,067       *  
 
Issa Family Foundation(8)
    1,327,009       7.0 %     257,813       1,069,196       4.3 %
Directors and Executive Officers:
                                       
 
James E. Minarik
    102,261       *             102,261       *  
 
Glenn R. Busse
    56,639       *             56,639       *  
 
Richard J. Hirshberg
    36,844       *             36,844       *  
 
Mark E. Rutledge
    56,639       *             56,639       *  
 
Kevin P. Duffy
    23,235       *             23,235       *  
 
Troy D. Templeton(2)(9)
    13,605,990       72.3 %     2,626,250       10,979,740       44.3 %
 
Earl W. Powell(2)(9)
    13,605,990       72.3 %     2,626,250       10,979,740       44.3 %
 
Jon E. Elias(2)(9)
    13,605,990       72.3 %     2,626,250       10,979,740       44.3 %
 
Darrell E. Issa
    1,327,009       7.0 %     257,813       1,069,196       4.3 %
 
Andrew D. Robertson
                            *  
 
Victor J. Orler
                            *  
 
S. James Spierer
                            *  
 
Kevin B. McColgan
                            *  
 
Edmond S. Thomas
                            *  
 
All directors and executive officers as a group (17 persons)
    15,261,079       81.0 %     2,884,063       12,377,016       50.0 %
 
Less than one percent.

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(1)  The table does not give effect to the sale of additional shares if the underwriters’ option to purchase additional shares is exercised. If such option is exercised in full, the following shareholders will sell up to the following number of additional shares:
           
Trivest Funds
    1,074,375  
MassMutual Entities
    157,500  
BancBoston Investments, Inc.
    52,031  
555 Madison Investors, LLC
    9,844  
HVB U.S. Finance, Inc.
    7,031  
Issa Family Foundation
    105,469  
       
 
Total
    1,406,250  
       
(2)  Represents shares held by Trivest Fund II, Ltd., Trivest Equity Partners II, Ltd., Trivest Principals Fund II, Ltd., Trivest-DEI Co-Investment Fund, Ltd., Trivest Fund III, L.P., Trivest Principals Fund III, L.P., Trivest Equity Partners III, L.P. and Trivest Fund Cayman III, L.P., all of which are affiliates (collectively, the “Trivest Funds”). Mr. Earl W. Powell exercises voting and dispositive power over all such shares. The address of each of the Trivest Funds is 2665 South Bayshore Drive, Suite 800, Miami, Florida 33133.
 
(3)  Represents shares held by MassMutual Corporate Investors, MassMutual Participation Investors and Massachusetts Mutual Life Insurance Company (collectively, the “MassMutual Entities”). Includes 1,065,028 shares that will be issued upon exercise of outstanding warrants prior to the closing of this offering. MassMutual Corporate Investors and MassMutual Participation Investors are public reporting entities. The following officers of Babson Capital Management (which acts as investment adviser for Massachusetts Mutual Life Insurance Company) exercise sole voting and dispositive power over all shares held by MMLIC: Roger W. Crandall (Chairman), William F. Glavin, Jr. (President and CEO), David J. Brennan (Vice Chairman and Managing Director), Stephen L. Kuhn (General Counsel and Secretary), Rodney J. Dillman (Deputy General Counsel and Assistant Secretary), John E. Deitelbaum (Counsel and Assistant Secretary), John A. Anderson III (Counsel and Assistant Secretary), James E. Masur (CFO and Managing Director), Jan F. Jumet (Managing Director and Chief Compliance Officer), DeAnne Dupont (Treasurer, Controller, and Managing Director), Bernadette Clegg (Assistant Treasurer and Managing Director), Deborah L. Gatto (Assistant Treasurer), and other individuals holding the title of “Managing Director” from time to time. The MassMutual Entities are affiliated with the following broker-dealers: Babson Capital Securities Inc.; Baring Investment Services, Inc.; MML Distributors, LLC; MML Investors Services, Inc.; MMLISI Financial Alliances, LLC; OppenheimerFunds Distributor, Inc.; Centennial Asset Management Corporation; and Tremont Securities, Inc. The address of each of the MassMutual Entities is 1295 State Street, Springfield, Massachusetts 01111.
 
(4)  This selling shareholder purchased such shares in the ordinary course of business and, at the time of the purchase of such shares, had no agreements or understandings, directly or indirectly, with any person to distribute them.
 
(5)  Includes 355,009 shares that will be issued upon exercise of outstanding warrants prior to the closing of this offering. BancBoston Investments, Inc. (“BBI”) is a wholly-owned subsidiary of Bank of America Corporation (“BAC”). BAC may be deemed to have shared voting and investment power with respect to such securities by virtue of its ownership of BBI. In accordance with BBI’s policies and procedures: (i) the head of the business unit responsible for the investment by BBI (Maia Heymann) has voting power with respect to the shares; and (ii) the head of such business unit (Maia Heymann), the Chief Investment Officer of BBI (Edward McCaffrey), and the Vice Chairman of BBI (Terry Perucca), collectively, have dispositive power over the shares. BBI is affiliated with the following broker-dealers: Bank of America Securities LLC; Banc of America Investment Services, Inc.; BACAP Distributors, LLC; Banc of America Futures, Incorporated; Fleet Securities, Inc.; Quick &

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Reilly, Inc.; Columbia Fund Distributor, Inc.; and Columbia Financial Center, Inc. The address of BancBoston Investments, Inc. is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110.
 
(6)  Mr. Gregory W. Cashman exercises sole voting and dispositive power over all such shares. The address of 555 Madison Investors, LLC is 551 Madison Avenue, 6th Floor, New York, New York 10022.
 
(7)  Mr. John W. Sweeney, Ms. Loriann Curnyn, and/or any duly authorized director of HVB U.S. Finance, Inc. exercise sole voting and dispositive power over all such shares. HVB U.S. Finance, Inc. is affiliated with the following broker-dealer: HVB Capital Markets, Inc. The address of HVB U.S. Finance, Inc. is 150 East 42nd Street, New York, NY 10017. This selling shareholder has identified itself as an affiliate of a broker-dealer.
 
(8)  Mr. Darrell E. Issa exercises sole voting and dispositive power over all such shares. The address of the Issa Family Foundation is 1800 Thibodo Road, Suite 320, Vista, California 92081.
 
(9)  Represents shares held by the Trivest Funds, as described in note 2. Messrs. Powell, Templeton, and Elias are each officers of certain of the Trivest Funds or their affiliates. Accordingly, Messrs. Powell, Templeton, and Elias may be deemed to beneficially own the shares owned by the Trivest Funds. Each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. The address of each such person is c/o Trivest Partners, L.P., 2665 South Bayshore Drive, Suite 800, Miami, Florida 33133.

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DESCRIPTION OF CAPITAL STOCK
       We are authorized to issue 100,000,000 shares of common stock, $.01 par value, and 5,000,000 shares of undesignated preferred stock, $.01 par value. The following description of our capital stock is intended to be a summary and does not describe all provisions of our articles of incorporation or bylaws or Florida law applicable to us. For a more thorough understanding of the terms of our capital stock, you should refer to our articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part.
Common Stock
       The holders of common stock are entitled to one vote per share on all matters to be voted upon by shareholders. There is no cumulative voting. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available for that purpose. In the event of the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock. The common stock has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions.
       As of the date of this prospectus, there were 61 holders of our common stock.
       Our articles of incorporation previously authorized the issuance of Class A and Class B common stock. Each holder of record of Class A common stock was entitled to one vote for each share of Class A common stock. The holders of Class B common stock did not have voting rights. Each holder of Class B common stock was entitled to convert any and all of the shares of such holder’s Class B common stock into the same number of shares of Class A common stock, adjusted to reflect stock splits, reorganizations, and other similar changes. The holders of Class A and Class B common stock were entitled to dividends if and when such dividends were declared by our board of directors. In connection with this offering, we amended and restated our articles of incorporation to provide for only one class of common stock, and each share of Class A common stock and Class B common stock was converted into shares of new common stock on a 3.27-for-one basis. We do not intend to declare dividends on our Class A or Class B common stock in connection with the conversion or in connection with this offering.
Warrants
       We previously had outstanding warrants to purchase 1,420,037 shares of common stock at an exercise price of $.01 per share. All of the warrants were exercised in connection with this offering. Unless otherwise indicated, all information in this prospectus relating to the warrants reflects an amendment to our articles of incorporation and the conversion of our Class A common stock and Class B common stock into a single class of common stock as discussed in the preceding paragraph.
Preferred Stock
       Our articles of incorporation authorize our board of directors, without any vote or action by the holders of our common stock, to issue preferred stock from time to time in one or more series. Our board of directors is authorized to determine the number of shares and to fix the designations, powers, preferences, and the relative, participating, optional, or other rights of any series of preferred stock. Issuances of preferred stock would be subject to the applicable rules of the Nasdaq National Market or other organizations on which our securities are then quoted or listed. Depending upon the terms of preferred stock established by our board of directors, any or all series of preferred stock could have preference over the common stock with respect to dividends and other distributions and upon our liquidation. If any shares of preferred stock are issued with voting powers, the voting power

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of the outstanding common stock would be diluted. No shares of preferred stock are presently outstanding, and we have no present intention to issue any shares of preferred stock.
Registration Rights
       Beginning 180 days after the completion of this offering, shareholders owning 14,373,104 shares will be entitled to require us to register our securities owned by them for public sale pursuant to an agreement granting them registration rights. These rights are described below.
Demand Registration Rights
       If we receive a written request from certain shareholders to file a registration statement under the Securities Act covering the registration of the shares of our common stock, we must use our best efforts to effect registration of the securities requested to be registered. We are not required to register our common stock unless the aggregate offering price to the public is at least $5.0 million. In addition, we are not required to effect more than two of these registrations. However, in the event that not all of the common stock for which registration has been requested by shareholders may be registered, then the shareholders are entitled to one additional registration.
Form S-3 Registration Rights
       Upon receipt of a written request from certain shareholders, we must use our best efforts to file and effect a registration statement with respect to any of the shares of our common stock held by those shareholders. We are not, however, required to effect any such registration if (1) we are not eligible to file a registration statement on Form S-3, or (2) the aggregate offering price of the securities to be registered is less than $2.0 million. Additionally, we are not required to effect more than one Form S-3 registration during any six-month period nor within 180 days after any other registration statement we have been requested to effect has been declared effective. If the shareholders so request, we are required to register their securities for sale on a delayed or continuous basis and to keep such registration effective for a maximum of 90 days.
Incidental Registration Rights
       The shareholders who are party to the registration rights agreement are entitled to include all or part of their shares of our common stock in any of our registration statements under the Securities Act, excluding registration statements relating to our employee benefit plans or a corporate reorganization. The managing underwriter of any underwritten offering will have the right to limit the number of securities included in such offering due to marketing reasons. However, if the underwriter reduces the number of securities included in the offering, the reduction in the number of securities held by those shareholders cannot represent a greater percentage of the shares requested to be registered by such shareholders than the lowest percentage reduction imposed upon any other shareholder.
Registration Expenses
       We will pay all expenses incurred in connection with the registrations described above, except for underwriting discounts and commissions, and we will pay the expenses of one counsel representing the holders of registration rights.
Lock-Up Agreements
       If we register our shares of common stock for sale to the public, the shareholders who are party to the registration rights agreement have agreed not to make any short sale of, grant any option for the transfer of, or otherwise transfer, any securities held by them not sold in the offering for a reasonable period of time. In no event may the lock-up period be more than 180 days after the effectiveness of the registration statement for the offering.

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Limitations on Registration Rights
       We have the right to delay the filing or effectiveness of a registration statement if our board of directors believes that the demand or incidental offering would materially interfere with or be materially detrimental to an offering previously planned by us. We may also delay the filing or effectiveness of, or may withdraw, any incidental registration at any time for any reason.
Indemnification
       In connection with all of the registrations described above, we have agreed to indemnify the selling shareholders against certain liabilities, including liabilities arising under the Securities Act.
Anti-Takeover Effects
General
       Our articles of incorporation, our bylaws, and the Florida Business Corporation Act, or FBCA, contain certain provisions that could delay or make more difficult an acquisition of control of our company not approved by our board of directors, whether by means of a tender offer, open market purchases, a proxy context, or otherwise. These provisions have been implemented to enable us, particularly but not exclusively in the initial years of our existence as a publicly owned company, to develop our business in a manner that will foster our long-term growth without disruption caused by the threat of a takeover not deemed by our board of directors to be in the best interests of our company and our shareholders. These provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of our company even if such a proposal, if made, might be considered desirable by a majority of our shareholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management without the concurrence of our board of directors.
       Set forth below is a description of the provisions contained in our articles of incorporation and bylaws and the FBCA that could impede or delay an acquisition of control of our company that our board of directors has not approved. This description is intended as a summary only and is qualified in its entirety by reference to our articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, as well as the FBCA.
Authorized but Unissued Preferred Stock
       Our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms and rights of such series without any further vote or action by our shareholders. The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or discourage an attempt to obtain control of our company by means of a proxy contest, tender offer, or other extraordinary transaction. Any issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. The existence of authorized but unissued shares of preferred stock will also enable our board of directors, without shareholder approval, to adopt a “poison pill” takeover defense mechanism. We have no present plans to issue any shares of preferred stock.
Number of Directors; Removal; Filling Vacancies
       Our articles of incorporation and bylaws provide that the number of directors shall be fixed only by resolution of our board of directors from time to time. Our articles of incorporation provide that directors may be removed by shareholders only for cause and with the affirmative vote of at least 662/3% of the shares entitled to vote. Our articles of incorporation and bylaws provide that vacancies on the board of directors may be filled only by a majority vote of the remaining directors or by the sole remaining director.

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Classified Board
       Our articles of incorporation provide for our board to be divided into three classes, as nearly equal in number as possible, serving staggered terms. Approximately one-third of our board will be elected each year. See “Management — Board of Directors and Committees.” The provision for a classified board could prevent a party who acquires control of a majority of our outstanding common stock from obtaining control of the board until our second annual shareholders’ meeting following the date the acquirer obtains the controlling share interest. The classified board provision could have the effect of discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us and could increase the likelihood that incumbent directors will retain their positions.
Shareholder Action
       Our articles of incorporation provide that shareholder action may be taken only at an annual or special meeting of shareholders. This provision prohibits shareholder action by written consent in lieu of a meeting. Our articles of incorporation and bylaws further provide that special meetings of shareholders may be called only by the chairman of the board of directors or a majority of the board of directors. Shareholders are not permitted to call a special meeting or to require our board of directors to call a special meeting of shareholders.
       The provisions of our articles of incorporation and bylaws prohibiting shareholder action by written consent may have the effect of delaying consideration of a shareholder proposal until the next annual meeting unless a special meeting is called as provided above. These provisions would also prevent the holders of a majority of the voting power of our stock from unilaterally using the written consent procedure to take shareholder action. Moreover, a shareholder could not force shareholder consideration of a proposal over the opposition of the board of directors by calling a special meeting of shareholders prior to the time our chairman or a majority of the whole board believes such consideration to be appropriate.
Advance Notice for Shareholder Proposals and Director Nominations
       Our bylaws establish an advance notice procedure for shareholder proposals to be brought before any annual or special meeting of shareholders and for nominations by shareholders of candidates for election as directors at an annual meeting or a special meeting at which directors are to be elected. Subject to any other applicable requirements, including, without limitation, Rule 14a-8 under the Exchange Act, only such business may be conducted at a meeting of shareholders as has been brought before the meeting by, or at the direction of, our board of directors, or by a shareholder who has given our Secretary timely written notice, in proper form, of the shareholder’s intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. Only persons who are nominated by, or at the direction of, our board of directors, or who are nominated by a shareholder that has given timely written notice, in proper form, to our Secretary prior to a meeting at which directors are to be elected, will be eligible for election as directors.
Amendments to Bylaws
       Our articles of incorporation provide that only our board of directors or the holders of at least 662/3% of the shares entitled to vote at an annual or special meeting of shareholders have the power to amend or repeal our bylaws.
Amendments to Articles of Incorporation
       Any proposal to amend, alter, change, or repeal any provision of our articles of incorporation requires approval by the affirmative vote of a majority of the voting power of all of the shares of our capital stock entitled to vote on such matters, with the exception of certain provisions of our articles

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of incorporation that require a vote of at least 662/3% of such voting power. The requirement of a super-majority vote to approve amendments to the articles of incorporation or bylaws could enable a minority of our shareholders to exercise veto power over an amendment.
Florida Statutory Provisions
       We are subject to several anti-takeover provisions under the FBCA that may deter or hinder takeovers of Florida corporations. Florida’s control share acquisition statute generally provides that shares acquired in a “control share acquisition” will not possess any voting rights unless either the board of directors approves the acquisition or such voting rights are approved by a majority of the corporation’s voting shares, excluding interested shares. Interested shares are those held by our officers and inside directors and by the acquiring party. A “control share acquisition” is an acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding “control shares” of a publicly held Florida corporation. “Control shares” are shares that, except for Florida’s control share acquisition statute, would have voting power that, when added to all other shares that can be voted by the acquiring party, would entitle the acquiring party, immediately after the acquisition of such shares, directly or indirectly, to exercise voting power in the election of directors within any of the following ranges:
  •  at least 20% but less than 331/3% of all voting power;
 
  •  at least 331/3% but less than a majority of all voting power; or
 
  •  a majority or more of all voting power.
       We also are subject to the “affiliated transactions” statute of the FBCA. The affiliated transactions statute prohibits a publicly held Florida corporation from engaging in a broad range of business combinations or other extraordinary corporate transactions with an “interested shareholder” unless:
  •  the transaction is approved by a majority of disinterested directors;
 
  •  the corporation has not had more than 300 shareholders of record at any time during the three years preceding the announcement of the transaction;
 
  •  the interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years;
 
  •  the interested shareholder is the beneficial owner of at least 90% of the voting shares (excluding shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors);
 
  •  consideration is paid to the holders of the corporation’s shares equal to the highest amount per share paid by the interested shareholder for the acquisition of the corporation’s shares in the last two years or the fair market value of the shares, and other specified conditions are met; or
 
  •  the transaction is approved by the holders of two-thirds of the company’s voting shares other than those owned by the interested shareholder.
       An “interested shareholder” is defined as a person who, together with affiliates and associates, beneficially owns more than 10% of a company’s outstanding voting shares. The FBCA defines “beneficial ownership” in more detail.
Limitation of Liability and Indemnification of Officers and Directors
       Our articles of incorporation and bylaws limit the liability of directors to the fullest extent permitted by the FBCA. In addition, our articles of incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by law. In connection with this

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offering, we are entering into indemnification agreements with our current directors and executive officers and expect to enter into a similar agreement with any new directors or executive officers.
Indemnification for Securities Act Liabilities
       Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for directors, officers, or controlling persons pursuant to the provisions described in the preceding paragraph, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer Agent and Registrar
       The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. The transfer agent’s address is 59 Maiden Lane, New York, New York 10038 and its telephone number is (877) 777-0800.

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DESCRIPTION OF INDEBTEDNESS
       We have outstanding debt under our senior secured credit facility and our subordinated notes.
Senior Secured Credit Facility
       In June 2004, we entered into a senior secured credit agreement with various lenders. Wachovia Bank, National Association, acts as administrative agent for the lenders and CIBC World Markets Corp. acts as syndication agent for the lenders. In September 2004, in connection with our acquisition of Definitive Technology, we amended the credit agreement to increase the amount available for borrowings. In February 2005, we further amended the credit agreement in order to amend certain interest rates. In September 2005, we further amended the credit agreement to increase the amount available for borrowings. We refer to the credit agreement and related documents, as amended through the date of this prospectus, as our senior secured credit facility. As of September 30, 2005, we had $166.6 million outstanding under our senior secured credit facility. Our senior secured credit facility now consists of the following:
  •  a term loan facility of $171.0 million, of which $166.6 million was outstanding as of September 30, 2005; and
 
  •  a 5-year revolving credit facility of up to $50.0 million in revolving credit loans, letters of credit, and swingline loans, none of which was outstanding as of September 30, 2005 and $11.9 million of which was outstanding at November 30, 2005.
       We are obligated with respect to all amounts owing under our senior secured credit facility. In addition, our senior secured credit facility is:
  •  jointly and severally guaranteed by each of our subsidiaries;
 
  •  secured by a first priority lien on substantially all of our subsidiaries’ tangible and intangible personal property; and
 
  •  secured by a pledge of all of the capital stock of our subsidiaries.
       Our future domestic subsidiaries will guarantee the senior secured credit facility and secure that guarantee with substantially all of their tangible and intangible personal property.
       Our senior secured credit facility requires us to meet financial tests, including a maximum consolidated total leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio. In addition, our senior secured credit facility contains negative covenants limiting, among other things, additional liens and indebtedness, capital expenditures, real estate acquisitions, transactions with certain shareholders and any affiliates, mergers and consolidations, liquidations and dissolutions, sales of assets, dividends, investments and joint ventures, loans and advances, prepayments and modifications of debt instruments, and other matters customarily restricted in such agreements. Our senior secured credit facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect, and a change of control of our business, which for purposes of the credit facility includes this initial public offering.
       Our senior credit facility includes covenants that require us to, among other things, maintain a specific ratio of consolidated earnings before interest, taxes, depreciation and amortization (subject to certain adjustments including the operating results of Definitive Technology not otherwise included in our GAAP financial statements for the 12-month period for which the covenants are calculated) to

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total leverage and senior leverage. We must also maintain a specified fixed charge coverage ratio. We were in compliance with all debt covenants as of September 30, 2005.
                 
    As of September 30, 2005
     
    Actual Ratio   Required Ratio
         
Total Leverage
    4.91x       5.50x maximum  
Senior Leverage
    3.40x       4.00x maximum  
Fixed Charge Coverage
    1.81x       1.25x minimum  
       Debt covenant targets are adjusted in accordance with the terms of our senior credit facility.
       Our borrowings under the senior secured credit facility bear interest at a floating rate and may be maintained as alternate base rate loans or as LIBOR rate loans. Alternate base rate loans bear interest at the higher of (1) the rate of interest announced publicly by Wachovia Bank in Charlotte, North Carolina, from time to time, as Wachovia Bank’s prime rate, and (2) the weighted average of the rates on overnight federal funds transactions as published by the Federal Reserve Bank of New York plus 1/2 of 1%. LIBOR rate loans bear interest at the LIBOR rate, as described in the senior secured credit facility, plus the applicable LIBOR rate margin, which margin is 2.75% — 3.25%. Effective February 2006, the interest rate on our term loan will be reduced to LIBOR plus 2.25% and the interest rate on our revolving credit borrowings will be reduced to LIBOR plus the applicable margin of 1.75% — 2.25%
       The applicable margins with respect to the term loan facility and the revolving credit facility will vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on our consolidated total leverage ratio.
       At September 30, 2005, the weighted average interest rate on the term loan facility was 7.2%, and the commitment fee on the undrawn revolving credit facility was 0.5%.
       With respect to letters of credit, which may be issued as a part of the revolving loan commitment, the revolver lenders will be entitled to receive a fee equal to the product of the applicable LIBOR rate margin then in effect and the average daily maximum amount available to be drawn under such letters of credit. In addition, the issuing bank will be entitled to receive a fronting fee of 0.125% per annum plus its other reasonable and customary processing charges. Such letter of credit fees and fronting fees are payable quarterly in arrears.
       The senior secured credit facility prescribes that specified amounts must be used to prepay the term loan facility and reduce commitments under the revolving credit facility, including:
  •  100% of the net proceeds of any sale or other disposition by us or any of our subsidiaries of any assets, subject to exceptions if the aggregate amount of such proceeds are reinvested in other business-related assets;
 
  •  100% of the net proceeds of casualty insurance, condemnation awards, or other recoveries, subject to exceptions;
 
  •  100% of the net proceeds of any issuance of indebtedness after the closing date by us or any of our subsidiaries, subject to exceptions for permitted debt;
 
  •  50% of the net proceeds from the issuance of equity securities by us or our subsidiaries, subject to exceptions; and
 
  •  if our consolidated total leverage ratio is over 3.50, 75% of consolidated excess cash flow, for any fiscal year; provided, that the foregoing percentage may be reduced to either 50% if our leverage ratio is between 3.50 and 2.50, or 0% if our leverage ratio is less than 2.50.
       In general, any mandatory prepayments as described above will be applied first to prepay the term loan facility, second to prepay the revolving loans, and third to reduce commitments under the

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revolving credit facility. Prepayments of the term loan facility, voluntary or mandatory, will be applied pro rata to the scheduled installments of the term loan facility; provided, however, voluntary prepayments will be applied first to scheduled payments due and payable during the 12 months immediately following the date of such prepayments and thereafter on a pro rata basis as provided above. Voluntary prepayments of our senior secured credit facility are permitted at any time but may not then be reborrowed.
       In connection with this offering, we obtained an amendment and a consent under the senior secured credit facility to, among other things, waive the requirement to use 50% of the net proceeds of this offering to repay indebtedness under the senior secured credit facility and to permit the use of proceeds described under “Use of Proceeds.”
       This summary of the senior secured credit facility may not contain all of the information that is important to you and is subject to, and qualified in its entirety by reference to, all of the provisions of the credit agreement and related documents, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part. See “Where You Can Find Additional Information.”
Senior Subordinated Notes and Junior Subordinated Notes
       Our senior subordinated notes were issued in an aggregate principal amount at maturity of $37.0 million and will mature on June 17, 2011. Our junior subordinated notes were issued in an aggregate principal amount at maturity of $37.0 million and will mature on June 17, 2012. We refer to the senior subordinated notes and the junior subordinated notes collectively as the “subordinated notes.” The subordinated notes were issued pursuant to a note purchase agreement dated as of June 17, 2004 between our company and our subsidiaries, as issuers, American Capital Strategies, Ltd., as the purchaser of the notes, and American Capital Financial Services, Inc., as administrative agent, and are subordinated unsecured obligations of our company and our subsidiaries. Cash interest on the subordinated notes accrues at the rate of the LIBOR rate plus 8.0% per annum and cash interest on the junior subordinated notes accrues at the rate of 12% per annum. Interest on the subordinated notes is payable on the 10th day of January, April, July, and October each year. As of September 30, 2005, there were $37.0 million in aggregate principal amount of the senior subordinated notes outstanding and $37.0 million in aggregate principal amount of the junior subordinated notes outstanding.
       The senior subordinated notes are prepayable, at our option, in whole at any time or in part from time to time, upon not less than 30 nor more than 90 days’ notice, without penalty.
       The junior subordinated notes are prepayable, at our option, in whole at any time or in part from time to time, upon not less than 30 nor more than 90 days’ notice, so long as no senior subordinated notes remain outstanding, at the following prepayment prices, expressed as percentages of the principal amount thereof, if prepaid during the twelve-month period ending on June 17 of the year set forth below, plus, in each case, accrued interest to the date of prepayment:
         
Year   Percentage
     
2006
    102.00%  
2007
    101.00%  
2008 and thereafter
    100.00%  
       We intend to prepay our outstanding subordinated notes with a portion of the net proceeds of this offering. See “Use of Proceeds.”
Convertible Notes
       In June 2004, all of our outstanding convertible notes plus interest were converted into 4,630,412 shares of common stock in connection with our recapitalization. See Note 12 to our consolidated financial statements for a discussion of the convertible notes.

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SHARES ELIGIBLE FOR FUTURE SALE
       Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares, or the availability of shares for sale, will have on the market price of our common stock prevailing from time to time. Sales of our common stock in the public market after the restrictions described below lapse, or the perception that those sales may occur, could cause the prevailing market price to decline or to be lower than it might be in the absence of those sales or perceptions.
Sale of Restricted Shares
       Upon completion of this offering, we will have 24,769,197 shares of common stock outstanding, based on 18,831,697 shares of common stock outstanding as of December 1, 2005. Of these shares, the shares sold in this offering, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable without restriction under the Securities Act, except for any shares purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. In general, affiliates include executive officers, directors, and 10% shareholders. Shares purchased by affiliates will remain subject to the resale limitations of Rule 144.
       The remaining shares outstanding prior to this offering are restricted securities within the meaning of Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k), or 701 promulgated under the Securities Act, which are summarized below.
       Taking into account the lock-up agreements, and assuming Goldman, Sachs & Co. does not release shares from these agreements, the following shares will be eligible for sale in the public market beginning 180 days after the effective date of the registration statement of which this prospectus forms a part (unless the lock-up period is extended as described below and in “Underwriting”):
  •  approximately 13.2 million additional shares held by affiliates will be eligible for sale subject to volume, manner of sale, and other limitations under Rule 144;
 
  •  approximately 235,000 additional shares held by non-affiliates will be eligible for sale subject to volume, manner of sale, and other limitations under Rule 144; and
 
  •  approximately 900,000 additional shares will be eligible for sale pursuant to Rule 144(k).
Lock-Up Agreements
       Our directors, executive officers, and certain shareholders have entered into lock-up agreements in connection with this offering, generally providing that they will not offer, sell, contract to sell, or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Goldman, Sachs & Co. The 180-day restricted period described in the preceding sentence will be extended if:
  •  during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or
 
  •  prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period beginning on the last day of the 180-day period;
in which case the restrictions described in the preceding sentence will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event. Despite possible earlier eligibility for sale

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under the provisions of Rules 144, 144(k), and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are waived by Goldman, Sachs & Co. These agreements are more fully described in “Underwriting.”
       We have been advised by the underwriters that they may at their discretion waive the lock-up agreements; however, they have no current intention of releasing any shares subject to a lock-up agreement. The release of any lock-up would be considered on a case-by-case basis. In considering any request to release shares covered by a lock-up agreement, the representatives would consider, among other factors, the particular circumstances surrounding the request, including but not limited to the number of shares requested to be released, market conditions, the possible impact on the market for our common stock, the trading price of our common stock, historical trading volumes of our common stock, the reasons for the request and whether the person seeking the release is one of our officers or directors. No agreement has been made between the representatives and us or any of our shareholders pursuant to which the representatives will waive the lock-up restrictions.
Rule 144
       In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the following:
  •  1% of the number of shares of common stock then outstanding; or
 
  •  the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
       Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public information about us.
Rule 144(k)
       Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell his or her shares without complying with the manner of sale, public information, volume limitation, or notice provisions of Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up agreements or otherwise, those shares may be sold immediately upon the completion of this offering.
Rule 701
       Under Rule 701 as currently in effect, each of our employees, officers, directors, and consultants who purchased shares pursuant to a written compensatory plan or contract is eligible to resell these shares 90 days after the effective date of this offering in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144.
Form S-8 Registration Statements
       We intend to file one or more registration statements on Form S-8 under the Securities Act as soon as practicable after the completion of this offering for shares to be issued under our employee benefit plans. As a result, any options or rights exercised under the 2005 incentive compensation plan or any other benefit plan after the effectiveness of the registration statements will also be freely

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tradable in the public market. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice, and public information requirements of Rule 144 unless otherwise resalable under Rule 701.
Registration Rights
       Beginning 180 days after the completion of this offering, shareholders owning 14,373,104 shares will be entitled to require us to register our securities owned by them for public sale. See “Description of Capital Stock — Registration Rights.” Registration of these shares under the Securities Act would result in their becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the applicable registration statement.

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF OUR COMMON STOCK
       The following discussion describes the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete analysis of all the potential U.S. federal income tax consequences relating thereto, nor does it address any tax consequences arising under any state, local or foreign tax laws or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service (the “IRS”), all as in effect as of the date of this offering. These authorities may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. No ruling from the IRS has been or will be sought with respect to the matters discussed below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock, or that any such contrary position would not be sustained by a court.
       This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax considerations that may be relevant to a particular holder in light of that holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including, without limitation, U.S. expatriates, partnerships, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-exempt organizations, tax-qualified retirement plans, persons subject to the alternative minimum tax, and persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment.
       For the purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a “U.S. person” for U.S. federal income tax purposes. A U.S. person is any of the following:
  •  a citizen or resident of the United States;
 
  •  a corporation or partnership (or other entity treated as a corporation or a partnership for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia;
 
  •  an estate the income of which is subject to U.S. federal income tax regardless of its source; or
 
  •  a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or (2) has validly elected to be treated as a U.S. person for U.S. federal income tax purposes.
       If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner in the partnership generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock and partners in such partnerships are urged to consult their tax advisors regarding the specific U.S. federal income tax consequences to them.

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Distributions on our Common Stock
       Payments on our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s adjusted tax basis in the common stock, but not below zero. Any excess will be treated as capital gain.
       Dividends paid to a non-U.S. holder of our common stock that are not effectively connected with a U.S. trade or business conducted by such holder generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate specified by an applicable tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying such holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, but which qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
       If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on the common stock are effectively connected with such holder’s U.S. trade or business, the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form).
       Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s U.S. trade or business (or if required by an applicable tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States) generally will be subject to U.S. federal income tax on a net income basis in the same manner as if such holder were a resident of the United States, unless an applicable tax treaty provides otherwise. A non-U.S. holder that is a foreign corporation also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders are urged to consult any applicable tax treaties that may provide for different rules.
Gain on Disposition of our Common Stock
       A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless:
  •  the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, or if required by an applicable tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States;
 
  •  the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or
 
  •  our common stock constitutes a U.S. real property interest by reason of our status as a “United States real property holding corporation” for U.S. federal income tax purposes (a “USRPHC”) at any time within the shorter of the five-year period preceding the disposition or your holding period for our common stock.
       Unless an applicable tax treaty provides otherwise, gain described in the first bullet point above will be subject to U.S. federal income tax on a net income basis in the same manner as if such holder were a resident of the United States. Non-U.S. holders that are foreign corporations also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable tax

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treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders are urged to consult any applicable tax treaties that may provide for different rules.
       Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate, but may be offset by U.S. source capital losses.
       We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests with respect to a non-U.S. holder only if the non-U.S. holder actually or constructively holds more than five percent of such regularly traded common stock at any time during the five-year period ending on the date of the disposition.
Information Reporting and Backup Withholding
       We must report annually to the IRS and to each non-U.S. holder the amount of dividends on our common stock paid to such holder and the amount of any tax withheld with respect to those dividends. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, however, generally will not apply to payments of dividends to a non-U.S. holder of our common stock provided the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, such as by providing a valid IRS Form W-8BEN or W-8ECI.
       Payment of the proceeds from a disposition by a non-U.S. holder of our common stock generally will be subject to information reporting and backup withholding unless the non-U.S. holder certifies as to its non-U.S. holder status under penalties of perjury, such as by providing a valid IRS Form W-8BEN or W-8ECI, or otherwise establishes an exemption from information reporting and backup withholding. Notwithstanding the foregoing, information reporting and backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person.
       Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
       PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.

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UNDERWRITING
       The company, the selling shareholders and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and J.P. Morgan Securities Inc. are the representatives of the underwriters.
           
Underwriters   Number of Shares
     
Goldman, Sachs & Co. 
    3,750,000  
J.P. Morgan Securities Inc. 
    3,281,250  
CIBC World Markets Corp. 
    937,500  
Wachovia Capital Markets, LLC
    937,500  
Citigroup Global Markets Inc. 
    468,750  
       
 
Total
    9,375,000  
       
       The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.
       If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 1,406,250 shares from the selling shareholders to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.
       The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by the company and the selling shareholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase  additional shares from the selling shareholders.
Paid by the Company
                 
    No Exercise   Full Exercise
         
Per Share
  $ 1.12     $ 1.12  
Total
  $ 6,650,000     $ 6,650,000  
Paid by the Selling Shareholders
                 
    No Exercise   Full Exercise
         
Per Share
  $ 1.12     $ 1.12  
Total
  $ 3,850,000     $ 5,425,000  
       Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $0.6720 per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $0.1000 per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms.
       The company and its officers, directors, and holders of substantially all of the company’s common stock, including the selling shareholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible

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into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co.
       The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period, the company issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the 180-day restricted period, the company announces that it will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
       This agreement does not apply to any existing employee benefit plans. See “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions.
       At the company’s request, the underwriters have reserved up to 5% of the shares of common stock for sale at the initial public offering price to the company’s directors, officers or employees, and certain of their family members, or persons who are otherwise associated with the company, through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. The directed share program materials will include a lock-up agreement requiring each purchaser in the directed share program to agree that for a period of 25 days from the date of this prospectus, such purchaser will not, without prior written consent from Citigroup Global Markets Inc., dispose of or hedge any shares of common stock purchased in the directed share program, except for the company’s directors and officers, who have agreed that, for a period of 180 days from the date of this prospectus, they will not dispose of or hedge any shares of common stock purchased in the directed share program. The purchasers in the directed share program will be subject to substantially the same form of lock-up agreement as the company’s officers, directors and stockholders described above. The company has agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sale of the directed shares.
       Prior to the offering, there has been no public market for the shares. The initial public offering price was negotiated among the company and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were the company’s historical performance, estimates of the business potential and earnings prospects of the company, an assessment of the company’s management and the consideration of the above factors in relation to market valuation of companies in related businesses.
       The common stock has been approved for quotation on the Nasdaq National Market under the symbol “DEIX.”
       In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from the selling shareholders in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out

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any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.
       The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
       Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of the company’s stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise.
       Each of the underwriters has represented and agreed that:
  (1)     it has not made and will not make an offer of shares to the public in the United Kingdom (within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended, “FSMA”)) except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by the company of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority;
 
  (2)     it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to the company; and
 
  (3)     it has complied with and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.
       In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each underwriter has represented and agreed that starting on the date on which the Prospectus Directive is implemented in that Relevant Member State (each, a “Relevant Implementation Date”) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, starting on the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
  (1)     to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
 
  (2)     to any legal entity which has two or more of (x) an average of at least 250 employees during the last financial year, (y) a total balance sheet of more than

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  43,000,000 and (z) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or
 
  (3)     in any other circumstances which do not require the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.

       For the purposes of the preceding paragraph, the phrase “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe for the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State; and the term “Prospectus Directive” means Directive 2003/71/ EC and includes any relevant implementing measure in each Relevant Member State.
       The shares may not be offered or sold by means of any document other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong, and no advertisement, invitation or document relating to the shares may be issued, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.
       This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (2) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
       Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
       The securities have not been and will not be registered under the Securities and Exchange Law of Japan (the Securities and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

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       A prospectus in electronic format will be made available on the websites maintained by one or more of the lead managers of this offering and may also be made available on websites maintained by other underwriters. The underwriters may agree to allocate a number of shares of the company’s common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead managers to underwriters that may make internet distributions on the same basis as other allocations.
       The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.
       The company and the selling shareholders estimate that their share of the total expenses of the offering, excluding the underwriting discounts and commissions, will be approximately $4.0 million. The company has agreed that it will pay all expenses of the offering on behalf of the company and the selling shareholders, except that the selling shareholders will pay the underwriting discount with respect to the shares to be sold by them in this offering.
       The company and the selling shareholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
       Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the company and its affiliates, for which they received or will receive customary fees and expenses. Wachovia Capital Markets, LLC and CIBC World Markets Corp. or one of its affiliates were the co-lead arrangers and joint book-runners of the company’s credit facility. Wachovia Bank, National Association, an affiliate of Wachovia Capital Markets, LLC, is the administrative agent and a lender under the credit facility and CIBC World Markets Corp. and CIBC Inc., an affiliate of CIBC World Markets Corp., is the syndication agent and is a lender, respectively, under the credit facility. In addition, Goldman Sachs Credit Partners L.P., an affiliate of Goldman Sachs & Co., and JPMorgan Chase Bank, N.A., an affiliate of J.P. Morgan Securities Inc., are lenders under the senior secured credit facility. An affiliate of Citigroup Global Markets Inc. holds an approximate 0.3% limited partnership interest in Trivest Fund III, L.P., one of the selling shareholders. An affiliate of Wachovia Capital Markets, LLC holds an approximate 8.7% limited partnership interest in Trivest Fund III, L.P., one of the selling shareholders. Affiliates of CIBC World Markets Corp. hold an approximate 2.0% and 7.0% limited partnership interest in Trivest Fund II, Ltd. and Trivest Fund III, L.P., respectively, each of which is a selling shareholder. In addition, a managing director in the Leveraged Finance Group of CIBC World Markets Corp. has served on the advisory board of Trivest Fund III, L.P. since its inception in 2001 and is an active member of the advisory board.
LEGAL MATTERS
       The validity of the common stock in this offering will be passed upon for us by Greenberg Traurig, LLP, Phoenix, Arizona. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Los Angeles, California.
EXPERTS
       The consolidated financial statements of Directed Electronics, Inc. as of December 31, 2003 and December 31, 2004 and for each of the three years in the period ended December 31, 2004 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the company’s restatement of its financial statements as described in Note 2 to the financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
       Ernst & Young LLP, independent auditors, have audited the financial statements of Definitive Technology, L.L.P. as of December 31, 2003 and for the year ended December 31, 2003, as set

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forth in their report. We have included the financial statements of Definitive Technology, L.L.P. in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
       On July 5, 2005, we retained PricewaterhouseCoopers LLP as our independent registered public accounting firm to audit our consolidated financial statements as of December 31, 2004 and for the year then ended, and to reaudit our consolidated financial statements as of December 31, 2003 and for each of the two years in the period then ended. Another auditor had previously been engaged to audit our consolidated financial statements as of December 31, 2003 and for each of the four years in the period then ended. That auditor, however, concluded that it was not independent within the meaning of Rule 2-01(b) of Regulation S-X. The decision to dismiss our former auditor was approved by our board of directors on May 12, 2005.
       The reports of our former auditor on our consolidated financial statements did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report for the year ended December 31, 2002 was modified to disclose that we had restated our financial statements for the years ended December 31, 2000 and 2001. We had no disagreements with our former auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to its satisfaction, would have caused our former auditor to make reference in connection with its opinion to the subject matter of the disagreement. During the fiscal years ended December 31, 2003 and 2004 and through July 5, 2005, there were no “reportable events” as such term is defined in Item 304(a)(1)(v) of Regulation S-K.
       During the fiscal years ended December 31, 2003 and 2004 and through our retention of PricewaterhouseCoopers LLP as our independent registered public accounting firm in July 2005, we did not consult with PricewaterhouseCoopers LLP on matters that involved the application of accounting principles to a specified transaction, the type of audit opinion that might be rendered on our financial statements, or any other matter that was the subject of a disagreement or a reportable event.
       We have provided our former auditor with a copy of the above statements and requested that it furnish a letter addressed to the Securities and Exchange Commission stating whether our former auditor agrees with those statements. A copy of that letter is filed as an exhibit to the registration statement of which this prospectus forms a part.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
       We have filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to our company and the common stock offered by this prospectus, we refer you to the registration statement, exhibits, and schedules.
       Anyone may inspect a copy of the registration statement without charge at the public reference facility maintained by the SEC in Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of the registration statement may be obtained from that facility upon payment of the prescribed fees. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC.

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INDEX TO FINANCIAL STATEMENTS
           
    Page
     
Directed Electronics, Inc.
       
 
Report of Independent Registered Public Accounting Firm
    F-2  
 
Consolidated Balance Sheets — Restated as of December 31, 2003 and 2004; and September 30, 2005 (unaudited)
    F-3  
 
Consolidated Statements of Income — Restated for the years ended December 31, 2002, 2003, and 2004; and for the nine months ended September 30, 2004 and 2005 (unaudited)
    F-4  
 
Consolidated Statements of Shareholders’ Equity (Deficit) — Restated for the years ended December 31, 2002, 2003, and 2004
    F-5  
 
Consolidated Statements of Cash Flows — Restated for the years ended December 31, 2002, 2003, and 2004; and the nine months ended September 30, 2004 and 2005 (unaudited)
    F-6  
 
Notes to Consolidated Financial Statements
    F-7  
 
Definitive Technology, L.L.P.
       
 
Report of Independent Auditors
    F-30  
 
Balance Sheets as of December 31, 2003 and June 30, 2004 (unaudited)
    F-31  
 
Statements of Income and Partners’ Capital for the year ended December 31, 2003 and the six months ended June 30, 2003 and 2004 (unaudited)
    F-32  
 
Statements of Cash Flows for the year ended December 31, 2003 and the six months ended June 30, 2003 and 2004 (unaudited)
    F-33  
 
Notes to Financial Statements
    F-34  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Directed Electronics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Directed Electronics, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company has restated its financial statements as of December 31, 2004 and for each of the three years in the period then ended.
  /s/     PricewaterhouseCoopers LLP
San Diego, California
August 24, 2005, except as to
Note 2(b) for which the date
is October 11, 2005, and Note 18
for which the date is December 1, 2005

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DIRECTED ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
                           
    Restated    
         
    December 31,    
        September 30,
    2003   2004   2005
             
            (Unaudited)
ASSETS
Current assets:
                       
 
Cash and cash equivalents
  $ 16,284     $ 3,784     $ 3,497  
 
Accounts receivable, net
    17,559       48,442       42,877  
 
Inventories
    21,508       30,768       49,680  
 
Prepaid expenses and other assets
    1,238       4,037       7,021  
 
Deferred tax assets
    1,172       2,240       2,240  
                   
Total current assets
    57,761       89,271       105,315  
Property and equipment, net
    3,411       4,368       4,534  
Intangible assets, net
    73,414       93,750       91,070  
Goodwill
    76,607       97,441       97,628  
Other assets
    1,888       8,783       8,485  
                   
Total assets
  $ 213,081     $ 293,613     $ 307,032  
                   
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
                       
 
Accounts payable
  $ 23,088     $ 36,810     $ 29,706  
 
Accrued liabilities
    6,871       11,216       12,531  
 
Current portion of notes payable
    2,750             1,274  
 
Income taxes payable
    2,691       5,741       3,213  
                   
Total current liabilities
    35,400       53,767       46,724  
Revolving loan
                 
Senior notes, less current portion
    50,640       151,610       165,336  
Senior subordinated notes
    28,150       37,000       37,000  
Junior subordinated notes
          37,000       37,000  
Notes payable to shareholders
    13,552              
Deferred tax liabilities
    10,115       13,968       13,968  
Other
    410       544       1,018  
                   
Total liabilities
    138,267       293,889       301,046  
                   
Commitments and contingencies (Note 14)
                       
Shareholders’ equity:
                       
 
Common Stock, $0.01 par value:
                       
 
Authorized shares — 100,000; issued and outstanding shares — 11,556, 17,361, and 17,412 in 2003, 2004, and 2005 respectively
    116       174       174  
 
Paid-in capital
    39,693       6,527       6,787  
 
Notes receivable from shareholders
    (773 )           (120 )
 
Accumulated other comprehensive income
    303       285       422  
 
Retained earnings (deficit)
    35,475       (7,262 )     (1,277 )
                   
Total shareholders’ equity (deficit)
    74,814       (276