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Directed Exits Satellite Radio

Vista Calif. — Directed Electronics said it will exit the satellite radio market, citing softening sales of aftermarket satellite radio products.

Directed will stop acting as Sirius’ exclusive retail distributor on Jan. 31, 2009, the company announced late yesterday.

Citing Sirius XM’s high debt of more than $1 billion, and the unfavorable credit markets, Directed said the relationship with Sirius no longer provides a favorable “risk-reward tradeoff.” It offers “a relatively small contribution [to sales] vs. the potential risk of a catastrophic situation for us if they can’t refinance,” said Jim Minarik, president and CEO of Directed’s parent, DEI Holdings, on a conference call with analysts.

Minarik also told TWICE that Sirius plans to appoint a new distributor shortly. Audiovox, the distributor of Sirius’ XM brand, did not comment on this report. Sirius did not respond to a TWICE inquiry late yesterday but the company issued a statement this, morning stating it is in discussions with several financial institutions regarding financing to replace its 2.5 percent convertible notes due 2009.

The statement said, “Current economic conditions, particularly the dramatic and recent slowdown in auto sales, have negatively impacted subscriber growth for 2008 and 2009. The company expects to end 2008 with 19.1 million subscribers and end 2009 with 20.6 million subscribers.”

Sirius XM had previously forecast 19.5 million subscribers for 2008 and 21.5 million by the end of 2009.

Sirius XM said it remains confident in its revenue and adjusted EBITDA guidance for 2008 and 2009, which remains unchanged.

Sirius XM also released a five-year forecast that places subscriber estimates for 2009 at 20.6 million with revenue of $2.7 billion, increasing in 2013 to 28.4 million subscribers with revenues of $4.1 billion. Free cash flow will reach $400 billion in 2010, it said.

Sirius XM plans to release third-quarter 2008 financial and operating results on Nov. 10.

Sirius XM will purchase nearly all Directed’s remaining satellite radio receiver inventory during the first quarter of 2009 and will assume full responsibility for all product returns and warranty costs after Jan. 31, Minarik said.

Minarik said Directed’s revenues in satellite radio have declined steadily since 2006 from $220 million in 2006 to $118 million in 2007 and are expected to fall to between $70 to $90 million this year, marking a further reduction of 25 to 40 percent.

Minarik added, “Combining this substantial downward sales trend with the other negative realities of this business, including declining margins … and a significant working capital investment, we believe our decision to exit this category is really the only logical choice.”

Directed has approximately $27 million in Sirius inventory, DEI Holdings’ chief financial officer Kevin Duffy told analysts. “Exiting the satellite radio business will allow us to focus on our core categories and also increase our ability to pay down debt by recovering the $20 to $25 million of working capital we have committed to this business,” he added.

The company does not expect Sirius inventory will be sold at reduced margins.

Minarik stated, “We have enjoyed an excellent partnership with Sirius over the past four years and expect to continue working closely with them to ensure the smoothest possible transition to their new distribution partner between now and early 2009.”

Regarding Sirius’ challenge to refinance its debt, Minarik told TWICE, “They have one of the market’s most talented CEOs running that company so if anyone can get it refinanced he can.” But, Minarik said, “The credit markets are incredibly difficult right now. Their stock and our stock have been beaten into oblivion.”

He concluded, “Our point is we have a very healthy business with our brands, Viper, Clifford, Python … what we need to do is get back to focusing all of our attention on those businesses.”