THANE INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

Commission file number: 000-49826

THANE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 52-2000275
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

78-140 CALLE TAMPICO
LA QUINTA, CALIFORNIA 92253
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code:
(760) 777-0217

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes [ ] No [X]

The number of shares outstanding of the registrant's $.001 par value common
stock as of August 14, 2002 was 35,462,781.

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Thane International, Inc.

INDEX

PAGE
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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)....................................................... 3

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 10

Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................................ 15

PART II - OTHER INFORMATION

Item 5. Other Information...................................................................... 15

Item 6. Exhibits and Reports on Form 8-K....................................................... 15

Signatures................................................................................................. 16

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Thane International, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)

JUNE 30, MARCH 31,
2002 2002
--------- -------------

ASSETS
Current assets:
Cash and cash equivalents $ 6,531 $ 13,568
Accounts receivable, net of allowance of $5,678 and $6,342 on
June 30, 2002 and March 31, 2002, respectively 13,488 19,706
Inventories, net of reserves of $3,677 and $4,134 on June 30,
2002 and March 31, 2002, respectively 14,746 13,458
Prepaid advertising 956 991
Prepaid royalties 2,355 --
Prepaid expenses and other 2,034 1,755
Due to affiliate -- 3,156
Deferred income taxes 6,643 6,579
Income taxes receivable 2,722 515
Other current assets 3,324 621
--------- --------
Total current assets 52,799 60,349

Property and equipment:
Building 3,260 3,260
Furniture, fixtures and equipment 2,701 2,247
Less accumulated depreciation (979) (821)
--------- --------
4,982 4,686
Noncurrent assets:
Production costs, net of accumulated amortization of $181 and
$52 on June 30, 2002 and March 31, 2002, respectively 1,468 471
Goodwill 44,041 24,415
Financing costs, net 1,220 1,402
Deferred income taxes 496 496
Other noncurrent assets 346 2,024
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Total noncurrent assets 47,571 28,808
--------- --------
Total assets $ 105,352 $ 93,843
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,646 $ 8,819
Allowance for product refunds and returns 2,395 3,523
Accrued expenses 6,597 14,755
Line of credit 1,522 1,522
Current portion of long-term debt 10,972 9,040
Current portion of capital lease obligation 31 --
Deferred consideration 2,040 2,230
--------- --------
Total current liabilities 29,203 39,889

Long-term debt, less current portion 11,666 14,107
Capital lease obligations 3,277 3,238
Minority interest 668 562

Commitments and contingencies

Stockholders' equity:
Class A common stock, par value $.001:
Authorized shares - 200,000,000
Issued and outstanding shares - 35,323,820 and 31,791,406
on June 30, 2002 and March 31, 2002, respectively 35 32
Warrants 5,130 5,130
Note receivable - stockholders (2,516) --
Paid-in capital 46,862 22,114
Retained earnings 11,027 8,771
--------- --------
Total stockholders' equity 60,538 36,047
--------- --------
Total liabilities and stockholders' equity $105,352 $93,843
========= ========

SEE ACCOMPANYING NOTES.

3

Thane International, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in thousands, except share data)

THREE MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2002 2001
----------- -----------

Revenues:
Net product sales $ 41,463 $ 69,960
Other 3,278 2,761
----------- -----------
Total revenues 44,741 72,721

Costs and expenses:
Costs of sales, including selling expenses 32,971 59,801
General and administrative expenses 6,751 5,055
Depreciation 158 44
----------- -----------
Total costs and expenses 39,880 64,900
----------- -----------
Income from operations 4,861 7,821

Interest expense, net 1,125 650
Minority interest and other 110 143
----------- -----------
Income before income taxes 3,626 7,028

Provision for income taxes 1,370 2,671
----------- -----------
Net income $ 2,256 $ 4,357
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Weighted average shares - basic 33,344,130 32,577,088
----------- -----------
Basic earnings per share $ 0.07 $ 0.13
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Weighted average shares - diluted 35,819,264 32,577,088
----------- -----------
Diluted earnings per share $ 0.06 $ 0.13
=========== ===========

SEE ACCOMPANYING NOTES.

4

Thane International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

THREE MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
2002 2001
---------- ----------

OPERATING ACTIVITIES
Net income $ 2,256 $4,357
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 158 44
Amortization of production costs 129 67
Amortization of financing costs 182 49
Amortization of discount on debt 140 --
Provision for doubtful accounts (777) 698
Provision for inventory reserves (457) (358)
Minority interest 110 143
Changes in operating assets and liabilities:
Accounts receivable 7,832 (1,908)
Inventories 60 1,352
Prepaid advertising 35 2,838
Prepaid royalties (2,155) --
Prepaid expenses and other 59 1,169
Production costs (271) (258)
Due from affiliate 3,156 --
Other assets 69 (1,004)
Accounts payable (3,552) (8,429)
Allowance for product refunds and returns (1,348) 4,482
Accrued expenses (8,816) 5,250
Income taxes payable (1,637) (4,620)
------ ------
Net cash (used in) provided by operating activities (4,827) 3,872

INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment (149) (206)
Acquisition of company, net of cash acquired 1,278 --
Notes issued to stockholders (2,500) --
Interest on stockholder notes receivable (16) --
------- ------
Net cash used in investing activities (1,381) (206)

FINANCING ACTIVITIES:
Payments on long-term debt (649) (1,100)
Proceeds from line of credit -- 5,000
Payments on line of credit -- (2,000)
Payments of deferred consideration (190) --
Payments on capital lease obligations (4) (22)
Investments from minority owners 20 --
------- ------
Net cash (used in) provided by financing activities (829) 1,878
------- ------
Net (decrease) increase in cash and cash equivalents (7,037) 5,544

Cash and cash equivalents at beginning of period 13,568 4,060
------- ------
Cash and cash equivalents at end of period $ 6,531 $9,604
======= ======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 741 $ 595
======= ======

Income taxes $ 3,484 $7,200
======= ======

SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS

Asset acquired under capital lease $ 74 $3,260
======= ======

Forfeiture of minority owner investment $ 24 $ --
======= ======

SEE ACCOMPANYING NOTES.

5

Thane International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2002
(in thousands, except share data)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Thane
International, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") and pursuant to Securities and
Exchange Commission rules and regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's annual report for the fiscal year ended March 31,
2002.

The financial information included herein reflects all adjustments consisting of
normal recurring (adjustments) that are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented. The
results of operations for the three months ended June 30, 2002 and 2001 are not
necessarily indicative of the results to be expected for the full year.

Certain amounts from 2001 have been reclassified to conform to the 2002
presentation

PREPAID ROYALTIES

Prepaid royalties include royalty advances paid in conjunction with acquiring
the marketing and/or distribution rights to certain products. These amounts will
be expensed as earned, based on future sales in accordance with the provisions
of each agreement.

EARNINGS PER SHARE

The computation of basic and diluted income per share of common stock based on
the weighted average number of shares outstanding during the period of the
financial statements as follows:

At June 30, 2001, there were no dilutive instruments outstanding. Accordingly,
the basic and diluted earnings per share were $0.13 with weighted average shares
outstanding of 32,577,088.

2. USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

6

Thane International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2002
(in thousands, except per share data)

3. CHANGE IN ACCOUNTING POLICY

Effective April 1, 2002, the Company changed its method of accounting for media
commissions from recognizing gross media revenues and expenses to recognizing
the net commission as a component of Other revenues. The adoption of this policy
has no effect on the Company's Income from operations and amounts in all periods
presented have been reclassified to reflect this change.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued FAS No. 141, BUSINESS COMBINATIONS (FAS 141), and
FAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (FAS 142), effective for
fiscal years beginning after December 15, 2001. Under these new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives. FAS 142
is immediately applicable to any acquisitions made after June 30, 2001.

In June 2001, the FASB issued FAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (FAS 143). FAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation when an existing law or contract
requires that the obligation be settled. The statement requires that the amount
recorded as a liability be capitalized by increasing the carrying amount of the
related long-lived asset. The capitalized cost is depreciated over the useful
life of the related asset. FAS 143 will be effective for financial statements
beginning after January 21, 2003, with earlier application encouraged. The
Company is currently evaluating the impact of this statement on its consolidated
financial statements.

In October 2001, the FASB issued FAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS (FAS 144), which supersedes prior accounting
standards concerning the financial accounting and reporting for the impairment
or the disposition of the long-lived assets and for the disposition of a segment
of a business. FAS 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted FAS 144 as of April 1, 2002 and it has not had an
effect on the Company's financial position, results of operation or cash flows
as of June 30, 2002.

5. ACQUISITION

In May 2002, the Company acquired 100% of Reliant Interactive Media Corp.
("Reliant") in exchange for 3,532,414 shares of the Company's common stock, of
which 2,214,273 were issued to Reliant's principal shareholders. Each share of
Reliant stock was exchanged for approximately 0.3049459 shares of the Company's
stock in a transaction valued at approximately $24,727. The components of the
purchase price and goodwill are as follows:

Allocation of purchase price:
Cash $ 1,696
Accounts receivable 837
Other Receivables 3,054
Inventory 891
Income taxes receivable 570
Prepaid expenses and other assets 924
Production Costs 855
Excess of cost over net liabilities acquired 17,806
Accounts payable (1,028)
Accrued expenses and other liabilities (878)
--------
Total purchase price $ 24,727
--------
Components of Goodwill:
Excess of cost over net liabilities acquired $ 17,806
Acquisition costs 1,820
--------
Total Goodwill $ 19,626
--------

In accordance with the purchase agreement, the Company loaned $2,500 to
Reliant's principal shareholders and the notes accrue interest at 6%. In the
event that certain thresholds are met in future years, the loans will be
forgiven and recognized as compensation expense. Additionally, of the 2,214,273
shares issued to Reliant's principal shareholders, 442,854 shares have been
placed in escrow as collateral on these loans. The remaining 1,771,419 shares
have been placed in escrow and may be earned in the event that certain future
quarterly and cumulative earnings thresholds are met. As of June 30, 2002, none
of these thresholds had been met and all shares remain in escrow and the notes
receivable are reflected as a reduction of equity.

7

Thane International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2002
(in thousands, except per share data)

PRO FORMA RESULTS (UNAUDITED)
The unaudited pro forma financial information below for the three months ended
June 30, 2002 and 2001 were prepared as if all acquisitions subsequent to June
30, 2001 had occurred on April 1, 2001:

2002 2001
------- -------
Revenue $49,740 $92,643
Total costs and expenses $45,676 $82,493
Net income $ 1,770 $ 5,411
Basic earnings per share $ 0.05 $ 0.16
Diluted earnings per share $ 0.05 $ 0.15

The unaudited pro forma financial information is not necessarily indicative of
what actual results would have been had the transaction occurred at the
beginning of the respective year, nor does it purport to indicate the results of
future operations of the Company.

6. COMMITMENTS & CONTINGENCIES

REGULATION

Substantially all aspects of the Company's marketing operations are subject to
oversight and regulation by federal, state and local agencies including the
Federal Trade Commission (FTC). FTC regulations are primarily governed under
Section 5 of the Federal Trade Commission Act prohibiting deceptive advertising.
Various state and local governments have comparable fair practice laws, which
are applicable to the Company. In addition, the direct marketing industry has
set up guidelines for the truth and substantiation of direct marketing program
claims and products through its self-regulation trade association, Electronic
Retail Association (ERA), of which the Company is a member. The Company believes
that all of its current direct marketing programs comply with applicable FTC
standards and the ERA guidelines. Certain direct marketing products could be
regulated by other agencies such as the Food and Drug Administration and the
Consumer Product Safety Commission, although as of June 30, 2002, the Company
has not been subject to regulation by these agencies.

LITIGATION

The Company is involved with pending litigation, which has arisen in the
ordinary course of business. Although the outcome of these matters is not
presently determinable, management does not expect that the resolution of these
matters will have a material adverse impact on the financial position, results
of operations, or cash flows.

7. RELATED PARTY TRANSACTIONS

Included in general and administrative expenses are management consulting and
financial services fees paid to H.I.G. Capital, LLC, an affiliate of the
Company's majority stockholder H.I.G. Direct Marketing Holdings. The Company
incurred approximately $75 and $62 in management fees for the three months ended
June 30, 2002 and 2001, respectively.

The Company leases an aircraft from a related entity whose principal
stockholders are stockholders of the Company. The lease is approximately $30 per
month, plus maintenance, insurance and other costs. The Company also leases an
automobile, on a month-to-month basis, from this entity for approximately $2 per
month.

8

Thane International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2002
(in thousands, except per share data)

The Company leases a residential property from two of its stockholders on a
month-to-month basis for approximately $4 per month. The residence is used
solely for the purpose of housing for Thane employees traveling to the Company's
headquarters. Management believes these accommodations save the Company
substantial lodging expenses.

The Company leases an office building under a capital lease from two of its
stockholders. The lease had a related obligation of approximately $3,260, at
inception, at an imputed interest rate of 9.25%, a term of 20 years and
escalating payments over the life of the lease from approximately $22 to $47 per
month. In August 2002, the stockholders sold the building to an unrelated third
party and the lease terms have remained the same.

The Company has retained the services of the law firm Hall, Dickler, Kent,
Goldstein and Wood, LLP. Ms. Linda Goldstein, who served as one of our directors
from May 2002 to August 2002, is a partner of Hall, Dickler, Kent, Goldstein and
Wood, LLP. During the three months ended June 30, 2002, the Company paid
approximately $212 in legal fees in connection with this professional
relationship.

8. SUBSEQUENT EVENT

The Company has entered into an agreement to purchase a retail and distribution
company for stock and cash of approximately $33,000 contingent upon the Company
raising additional debt and/or equity capital.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR ACCOMPANYING UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED HEREIN FOR THE FISCAL
QUARTER ENDED JUNE 30, 2002 AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
MARCH 31, 2002. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THOSE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE DISCUSSED BELOW AND IN OUR ANNUAL REPORT ON FORM 10-K FOR FISCAL
YEAR ENDED MARCH 31, 2002, PARTICULARLY UNDER THE HEADING "RISK FACTORS."

GENERAL

We are a leading multi-channel direct marketer of branded, value added consumer
products and services in the fitness, health and beauty, housewares and consumer
electronic product categories. We currently distribute our products throughout
the United States and, through our 186 international distributors and strategic
partners, in over 80 countries around the world. Our international distribution
infrastructure consists primarily of five complementary distribution channels
including direct response TV, traditional mass market retailer, home shopping
channels, telemarketing and the Internet. Our broad distribution capabilities
enable us to tailor individual product distribution strategies to maximize
customer awareness and brand recognition, thereby extending the product
lifecycle and maximizing potential profitability. We believe we are the only
direct marketer able to introduce a product in the U.S. and in over 80 countries
around the world within a 60-day period allowing us to rapidly and effectively
respond to customer demand for a product in a specific market niche.

We have historically been dependent upon a limited number of successful products
to generate a significant portion of our total revenues. We seek to reduce the
risk associated with relying on a limited number of successful products for a
disproportionate amount of our revenues by continually enhancing our diverse
product portfolio and utilizing multiple distribution channels to extend product
life cycles and maximize profit potential.

We generate revenues by selling our products (i) directly to consumers through
our direct response TV programs and the Internet, and (ii) wholesale through
international distributors and strategic partners, retailers, home shopping
channels, catalogs, telemarketing and credit card inserts. We also generate
revenues through our media purchasing, consumer clubs and product sourcing
activities. We allocate all of our U.S. media costs to our direct marketing
businesses and none to our wholesale business. Production costs are allocated
solely to our direct marketing business even though the direct response TV
programs are used to support our wholesale and international businesses.
Typically, as a product nears the end of its lifecycle, we will gradually reduce
the selling price of the product to further extend the lifecycle of the product.

10

Over the past several years, we have focused on developing our international and
wholesale channels of distribution. International sales have grown from $1.3
million in fiscal 1998 to $91.4 million in fiscal 2002. Wholesale revenues have
increased from $1.8 million in fiscal 1999 to $65.0 million in fiscal 2002. We
expect that international and wholesale channels of distribution will continue
to be a larger part of our revenues. We typically purchase merchandise from our
overseas manufacturers, and sell products to our international distributors and
strategic partners, in U.S. dollars. Accordingly, while we do not experience
significant exposure to foreign currency risk, our trading partners do.

Now that we have developed our channels of distribution, we intend to leverage
our multi-channel distribution infrastructure and marketing expertise to provide
marketing services to third party inventors and product owners for a service
fee. In connection with these arrangements, we expect to enter into marketing
and service agreements pursuant to which we will create marketing messages,
produce direct response TV programs, manage media purchases, and manage the
outsourcing of order processing and fulfillment functions for fees based on the
total revenues generated for a particular product as a result of our efforts.
Although we will not recognize revenues on the sales of the products pursuant to
these arrangements, we expect to recognize increased commission income. We
expect to incur minimal inventory, media purchasing or warranty or product
liability risk in connection with these arrangements. We anticipate that as we
begin to enter into more of these marketing and management agreements,
commission income will constitute a growing portion of our earnings.

Our revenues vary throughout the year, with third and fourth fiscal quarter
revenues being historically the highest. This was not the case for the quarter
ended June 30, 2001, however. Due to the direct response and wholesale success
of a fitness product in the first and second quarters of fiscal 2002, revenues
were higher in the first two quarters than the last two quarters and operating
income was essentially the same in the first half and the last half of the year.
We expect the typical seasonal trend to continue in fiscal 2003. These seasonal
trends have been and may continue to be affected by the timing and success of
new product offerings, expansion of our international and wholesale distribution
channels and the potential growth of other distribution channels.

We acquired Krane Products, Inc. as of March 15, 2002 and Reliant Interactive
Media Corp. as of May 22, 2002. Therefore, only 40 days of financial information
for Reliant is included in our results of operations for the quarter ended June
30, 2002 and neither Krane nor Reliant is included in our results of operations
for the quarter ended June 30, 2001. For historical pro forma results of
operations, please refer to the unaudited consolidated financial statements and
notes included herein and the audited consolidated financial statements and
notes included in our Annual Report on Form 10-K for the fiscal year ended March
31, 2002.

RESULTS OF OPERATIONS

The following table sets forth income statement data for the periods indicated
as a percentage of revenue.

FOR THE QUARTER ENDED
JUNE 30,
-------------------
2001 2002
------ ------

Total revenues 100.0% 100.0%
Cost of sales, including selling expenses 82.2% 73.7%
Gross profit 17.8% 26.3%
Operating expenses
General and administrative 7.0% 15.1%
Depreciation 0.1% 0.3%
Income from operations 10.7% 10.9%
Other expenses
Interest, minority interest and other 1.1% 2.8%
Income before income taxes 9.6% 8.1%
Provision for income taxes 3.6% 3.1%
Net income 6.0% 5.0%

11

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001

TOTAL REVENUES decreased $28.0 million, or 38.5%, to $44.7 million for the
quarter ended June 30, 2002 from $72.7 million for the quarter ended June 30,
2001. The decrease in total revenues is primarily attributable to direct to
consumer sales decreasing $14.3 million, or 40.6% from $35.2 million for the
quarter ended June 30, 2001 to $20.9 million for the quarter ended June 30,
2002. Wholesale sales decreased $18.5 million, or 75.5%, from $24.5 million for
the quarter ended June 30, 2001 to $6.0 million for the quarter ended June 30,
2002. These decreases were partially offset by international sales increasing
$4.8 million, or 36.9%, from $13.0 million for the quarter ended June 30, 2001
to $17.8 million for the quarter ended June 30, 2002.

Direct to consumer sales consist of products and services sold through direct
response TV programs, telemarketing and the Internet to U.S. consumers.
Wholesale sales consist of products and services sold to U.S. based businesses
such as television shopping channels, retailers, catalogers and other direct
marketing companies. International sales consist of products sold outside the
U.S. both to consumers and international distributors and strategic partners.

In the first quarter of fiscal 2002 direct to consumer and wholesale revenues
were comprised predominately of a single fitness product and the first quarter
of fiscal 2003 did not have such a successful product. The increase in
international sales was attributable to increased sales of fitness and health
and beauty products to a larger number of international distributors and
strategic partners. Within the direct to consumer and wholesale businesses we
have historically been dependent on a limited number of successful products to
generate a significant portion of our total revenues. We continue to seek to
reduce the risk associated with relying on a limited number of successful
products for a disproportionate amount of our revenues by continually enhancing
our diverse product portfolio and utilizing multiple distribution channels to
extend product life cycles and maximize profit potential.

COST OF SALES consists of product costs, advertising costs, media costs,
fulfillment costs and royalty costs. Cost of sales decreased $26.8 million, or
44.9%, to $33.0 million for the first quarter of fiscal 2003 from $59.8 million
for the first quarter of fiscal 2002. As a percentage of total revenues, cost of
sales decreased from 82.2% for the quarter ended June 30, 2001 to 73.7% for
the quarter ended June 30, 2002. The decrease in cost of sales dollars is
directly attributable to the lower sales levels discussed above. The decrease in
cost of sales as a percentage of total revenues for June 2002 as compared to
June 2001 is primarily due to higher gross profit margins in the telemarketing
and Internet businesses, which were acquired subsequent to June 30, 2001.

GROSS PROFIT decreased $1.1 million, or 8.9%, to $11.8 million for the three
months ended June 30, 2002 from $12.9 million for the comparable quarter in
fiscal 2002. As a percentage of total revenues, gross profit increased 48.1%
from 17.8% for fiscal 2001 to 26.3% for fiscal 2002. The increase in gross
profit as a percentage of total revenues is the result of higher gross profit
margins in the telemarketing and Internet businesses, which were acquired
subsequent to June 30, 2001.

GENERAL AND ADMINISTRATIVE EXPENSES increased $1.7 million, or 33.6%, to $6.8
million for the first quarter of fiscal 2003 from $5.1 million for the
comparable quarter in fiscal 2002. As a percentage of total revenues, general
and administrative expenses increased to 15.1% for fiscal 2002 from 7.0% for
fiscal 2001. The general and administrative expense increase was the result of
Thane's acquisition of Krane, a telemarketing company acquired in March 2002.
Although this telemarketing business produces higher gross profit as a
percentage of total revenue its general and administrative costs are higher as
well. All other general and administrative costs remained relatively constant
from quarter to quarter. Thane expects general and administrative expense
dollars to remain relatively constant for the balance of the year.

12

DEPRECIATION EXPENSE increased $114,000 due primarily to Thane entering into a
capital lease of its corporate headquarters in September 2001.

INCOME FROM OPERATIONS decreased $2.9 million, or 37.8%, to $4.9 million for the
first quarter of fiscal 2003 from $7.8 million for the comparable quarter in
fiscal 2002. As a percentage of total revenues, income from operations increased
from 10.7% for the first quarter of fiscal 2002 to 10.9% for the first quarter
of fiscal 2003. The slight increase in income from operations as a percentage of
total revenues is attributable to the increased gross margin percentage offset
by the increased general and administrative expense percentage discussed above.
Income from operations related to direct to consumer sales was $1.4 million in
the first quarter of 2003 compared to $1.2 million in the comparable quarter of
2001. Income from operations related to wholesale and international sales in the
first quarter of 2003 was $0.6 million and $2.9 million, respectively, as
compared to $4.1 million and $2.5 million, respectively, in the comparable
quarter of 2001.

OTHER EXPENSES consist of net interest expense and minority interest. Net
interest expense increased approximately $475,000, primarily as the result of
higher debt levels due to the Krane acquisition and higher interest rates due to
the refinancing of Thane debt in March 2002. Minority interest decreased
slightly due to profit decreases from Thane's non-wholly owned subsidiaries.

INCOME BEFORE INCOME TAXES decreased $3.4 million, or 48.4%, to $3.6 million for
the quarter ended June 30, 2002 from $7.0 million for the quarter ended June 30,
2001. The total revenue decrease discussed above was the primary reason for the
decrease. After applying the effective tax rate of 37.8% and 38.0%, for the
first quarters in fiscal 2003 and fiscal 2002, respectively, net income for the
respective periods was $2.3 million and $4.4 million, a $2.1 million, or 48.2%
decrease.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002, cash and cash equivalents were $6.5 million compared to
$13.6 million at March 31, 2002 and $9.6 million at June 30, 2001. Total assets
were $107.9 million at June 30, 2002 compared to $93.8 million at March 31, 2002
and $69.5 million at June 30, 2001. Comparing June 2002 to June 2001, the total
asset increase of $38.4 million was primarily due to an increase in goodwill
related to acquisitions made subsequent to June 30, 2001.

For the fiscal quarter ended June 30, 2002, the net cash used in operating
activities was $4.8 million compared to net cash provided by operating
activities of $3.9 million for the fiscal quarter ended June 30, 2001. Net cash
used in investing and financing activities was $2.2 million in the fiscal
quarter ended June 30, 2002 as compared to net cash provided by investing and
financing activities of $1.7 million in the fiscal quarter ended June 30, 2001.
The operating activity decreases were primarily due to decreases in receivables
and accounts payable and accrued expenses at June 30, 2002 as compared to June
30, 2001 and the net cash used in investing and financing activities was
primarily due to the reductions in debt and the acquisition of Reliant
Interactive Media Corp.

In March 2002, we entered into a loan and security agreement with Congress
Financial Corporation that provides us with a $20.0 million senior secured
revolving credit facility and an aggregate of $14.0 million in long-term loans.
These facilities were used to refinance our prior credit facilities, repurchase
outstanding warrants to purchase shares of our common stock, to pay certain fees
and expenses related to the Reliant and Krane acquisitions and provide for
future working capital requirements. As of June 30, 2002, no borrowings were
outstanding under the revolving credit facility and $13.7 million was
outstanding under the term loans.

Krane is a party to a credit agreement with LaSalle Bank National Association.
The credit agreement provides Krane with a term loan and a revolving credit
facility, each of which are collateralized by cash, receivables, and all
products and proceeds of Krane. As of June 30, 2002, Krane had $6.9 million
outstanding on the term loan and $1.5 million outstanding under the revolving
loan. The facilities mature in February 2003. Krane also maintains a $2.0
million unsecured subordinated term loan with Prairie Capital Mezzanine Fund,
L.P., which matures in June 2003.

Both credit facilities require maintenance of certain financial ratios and
contain other restrictive covenants. As of June 30, 2002, we were in compliance
with these covenants.

We believe that, through future cash flows and financing alternatives available,
we can continue to meet our short-term obligations and continue to generate the
working capital necessary to provide for the long-term liquidity and our future
internal growth. From time to time, we review potential acquisitions of direct
marketing and other companies that we deem complimentary to our business. We may
be able to finance smaller acquisitions with cash flow from operations; however,
larger acquisitions will require the use of stock as acquisition currency or our
obtaining additional public or private equity or debt financing. We may pursue
additional public or private financing from time to time on an opportunistic
basis.

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CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

Revenue is recorded at the time of product shipment. We also earn commission
income from media brokers and income from third parties for consulting services
rendered. The commission income earned from media brokers is netted against
advertising expense included in cost of sales. We also earn revenue on
membership referral fees from a joint venture with a third party. All shipping
and handling costs are recorded within cost of sales.

Generally, it is our policy to refund unconditionally the total price of
merchandise, less shipping and handling, for merchandise returned within 30
days. We provide an allowance, based on experience, for returned merchandise.
Revenues are shown net of returns, discounts and sales incentives.

ACCOUNTS RECEIVABLE

Accounts receivable consist primarily of amounts due to us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected uncollectibility of accounts receivable based on past collection
history and specific risks identified in the portfolio.

INVENTORIES

Inventories consist primarily of products purchased for resale and are stated at
the lower of cost (determined by the first-in, first out method) or market. An
allowance for obsolete inventory is maintained to reflect the expected
unsaleable inventory based on an evaluation of slow moving products.

GOODWILL

In June 2001, the FASB issued FAS No. 141, BUSINESS COMBINATIONS (FAS 141), and
FAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (FAS 142), effective for
fiscal years beginning after December 15, 2001. Under these new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives. FAS 142
is immediately applicable to any acquisitions made after June 30, 2001.

In June 2001, the FASB issued FAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (FAS 143). FAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation when an existing law or contract
requires that the obligation be settled. The statement requires that the amount
recorded as a liability be capitalized by increasing the carrying amount of the
related long-lived asset. The capitalized cost is depreciated over the useful
life of the related asset. FAS 143 will be effective for financial statements
beginning after January 21, 2003, with earlier application encouraged. We are
currently evaluating the impact on our consolidated financial statements of
adopting this statement.

In October 2001, the FASB issued FAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS (FAS 144), which supersedes prior accounting
standards concerning the financial accounting and reporting for the impairment
or the disposition of the long-lived assets and for the disposition of a segment
of a business. FAS 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted FAS 144 as of April 1, 2002 and it has not had an
effect on the Company's financial position, results of operations or cash flows
as of June 30, 2002.

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Goodwill represents the excess of the purchase price of each of our acquisitions
over the fair market value of the net assets acquired. The acquisitions have
been accounted for under FAS 141 and in accordance with FAS 142 and during
fiscal 2002, and the quarter ended June 30, 2002, no goodwill has been
amortized.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In connection with borrowings under our senior secured credit facility with
Congress Financial Corporation (Congress) and under Krane's senior secured
credit facility and revolving loan with LaSalle Bank National Association, we
will experience market risk with respect to changes in the general level of
interest rates and its effect upon our interest expense. Borrowings under these
facilities bear interest at variable rates based on the Prime Rate. Because such
rates vary from period to period, an increase in interest rates will result in
additional interest expense and a reduction in interest rates will result in
reduced interest expense. Accordingly, our present exposure to interest rate
fluctuations is primarily dependent on rate changes that may occur while the
senior secured credit facility is outstanding.

Our variable rate debt with Congress currently consists of a term loan borrowing
of $13.7 million. To date, we have not utilized our revolving credit facility
with Congress. Krane's variable rate debt currently consists of a term loan
borrowing and revolving loan borrowings of $6.9 million and $1.5 million,
respectively. Krane's unsecured debt of $2.0 million with Praine Capital
Mezzanine Fund, L.P. bears interest at a fixed rate of 15%.

FOREIGN EXCHANGE RISK

Purchases, as well as sales of products through our international distribution
channels are denominated in U.S. dollars and as such we have no foreign currency
fluctuation risk.

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

We have entered into a definitive agreement to acquire a privately held leading
supplier of branded consumer products, sold primarily under licensing agreements
with major consumer products companies in the hardware, automobile aftermarket,
pet and electronics product categories. This acquisition is contingent upon,
among other things, our raising the necessary debt and or equity capital to fund
the cash portion of the purchase price of approximately $30 million, including a
working capital investment.

In May and June of this year, we met with our investment bankers to discuss an
underwritten public offering of our common stock. Our investment bankers advised
us that we could potentially obtain more favorable pricing for the public
offering if we implemented our move to the NASDAQ National Market in conjunction
with the underwritten public offering. Over the course of June and July we have
been preparing for the public offering, but we have recently concluded that
present market conditions are no longer favorable for an underwritten public
offering of common stock. As such, we are currently evaluating the listing of
our common stock on a national market.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit 99.1 - Certification pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002

(b) Reports on Form 8-K

None.

15

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

THANE INTERNATIONAL, INC.
(Registrant)

August 14, 2002 By: /s/ William F. Hay
- ------------------ ---------------------------------------------------
Date William F. Hay, Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)

August 14, 2002 By: /s/ Kevin J. McKeon
- ------------------ ---------------------------------------------------
Date Kevin J. McKeon, Chief Financial Officer
(Principal Financial Officer)

August 14, 2002 By: /s/ Joshua A. Chandler
- ------------------ ---------------------------------------------------
Date Joshua A. Chandler, Chief Accounting Officer
(Principal Accounting Officer)

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