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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 QUARTER ENDED SEPTEMBER 30, 2003
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the registrant's $.001 par value
common stock as of November 13, 2003 was 35,462,781
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THANE INTERNATIONAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)...............................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................19
Item 4. Controls and Procedures.......................................................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................19
Item 3. Defaults on Senior Securities.................................................................19
Item 6. Exhibits and Reports on Form 8-K..............................................................21
Signatures..............................................................................................22
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THANE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, MARCH 31,
2003 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,010,000 $ 3,875,000
Accounts receivable, net of allowance for doubtful
accounts of $859,000 and $6,358,000 on
September 30, 2003 and March 31, 2003,
respectively 10,784,000 18,045,000
Other receivables 1,147,000 1,747,000
Inventories, net of reserves of $2,328,000 and $4,678,000 on
September 30, 2003 and March 31, 2003, respectively 6,714,000 7,279,000
Prepaid advertising 1,563,000 1,575,000
Prepaid expenses and other 1,833,000 1,313,000
Deferred income taxes 3,534,000 5,984,000
Income taxes receivable 235,000 4,982,000
------------ ------------
TOTAL CURRENT ASSETS: 30,820,000 44,800,000
PROPERTY AND EQUIPMENT
Building 3,260,000 3,260,000
Furniture, fixtures and equipment 2,261,000 2,957,000
Less accumulated depreciation (1,622,000) (1,524,000)
------------ ------------
3,899,000 4,693,000
NON-CURRENT ASSETS:
Production costs, net of accumulated amortization of $774,000 and
$1,781,000 on September 30, 2003 and March 31, 2003, respectively 1,130,000 704,000
Goodwill 2,228,000 2,228,000
Financing costs, net 808,000 1,096,000
Deferred income taxes 73,000 66,000
Other non-current assets 309,000 382,000
------------ ------------
TOTAL NON-CURRENT ASSETS: 4,548,000 4,476,000
------------ ------------
TOTAL ASSETS $ 39,267,000 $ 53,969,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,398,000 $ 5,080,000
Allowance for product refunds and returns 1,809,000 2,506,000
Accrued expenses 8,105,000 6,999,000
Line of credit -- 1,872,000
Current portion of long-term debt 2,656,000 15,281,000
Current portion of capital lease obligation -- 41,000
Deferred consideration 200,000 500,000
------------ ------------
TOTAL CURRENT LIABILITIES: 18,168,000 32,279,000
Long-term debt, less current portion 5,677,000 8,667,000
Capital lease obligation 3,238,000 3,238,000
Minority interest 715,000 670,000
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.001
Authorized shares - 50,000,000
Issued and outstanding shares - 0 -- --
Class A common stock, par value $0.001:
Authorized shares - 200,000,000
Issued and outstanding shares - 35,462,781 35,000 35,000
Warrants 5,130,000 5,130,000
Notes receivable - stockholders (230,000) (225,000)
Additional paid-in capital 32,893,000 32,453,000
Retained deficit (26,359,000) (28,278,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,469,000 9,115,000
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 39,267,000 $ 53,969,000
============ ============
SEE ACCOMPANYING NOTES
3
THANE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended
September 30, September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------
Revenues:
Net product sales $ 31,456,000 $ 24,850,000 $ 62,073,000 $58,939,000
Other 1,994,000 3,137,000 4,324,000 6,415,000
------------ ------------ ------------ -----------
Total revenues 33,450,000 27,987,000 66,397,000 65,354,000
Costs and expenses:
Costs of sales, including selling expenses 27,309,000 22,579,000 53,841,000 51,094,000
General and administrative expenses 8,383,000 6,073,000 14,061,000 11,215,000
Depreciation 143,000 148,000 303,000 272,000
------------ ------------ ------------ -----------
Total costs and expenses 35,835,000 28,800,000 68,205,000 62,581,000
------------ ------------ ------------ -----------
Income (loss) from operations (2,385,000) (813,000) (1,808,000) 2,773,000
Interest expense, net 678,000 540,000 1,419,000 1,099,000
Minority interest and other 72,000 (45,000) 97,000 65,000
------------ ------------ ------------ -----------
Income (loss) before income taxes (benefit) (3,135,000) (1,308,000) (3,324,000) 1,609,000
Provision for income taxes (benefit) (8,000) (471,000) 488,000 630,000
------------ ------------ ------------ -----------
Income (loss) from continuing operations (3,127,000) (837,000) (3,812,000) 979,000
Discontinued operations -- 454,000 574,000 894,000
Extraordinary gain on extinguishment of debt -- -- 5,157,000 --
------------ ------------ ------------ -----------
Net income (loss) $ (3,127,000) $ (383,000) $ 1,919,000 $ 1,873,000
============ ============ ============ ===========
Weighted average shares - basic 34,981,418 33,234,912 34,119,697 32,812,424
Basic earnings (loss) per share
Income (loss) from continuing operations $ (0.09) $ (0.03) $ (0.11) $ 0.03
Net income (loss) $ (0.09) $ (0.01) $ 0.06 $ 0.06
Weighted average shares - diluted 34,981,418 33,234,912 35,161,108 34,786,679
Diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.09) $ (0.03) $ (0.11) $ 0.03
Net income (loss) $ (0.09) $ (0.01) $ 0.05 $ 0.05
SEE ACCOMPANYING NOTES
4
THANE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------
2003 2002
----------- ------------
OPERATING ACTIVITIES
Net income $ 1,919,000 $ 1,873,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 335,000 342,000
Amortization of production costs 185,000 338,000
Amortization of financing costs 388,000 279,000
Amortization of discount on acquired debt -- 332,000
Interest on stockholders' notes receivable (75,000) --
Allowance on stockholders' notes receivable 70,000 --
Compensation expense related to release of
shares from escrow 440,000 --
Loss on disposal of assets 54,000 --
Gain on extinguishment of debt (5,157,000) --
Allowance for doubtful accounts 327,000 (857,000)
Inventory reserves (1,000,000) (347,000)
Cash related to disposition of Krane Holdings, Inc. (1,149,000) --
Minority interest 75,000 65,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 3,407,000 6,216,000
Other receivables 592,000 --
Inventories 1,546,000 943,000
Prepaid advertising 12,000 21,000
Prepaid expenses and other (590,000) (766,000)
Production costs (611,000) (450,000)
Due from affiliate -- 3,156,000
Other assets (16,000) (626,000)
Accounts payable 590,000 (5,499,000)
Allowance for product refunds and returns (697,000) (2,260,000)
Accrued expenses 2,681,000 (9,469,000)
Deferred revenue (292,000) --
Deferred income taxes 746,000 --
Income taxes, net 4,714,000 (1,250,000)
----------- ------------
Net cash provided by (used in) operating activities 8,494,000 (7,959,000)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment (88,000) (203,000)
Acquisition of companies, net of cash acquired -- 1,278,000
Notes issued to stockholders -- (2,500,000)
Interest on stockholder notes receivable -- (54,000)
----------- ------------
Net cash used in investing activities (88,000) (1,479,000)
----------- ------------
FINANCING ACTIVITIES
Payments on long-term debt (6,834,000) (1,503,000)
Proceeds from line of credit -- 350,000
Payment of deferred consideration (300,000) (190,000)
Debt financing costs (100,000) --
Payments on capital lease obligations (7,000) (21,000)
Net payments to minority owners (30,000) (48,000)
----------- ------------
Net cash used in financing activities (7,271,000) (1,412,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,135,000 (10,850,000)
Cash and cash equivalents at beginning of period 3,875,000 13,568,000
----------- ------------
Cash and cash equivalents at end of period $ 5,010,00 $ 2,718,000
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,210,000 $ 1,461,000
Income taxes $ 650,000 $ 3,484,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS
Depreciation included in discontinued operations $ 32,000 $ 70,000
Write-off of fully amortized production costs $ 1,193,000 $ --
Disposition of fully reserved inventory $ 1,350,000 $ --
Write-off of fully reserved accounts receivable $ 646,000 $ --
Asset acquired under capital lease $ -- $ 80,000
Payment of deferred compensation with stock $ -- $ 1,115,000
SEE ACCOMPANYING NOTES
5
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
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 on Form 10-K for the fiscal year ended
March 31, 2003.
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 Company's results for the interim
periods presented. The results of operations for the quarter and six months
ended September 30, 2003 and 2002 are not necessarily indicative of the results
to be expected for the full fiscal year.
Certain amounts from 2002 have been reclassified to conform to the 2003
presentation.
EARNINGS (LOSS) PER SHARE
The computation of basic and diluted income (loss) per share of common stock
based on the weighted average number of shares outstanding during the period of
the financial statements is as follows:
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
-----------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- -----------
BASIC LOSS PER SHARE
Loss available to common stockholders $ (3,127,000) 34,981,418 $ (0.09)
============= ========
EFFECT OF DILUTIVE SECURITIES --
----------
DILUTED LOSS PER SHARE
Loss available to common stockholders plus assumed
conversions $ (3,127,000) 34,981,418 $ (0.09)
============= ========
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2003
------------------------------------------
INCOME (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ------------
BASIC INCOME (LOSS)PER SHARE
Loss from continuing operations $(3,812,000) 34,119,697 $ (0.11)
Discontinued operations 574,000 34,119,697 0.02
Extraordinary gain on extinguishment of debt 5,157,000 34,119,697 0.15
----------- -------
Income available to common stockholders $ 1,919,000 34,119,697 $ 0.06
=========== =======
EFFECT OF DILUTIVE SECURITIES
Common stock options 248,718
Common stock warrants 792,693
-----------
DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $(3,812,000) 35,161,108 $ (0.11)
Discontinued operations 574,000 35,161,108 0.02
Extraordinary gain on extinguishment of debt 5,157,000 35,161,108 0.14
----------- -------
Income available to common stockholders plus assumed
conversions $ 1,919,000 35,161,108 $ 0.05
=========== =======
6
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2003
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
------------------------------------------
INCOME (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- -----------
BASIC INCOME (LOSS) PER SHARE
Loss from continuing operations $(837,000) 33,234,912 $ (0.03)
Discontinued operations 454,000 33,234,912 0.02
---------- --------
Loss available to common stockholders $ (383,000) 33,234,912 $ (0.01)
========== ========
EFFECT OF DILUTIVE SECURITIES --
----------
DILUTED INCOME PER SHARE
Loss from continuing operations $ (837,000) 33,234,912 $ (0.03)
Discontinued operations 454,000 33,234,912 0.02
---------- --------
Loss available to common stockholders plus assumed
conversions $ (383,000) 33,234,912 $ (0.01)
========== ========
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2002
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC INCOME PER SHARE
Income from continuing operations $ 979,000 32,812,424 $ 0.03
Discontinued operations 894,000 32,812,424 0.03
----------- ------
Income available to common stockholders $ 1,873,000 32,812,424 $ 0.06
=========== ======
EFFECT OF DILUTIVE SECURITIES
Common stock options 1,181,379
Common stock warrants 792,876
----------
DILUTED INCOME PER SHARE
Income from continuing operations $ 979,000 34,786,679 $ 0.03
Discontinued operations 894,000 34,786,679 0.02
----------- ------
Income available to common stockholders plus assumed
conversions $ 1,873,000 34,786,679 $ 0.05
=========== ======
The computation of weighted average shares for the periods ending September 30,
2003 and 2002 excludes the Escrowed Shares of 442,854 and 2,214,275,
respectively, related to the Reliant acquisition (Note 4).
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation 46"), an interpretation of ARB No.
51. Interpretation 46 addresses consolidation by business enterprises of
variable interest entities. Interpretation 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first year or interim period ending after December 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is in the initial stages of
reviewing this interpretation, but does not believe it has any variable interest
entities to which Interpretation 46 would apply. Additionally, the Company has
not invested in any new variable interest entities after January 31, 2003.
4. ACQUISITIONS
KRANE HOLDINGS
On March 15, 2002, the Company acquired 100% of Krane Holdings, Inc. (Krane) and
7
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2003
its wholly-owned subsidiary Krane Products, Inc. in exchange for approximately
2,635,000 shares of the Company's common stock. Each share of Krane stock was
exchanged for approximately 2.424 shares of the Company's common stock in a
transaction valued at $17,047,000.
As of December 31, 2002, Krane was in default of its credit facility with
LaSalle Bank National Association due to violations of certain debt covenants.
In addition, this credit facility matured in February 2003. The Company was
unable to negotiate a waiver for these violations or a short-term extension of
this facility. As a result, on June 18, 2003, LaSalle exercised its secured
rights under this facility, and accordingly, took possession of 100% of the
capital stock of Krane. In addition, the Company's evaluation of the fair value
of Krane's assets indicated they were not sufficient to recover the recorded
costs. Therefore, as of March 31, 2003, Thane recognized a non-cash write-off of
100% of the goodwill associated with the Krane acquisition, or $21,762,000. As a
result of LaSalle exercising its rights, the assets and liabilities of Krane are
no longer consolidated with the Company, effective June 18, 2003, and the
Company recorded a non-taxable, extraordinary gain from extinguishment of debt
of $5,157,000 in the quarter ended June 30, 2003. Additionally, the Company
expects to receive a tax deduction of approximately $2,000,000 related to the
disposal of Krane. Finally, the operations of Krane are presented as
discontinued operations in the quarter and six months ended September 30, 2003
and the operations of Krane for the quarter and six months ended September 30,
2002 have also been reclassified and presented as discontinued operations.
Selected financial data from discontinued operations were as follows:
For the six months ended For the three months ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
--------------- ------------- ------------- ---------------
Total revenues $ 5,032,000 $ 15,133,000 $ -- $ 7,759,000
Total costs and expenses $ 3,335,000 $ 9,266,000 $ -- $ 4,810,000
Income from operations $ 269,000 $ 2,517,000 $ -- $ 1,245,000
Net income $ 574,000 $ 894,000 $ -- $ 454,000
Basic earnings per share $ 0.02 $ 0.03 $ -- $ 0.02
Diluted earnings per share $ 0.02 $ 0.02 $ -- $ 0.02
RELIANT INTERACTIVE MEDIA CORP.
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 2,214,275 were issued to Reliant's principal shareholders and placed in
escrow (the "Escrowed Shares").
In accordance with the employment agreements entered into between the Company
and Reliant's principal shareholders, the Company loaned $2,500,000 to Reliant's
principal shareholders, with the underlying notes accruing interest at 6%. In
the event that certain thresholds are met in future years, the loans will be
forgiven and recognized as compensation expense. The notes and accrued interest
are reflected as a reduction of equity.
Of the 2,214,275 escrowed shares of the Company's stock, 442,854 shares
represent collateral for these loans. The amount of the loans and accrued
interest has been reduced by an allowance, such that the net amount of the loan
and accrued interest approximate the fair market value of the collateral shares.
The allowance is recorded as compensation expense, which is included in general
and administrative expenses, and will be adjusted as an increase or decrease to
expense based on changes in the market value of the underlying shares until such
time as the loan is repaid. As such, the Company recorded an increase (decrease)
to compensation expense of $130,000 and ($59,000) for the quarters ended June
30, 2003 and September 30, 2003, respectively.
The remaining 1,771,421 shares were placed in escrow and may be earned in the
event that certain future quarterly and cumulative earnings thresholds are met.
On July 2, 2003, the Company entered into amended and restated employment
agreements with Reliant's former principal shareholders. In conjunction
therewith, the 1,771,421 shares that were in escrow, to be earned in the event
that certain thresholds were met, were released from escrow by the Company and
purchased by two of the majority shareholders of the Company. The purchase price
per share was approximately $0.25. In addition, each of the former shareholders
will receive incentive compensation in an amount equal to 4.167% of the earnings
8
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2003
before interest, income taxes, depreciation and amortization of Reliant in the
fiscal years ended March 31, 2004 and 2005. All other terms of the original
employment agreements remained essentially the same. As a result of this
transaction, the Company recognized a charge to earnings, reflected in general
and administrative expenses in the accompanying statement of operations, in the
quarter ended September 30, 2003, of approximately $440,000.
PRO FORMA RESULTS (UNAUDITED)
The unaudited pro forma financial information below for the quarter and six
months ended September 30, 2002 were prepared as if the Reliant transaction
above had occurred on April 1, 2002:
Six months ended Three months ended
September 30, September 30,
2002 2002
----------------- -------------------
Revenue $70,353,000 $ 27,987,000
Total costs and expenses $68,377,000 $ 28,800,000
Income (loss) before discontinued
operations 493,000 (837,000)
Discontinued operations 894,000 454,000
Net income (loss) $ 1,387,000 $ (383,000)
Basic earnings per share $ 0.04 $ (0.01)
Diluted earnings per share $ 0.04 $ (0.01)
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.
5. LONG-TERM DEBT AND LINE OF CREDIT
In March 2002, the Company entered into a loan and security agreement with
Congress Financial Corporation ("Congress") and Ableco Finance ("Ableco") that
provided a $20,000,000 senior secured revolving credit facility and an aggregate
of $14,000,000 in long-term loans. Under this agreement, the Company and all of
its wholly-owned subsidiaries, with the exception of Krane, are either borrowers
or guarantors of this facility. This facility was used to refinance prior credit
facilities, repurchase outstanding warrants to purchase shares of common stock,
pay certain fees and expenses related to the Reliant and Krane acquisitions and
provide for future working capital requirements. Additionally, in conjunction
with this loan and security agreement, Congress, Ableco and Krane's lenders,
LaSalle Bank National Association and Prairie Capital Mezzanine Fund, executed
an intercreditor agreement whereby the lenders agreed that there would be no
cross-default between the credit facilities of the respective companies.
In October 2002, due to the lack of availability on the Company's revolving line
of credit resulting from the exclusion of certain assets in the borrowing base
calculation, the Company entered into an amendment to its original credit
facility that provided for an additional $5,000,000 subordinated term loan (Term
Loan C) due September 2003. Up to $2,000,000 of the term loan is guaranteed by
an affiliate of H.I.G. Direct Marketing Holdings, the Company's majority
stockholder.
As of December 31, 2002, the Company was in violation of certain debt covenants
within its Ableco credit facility. Accordingly, on February 6, 2003, the Company
entered into an amendment to this credit facility that waived the existing
financial covenants as of December 31, 2002, set new financial covenants on a
quarterly basis going forward, terminated the revolving line of credit portion
of this facility under which no monies were borrowed and required acceleration
of the term loan payment originally due in September 2003. The Company paid
$1,000,000 of the term loan due September 2003 upon the execution of the
amendment and an additional $1,000,000 was paid as required prior to March 31,
2003. In addition, the original loan and security agreement with Congress was
assigned in its entirety to Ableco. All other terms of the original loan and
security agreements remained materially the same. Finally, the $2,000,000
guarantee discussed above was extended to all term loans under the Ableco credit
facility.
9
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2003
As of March 31, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on June 26, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of March 31, 2003 and set new financial
covenants on a quarterly basis going forward. In addition, the Company agreed to
use all the proceeds of its expected tax refund of approximately $4,500,000 to
satisfy the $3,000,000 balance of the term loan due September 2003 and to prepay
the other term loans. All other terms of the original loan and security
agreement remained materially the same.
As of September 30, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on November 11, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of September 30, 2003. Ableco and the Company
have agreed to further amend the credit facility prior to December 31, 2003 to
set new mutually acceptable financial covenants on a quarterly basis going
forward.
As of December 31, 2002, Krane was in default of its credit facility with
LaSalle Bank National Association due to violations of certain debt covenants.
In addition, this credit facility matured in February 2003. The Company was
unable to negotiate a waiver for these violations or a short-term extension of
this facility. As a result, on June 18, 2003, LaSalle exercised its secured
rights under this facility, and accordingly, took possession of 100% of the
capital stock of Krane. In addition, the Company's evaluation of the fair value
of Krane's assets indicated they were not sufficient to recover the recorded
costs. Therefore, as of March 31, 2003, Thane recognized a non-cash write-off of
100% of the goodwill associated with the Krane acquisition, or $21,762,000. In
conjunction with the Krane acquisition, Thane's current lenders entered into an
intercreditor agreement with LaSalle whereby they agreed that there would be no
cross-default between the credit facilities of Krane and Thane. Accordingly, the
aforementioned events did not result in a default under Thane's Ableco credit
facility.
As a result of LaSalle exercising its rights, the operations of Krane are
reflected as discontinued effective June 18, 2003 and the Company recorded a,
non-taxable, extraordinary gain from extinguishment of debt of $5,157,000 in the
quarter ended June 30, 2003. The total Krane debt that existed on June 18, 2003
was $10,653,000.
6. INCOME TAXES
The difference between the Company's effective tax rate and the statutory tax
rate is primarily due to a deduction related to the disposal of Krane for the
six months ended September 30, 2003 and to transfer pricing and financing costs
related to the Company's current and prior years' expansion into foreign markets
for the six months ended September 30, 2003 and 2002.
7. 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 derived from
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 Retailing
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.
LITIGATION
The Company is involved in a class-action lawsuit brought by certain former
shareholders of Reliant related to certain non-financial disclosures made in the
Company's registration statement on Form S-4 in conjunction with the Company's
acquisition of Reliant. The Company believes that it has meritorious defenses
with regard to this litigation and will aggressively defend its position.
Management therefore does not believe that the resolution of this matter will
have a material adverse impact on the Company's financial position, results of
operations, or cash flows.
10
THANE INTERNATIONAL, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2003
The Company is also involved with other pending litigation which has arisen in
the ordinary course of business. Although the outcome of these matters is not
presently determinable, management does not believe that the resolution of these
matters will have a material adverse impact on the Company's financial position,
results of operations, or cash flows.
8. 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 $150,000 in management fees in each of the six months
ended September 30, 2003 and 2002.
The Company leases an aircraft with a related entity whose principal
stockholders are stockholders of the Company. The lease is approximately $26,000
per month, plus maintenance, insurance and costs. In September 2003, the Company
canceled the lease on the above mentioned aircraft and entered into a new
15-month lease with the same related entity on another aircraft at a monthly
cost of $12,500 plus maintenance, insurance and costs. The Company also leases
an automobile, on a month-to-month basis, from this entity for approximately
$2,000 per month.
In July 2003, TV Shop USA, Inc., a Delaware corporation, entered into an
agreement with the Company pursuant to which TV Shop USA purchases inventory
from the Company's foreign manufacturers and subsequently resells it to the
Company once the shipments arrive in the U.S. The inventory is resold to the
Company at cost plus a 2% markup necessary to cover the cost of interest
expense. The principal stockholders of TV Shop USA, Inc. are stockholders of the
Company. During the quarter and six months ended September 30, 2003 the total
markup paid to TV Shop USA was $17,000. In addition, at September 30, 2003 the
Company owed TV Shop USA, Inc. $533,000, including the 2% markup, which is
included in accrued expenses in the accompanying balance sheet.
The Company leases a residential property from two of its stockholders on a
month-to-month basis for approximately $4,000 per month. The residence is used
solely for the purpose of housing for Company employees traveling to the
Company's headquarters. Management believes these accommodations save the
Company substantial lodging expenses.
Prior to August 2002, the Company leased an office building under a capital
lease from two of its stockholders. The lease had a related obligation of
approximately $3,260,000 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 square foot. In August 2002, the stockholders sold
the building to an unrelated third party subject to the terms of the existing
lease. The lease terms have remained the same since the sale of the property.
The Company had 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. From the beginning of her tenure as director through June 30, 2002,
the Company paid approximately $70,000 in legal fees in connection with this
professional relationship.
9. SUBSEQUENT EVENT
On October 28, 2003 the Company was notified that Direct Marketing Holdings,
Inc. has acquired ownership of 33,570,400 shares of Thane common stock,
representing approximately 94.7% of the outstanding shares of Thane common
stock. The shares of Thane common stock acquired by Direct Marketing Holdings,
Inc. were contributed by certain of Thane's existing stockholders in exchange
for shares of Direct Marketing Holdings, Inc. common stock.
Direct Marketing Holdings, Inc. filed a Schedule 13e-3 with the Securities and
Exchange Commission in which it indicated its intention to contribute its shares
of Thane common stock to its wholly-owned subsidiary Thane DM Acquisition, Inc.,
which intends to conduct a "short-form" merger with and into Thane under
Delaware General Corporation Law ss.253. Upon completion of the short-form
merger, each share of Thane common stock not owned by Thane DM Acquisition will
be converted into the right to receive $0.35 in cash and the shares of Thane
common stock that remain outstanding will no longer be publicly traded.
11
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 QUARTER AND
SIX MONTHS ENDED SEPTEMBER 30, 2003 AND THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED MARCH 31, 2003. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE DISCUSSED BELOW AND IN OUR ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2003, PARTICULARLY UNDER THE HEADING "RISK
FACTORS."
GENERAL
We are engaged in the multi-channel direct marketing of consumer products and
services in the fitness, health and beauty, and housewares product categories.
Our distribution channels in the United States and, through our 186
international distributors and strategic partners, in 80 countries around the
world include direct response television, home shopping channels, catalogs,
retail print advertising, credit card inserts and the Internet. We develop and
acquire products, arrange low-cost, offshore manufacturing and then market and
distribute our products through our various distribution channels. We have
historically been dependent on 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 television programs and the Internet, and (ii) wholesale
through international distributors and strategic partners, retailers, home
shopping channels, catalogs and credit card inserts. We also generate revenues
through our media purchasing, consumer clubs and product sourcing activities. We
allocate all of our United States 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 television 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.
Over the past several years, we have focused on building our international and
wholesale channels of distribution. International sales have grown from $1.3
million in fiscal 1998 to $51.3 million in fiscal 2003. Wholesale revenues have
increased from $1.8 million in fiscal 1999 to $12.9 million in fiscal 2003. 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.
Our revenues vary throughout the year, with third and fourth fiscal quarter
revenues being historically the highest. 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 Reliant Interactive Media Corp. as of May 22, 2002. Therefore,
Reliant's included in our results of operations for the entire quarter ended
September 30, 2002 and only 40 days of financial information for Reliant is
included in our results of operations for the quarter ended June 30, 2002. 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 the Company's Annual
Report on Form 10-K for the year ended March 31, 2003.
As of December 31, 2002, Krane Product, Inc. (Krane) was in default of its
credit facility with LaSalle Bank National Association due to violations of
certain debt covenants. In addition, this credit facility matured in February
2003. The Company was unable to negotiate a waiver for these violations or a
short-term extension of this facility. As a result, on June 18, 2003, LaSalle
12
exercised its secured rights under this facility, and accordingly, took
possession of 100% of the capital stock of Krane. In addition, the Company's
evaluation of the fair value of Krane's assets indicated they were not
sufficient to recover the recorded costs. Therefore, as of March 31, 2003, Thane
recognized a non-cash write-off of 100% of the goodwill associated with the
Krane acquisition, or $21,762,000. As a result of LaSalle exercising its rights,
the operations of Krane are reflected as discontinued effective June 18, 2003
and the Company recorded an extraordinary gain from extinguishment of debt of
$5,157,000 in the six months ended September 30, 2003. In addition, the
operations of Krane are presented as discontinued operations in the quarter and
six months ended September 30, 2003 and the operations of Krane for the quarter
and six months ended September 30, 2002 have been reclassified and presented as
discontinued operations as well.
RESULTS OF OPERATIONS
The following table sets forth income statement data for the periods indicated
as a percentage of revenue.
For the quarter ended For the six months ended
September 30, September 30,
--------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Total revenues .................................. 100.00% 100.00% 100.00% 100.00%
Cost of sales, including selling expenses ....... 81.64% 80.68% 81.09% 78.18%
Gross profit .................................... 18.36% 19.32% 18.91% 21.82%
Operating expenses
General and administrative ............... 25.06% 21.70% 21.18% 17.16%
Depreciation ............................. 0.43% 0.53% 0.45% 0.42%
Income (loss) from operations ................... (7.13)% (2.91)% (2.72)% 4.24%
Other expenses
Interest, minority interest and other..... 2.24% 1.77% 2.28% 1.78%
Income (loss) before income taxes (benefit) ..... (9.37)% (4.68)% (5.00)% 2.46%
Provision for income taxes (benefit) ............ (0.02)% (1.68)% 0.74% 0.96%
Income (loss) from continuing operations ........ (9.35)% (3.00)% (5.74)% 1.50%
Discontinued operations ......................... -- 1.62% 0.86% 1.36%
Extraordinary gain on extinguishment of debt .... -- -- 7.77% --
Net income (loss) ............................... (9.35)% (1.38)% 2.89% 2.86%
COMPARISON OF THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
TOTAL REVENUES increased $5.5 million, or 19.5%, to $33.5 million for the
quarter ended September 30, 2003 from $28.0 million for the quarter ended
September 30, 2002. The increase in total revenues is primarily attributable to
international sales increasing $5.0 million, or 42.3 %, to $16.7 million for the
quarter ended September 30, 2003 from $11.7 million for the quarter ended
September 30, 2002. Wholesale sales increased $ 0.6 million, or 25.1%, to $3.2
million for the quarter ended September 30, 2003 from $2.6 million for the
quarter ended September 30, 2002.. These increases were partially offset by
direct to consumer sales decreasing $0.1 million, or 1.0%, to $13.6 million for
the quarter ended September 30, 2003 from $13.7 million for the quarter ended
September 30, 2002. For the six months ended September 30, 2003 total revenues
increased $1.0 million, or 1.6%, to $66.4 million for the six months ended
September 30, 2003 from $65.4 million for the six months ended September 30,
2002. The increase in total revenues is primarily attributable to international
sales increasing $2.3 million, or 7.8%, to $31.8 million for the six months
ended September 30, 2003 from $29.5 million for the six months ended September
30, 2002. Direct to consumer sales increased $0.7 million, or 2.7%, to $28.0
million for the six months ended September 30, 2003 from $27.3 million for the
six months ended September 30, 2002. These increases were partially offset by
wholesale sales decreasing $2.0 million, or 23.4%, to $6.6 million for the six
months ended September 30, 2003 from $8.6 million for the six months ended
September 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.
13
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.
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. The decrease in wholesale sales for the six months
ended September 2003 was attributable to sales of a single fitness product in
the first quarter of fiscal 2003 partially offset by increased sales in other
product categories in fiscal 2004. The increase in international sales was
attributable to a more diverse sales mix in fiscal 2004 compared to sales
dominated by a single health and beauty product in fiscal 2003.
COST OF SALES consists of product costs, advertising costs, media costs,
fulfillment costs and royalty costs. Cost of sales increased $4.7 million, or
20.9%, to $27.3 million for the second quarter of fiscal 2004 from $22.6 million
for the second quarter of fiscal 2003. As a percentage of total revenues, cost
of sales increased to 81.6% for the quarter ended September 30, 2003 from 80.7%
for the quarter ended September 30, 2002. The increase in cost of sales dollars
is directly attributable to the higher sales levels discussed above. The
increase in cost of sales as a percentage of total revenues for the quarter
ended September 2003 as compared to September 2002 is primarily due to higher
advertising and media costs during the quarter ended September 30, 2003. Cost of
sales increased $2.7 million, or 5.4%, to $53.8 million for the first six months
of fiscal 2004 from $51.1 million for the first six months of fiscal 2003. As a
percentage of total revenues, cost of sales increased to 81.1% for the six
months ended September 30, 2003 from 78.2 % for the six months ended September
30, 2002. The increase in cost of sales dollars is directly attributable to the
higher sales levels discussed above. The increase in cost of sales as a
percentage of total revenues for the six months ended September 2003 as compared
to September 2002 is primarily due to higher advertising and media costs during
the six months ended September 30, 2003.
GROSS PROFIT increased $0.7 million, or 13.6%, to $6.1 million for the quarter
ended September 30, 2003 from $5.4 million for the quarter ended September 30,
2002. As a percentage of total revenues, gross profit decreased 0.9% from 19.3%
for the second quarter of fiscal 2003 to 18.4% for the second quarter of fiscal
2004. The decrease in gross profit as a percentage of total revenues is the
result of higher advertising and media costs for the quarter ended September 30,
2003. Gross profit decreased $1.7 million, or 11.9%, to $12.6 million for the
six months ended September 30, 2003 from $14.3 million for the six months ended
September 30, 2002. As a percentage of total revenues, gross profit decreased
2.9% from 21.8% for the first six months of fiscal 2003 to 18.9% for the first
six months of fiscal 2004. The decrease in gross profit as a percentage of total
revenues is the result of higher advertising and media costs for the six months
ended September 30, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES increased $2.3 million, or 38.0%, to $8.4
million for the second quarter of fiscal 2004 from $6.1 million for the
comparable quarter in fiscal 2003. As a percentage of total revenues, general
and administrative expenses increased to 25.1% for the second quarter of fiscal
2004 from 21.7% for the second quarter of fiscal 2003. General and
administrative expenses increased $2.8 million, or 25.4 %, to $14.1 million for
the first six months of fiscal 2004 from $11.2 million for the comparable period
in fiscal 2003. As a percentage of total revenues, general and administrative
expenses increased to 21.2% for the first six months of fiscal 2004 from 17.2%
for the first six months of fiscal 2003. The increase in general and
administrative expenses was the result of a full quarter of general and
administrative expenses in the quarter ended June 30, 2003 for Reliant compared
to only forty days of such expenses in the quarter ended June 30, 2002 as well
as higher legal expenses and higher expenses in the Internet division.
DEPRECIATION EXPENSE for the decreased slightly for the three month period ended
September 30, 2003 and increased $31,000 for the six month period ended
September 30, 2003, due primarily to depreciation of fixed assets additions over
the last year.
INCOME (LOSS) FROM OPERATIONS decreased $1.6 million, or 193.4%, to $ (2.4)
million for the second quarter of fiscal 2004 from $(0.8) million for the second
quarter of fiscal 2003. As a percentage of total revenues, loss from operations
decreased to (7.1)% for the second quarter of fiscal 2004 from (2.9)% for the
second quarter of fiscal 2003. For the first six months of fiscal 2004, loss
14
from operations decreased $4.6 million, or 165.2%, to a loss of $(1.8) million
from income of $2.8 million for the first six months of fiscal 2003. As a
percentage of total revenues, loss from operations decreased to (2.7)% for the
first six months of fiscal 2004 from income of 4.2% for the first six months of
fiscal 2003. For the second quarter and first six months of fiscal 2004, the
decrease in income from operations as a percentage of total revenues is
attributable to lower gross profits and higher general and administrative
expenses discussed above.
OTHER EXPENSES consist of net interest expense and minority interest. Net
interest expense for the quarter and six months ended September 30, 2003
increased approximately $138,000 and $320,000, respectively, primarily due to
higher debt levels and higher borrowing costs during the first six months ended
September 30, 2003. Minority interest increased slightly in both periods due to
profit increases from Thane's non-wholly owned subsidiaries.
INCOME (LOSS) BEFORE INCOME TAXES decreased $1.8 million, or 139.7%, to $(3.1)
million for the quarter ended September 30, 2003 from $(1.3) million for the
quarter ended September 30, 2002. For the six months ended September 30, 2003,
income (loss) before income taxes decreased $4.9 million, or 306.6%, to $(3.3)
million for the six months ended September 30, 2003 from income of $1.6 million
for the six months ended September 30, 2002. The decrease is attributable to the
lower gross profits and higher general and administrative expenses discussed
above. After applying the effective tax rate (benefit) of (0.26)% and (36.0)%,
for the second quarters in fiscal 2004 and fiscal 2003, respectively, income
(loss) before discontinued operations and extraordinary items for the respective
periods was $(3.1) million and $(0.8) million, a $2.3 million, or 273.6%
decrease. For the six months ended September 30, 2003 and September 30, 2002,
after applying the effective tax rate of 14.7 % and 39.2% for the first six
months in fiscal 2004 and fiscal 2003, respectively, income (loss) before
discontinued operations and extraordinary items for the respective periods was
$(3.8) million and $1.0 million, a $4.8 million, or 489.4% decrease.
DISCONTINUED OPERATIONS AND EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
consists of the effects of the Company's disposition of Krane. As of December
31, 2002, Krane was in default of its credit facility with LaSalle Bank National
Association due to violations of certain debt covenants. In addition, this
credit facility matured in February 2003. The Company was unable to negotiate a
waiver for these violations or a short-term extension of this facility. As a
result, on June 18, 2003, LaSalle exercised its secured rights under this
facility, and accordingly, took possession of 100% of the capital stock of
Krane. In addition, the Company's evaluation of the fair value of Krane's assets
indicated they were not sufficient to recover the recorded costs. Therefore, as
of March 31, 2003, Thane recognized a non-cash write-off of 100% of the goodwill
associated with the Krane acquisition, or $21,762,000.
As a result of LaSalle exercising its rights, the operations of Krane are
reflected as discontinued effective June 18, 2003 and the Company recorded a
non-taxable, extraordinary gain from extinguishment of debt of $5,157,000 in the
quarter ended June 30, 2003. In addition, the operations of Krane are presented
as discontinued operations with income of $574,000 in the six months ended
September 30, 2003. The historical operations of Krane for the quarter and six
months ended September 30, 2002 have been reclassified and presented as
discontinued operations which reflected income of $454,000 and $894,000,
respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, cash and cash equivalents were $5.0 million compared
to $3.9 million at March 31, 2003 and $2.7 million at September 30, 2002. Total
assets were $39.3 million at September 30, 2003 compared to $54.0 million at
March 31, 2003 and $100.9 million at September 30, 2002. Comparing September
2003 to September 2002, the total asset decrease of $61.6 million was primarily
due to a decrease in goodwill of $41.8 million as discussed in the Company's
Form 10-K and a decrease in current assets of $16.9 million due primarily to
decreases in inventories, receivables, deferred income taxes and income taxes
receivable.
For the six months ended September 30, 2003, the net cash provided by operating
activities was $8.5 million compared to net cash used in operating activities of
$(8.0) million for the six months ended September 30, 2002. Net cash used in
investing and financing activities was $(7.4) million in the six months ended
September 30, 2003 as compared to net cash used in investing and financing
activities of $(2.9) million in the six months ended September 30, 2002. The
increase in cash provided by operating activities was primarily due to decreases
in accounts receivable, inventories and income taxes receivable for the six
months ended September 30, 2003. During the six months ended September 30, 2003,
the Company repaid $6.8 million in debt which comprised the majority of the net
cash used in investing and financing activities compared to debt repayments of
$1.5 million during the six months ended September 30, 2002.
15
In March 2002, the Company entered into a loan and security agreement with
Congress Financial Corporation ("Congress") and Ableco Finance ("Ableco") that
provided a $20,000,000 senior secured revolving credit facility and an aggregate
of $14,000,000 in long-term loans. Under this agreement, the Company and all of
its wholly-owned subsidiaries, with the exception of Krane, are either borrowers
or guarantors of this facility. These facilities were used to refinance prior
credit facilities, repurchase outstanding warrants to purchase shares of common
stock, pay certain fees and expenses related to the Reliant and Krane
acquisitions and provide for future working capital requirements. Additionally,
in conjunction with this loan and security agreement, Congress, Ableco and
Krane's lenders, LaSalle Bank National Association and Prairie Capital Mezzanine
Fund, executed an intercreditor agreement whereby the lenders agreed that there
would be no cross-default between the credit facilities of the respective
companies.
In October 2002, due to the lack of availability on the Company's revolving line
of credit resulting from the exclusion of certain assets in the borrowing base
calculation, the Company entered into an amendment to its original credit
facility that provided for an additional $5,000,000 subordinated term loan (Term
Loan C) due September 2003. Up to $2,000,000 of the term loan is guaranteed by
an affiliate of H.I.G. Direct Marketing Holdings, the Company's majority
stockholder.
As of December 31, 2002, the Company was in violation of certain debt covenants
within its Ableco credit facility. Accordingly, on February 6, 2003, the Company
entered into an amendment to this credit facility that waived the existing
financial covenants as of December 31, 2002, set new financial covenants on a
quarterly basis going forward, terminated the revolving line of credit portion
of this facility under which no monies were borrowed and required acceleration
of the term loan payment originally due in September 2003. The Company paid
$1,000,000 of the term loan due September 2003 upon the execution of the
amendment and an additional $1,000,000 was paid as required prior to March 31,
2003. In addition, the original loan and security agreement with Congress was
assigned in its entirety to Ableco. All other terms of the original loan and
security agreement remained materially the same. Finally, the $2,000,000
guarantee discussed above was extended to all term loans under the Ableco credit
facility.
As of March 31, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on June 26, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of March 31, 2003 and set new financial
covenants on a quarterly basis going forward. In addition, the Company agreed to
use all the proceeds of its expected tax refund of approximately $4,500,000 to
satisfy the $3,000,000 balance of the term loan due September 2003 and to prepay
the other term loans. All other terms of the original loan and security
agreement remained materially the same.
As of September 30, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on November 11, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of September 30, 2003. Albeco and the Company
have agreed to further amend the credit facility prior to December 31, 2003 to
set new mutually acceptable financial covenants on a quarterly basis going
forward.
As of December 31, 2002, Krane was in default of its credit facility with
LaSalle Bank National Association due to violations of certain debt covenants.
In addition, this credit facility matured in February 2003. The Company was
unable to negotiate a waiver for these violations or a short-term extension of
this facility. As a result, on June 18, 2003, LaSalle exercised its secured
rights under this facility, and accordingly, took possession of 100% of the
capital stock of Krane. In addition, the Company's evaluation of the fair value
of Krane's assets indicated they were not sufficient to recover the recorded
costs. Therefore, as of March 31, 2003, Thane recognized a non-cash write-off of
100% of the goodwill associated with the Krane acquisition, or $21,762,000. In
conjunction with the Krane acquisition, Thane's current lenders entered into an
intercreditor agreement with LaSalle whereby they agreed that there would be no
cross-default between the credit facilities of Krane and Thane. Accordingly, the
aforementioned events did not result in a default under Thane's Ableco credit
facility.
As a result of LaSalle exercising its rights, the operations of Krane are
reflected as discontinued effective June 18, 2003 and the Company recorded a
non-taxable, extraordinary gain from extinguishment of debt of $5,157,000 in the
quarter ended June 30, 2003. The total Krane debt that existed on June 18, 2003
was $10,653,000.
We believe that, through future cash flows, sales of certain of our non-core
subsidiaries 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.
16
Critical Accounting Policies
REVENUE RECOGNITION
The Company recognizes revenue upon concluding that all of the fundamental
criteria for revenue recognition have been met. All of the criteria are usually
met at the time of product shipment. The Company also earns 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. The Company also earns 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 the Company's policy to refund unconditionally the total price
of merchandise, less shipping and handling, for merchandise returned within 30
days. The Company provides 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.
ALLOWANCE FOR PRODUCT REFUNDS AND RETURNS
The allowance for product refunds and returns is based on past historical
experience of product returns and refunds during which a customer can return a
product.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary timing differences between the financial
statement and tax basis of assets and liabilities at the applicable enacted tax
rates. A valuation allowance is maintained to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.
GOODWILL
Goodwill represents the excess of the purchase price of each of the Company's
acquisitions over the fair market value of the net assets acquired. The
acquisitions have been accounted for under FAS 141 BUSINESS COMBINATIONS, and in
accordance with FAS 142, GOODWILL & INTANGIBLES, goodwill has not been amortized
and is tested annually or more frequently if circumstances indicate potential
impairment, by comparing the fair value of assets to its carrying amount.
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Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation 46"), an interpretation of ARB No.
51. Interpretation 46 addresses consolidation by business enterprises of
variable interest entities. Interpretation 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first year or interim period ending after December 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is in the initial stages of
reviewing this interpretation, but does not believe it has any variable interest
entities to which Interpretation 46 would apply. Additionally, the Company has
not invested in any new variable interest entities after January 31, 2003.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with borrowings under our senior secured credit facility with
Ableco 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 this facility bear interest at variable rates based on the prime rate.
Because such rate varies 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 currently consists of three term loans for total
borrowings of $8.3 million.
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 minimal foreign
currency fluctuation risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Company's management, including
the Company's Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer, concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's Exchange Act filings.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in a class-action lawsuit brought by certain former
shareholders of Reliant related to certain non-financial disclosures made in the
Company's registration statement on Form S-4 in conjunction with the Company's
acquisition of Reliant. The Company believes that it has meritorious defenses
with regard to this litigation and will aggressively defend its position.
Management therefore does not believe that the resolution of this matter will
have a material adverse impact on the Company's financial position, results of
operations, or cash flows.
The Company is also involved with other pending litigation which has arisen in
the ordinary course of business. Although the outcome of these matters is not
presently determinable, management does not believe that the resolution of these
matters will have a material adverse impact on the Company's financial position,
results of operations, or cash flows.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
In March 2002, the Company entered into a loan and security agreement with
Congress Financial Corporation ("Congress") and Ableco Finance ("Ableco") that
provided a $20,000,000 senior secured revolving credit facility and an aggregate
of $14,000,000 in long-term loans. Under this agreement, the Company and all of
its wholly-owned subsidiaries, with the exception of Krane, are either borrowers
or guarantors of this facility. These facilities were used to refinance prior
credit facilities, repurchase outstanding warrants to purchase shares of common
stock, pay certain fees and expenses related to the Reliant and Krane
acquisitions and provide for future working capital requirements. Additionally,
in conjunction with this loan and security agreement, Congress, Ableco and
Krane's lenders, LaSalle Bank National Association and Prairie Capital Mezzanine
Fund, executed an intercreditor agreement whereby the lenders agreed that there
would be no cross-default between the credit facilities of the respective
companies.
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In October 2002, due to the lack of availability on the Company's revolving line
of credit resulting from the exclusion of certain assets in the borrowing base
calculation, the Company entered into an amendment to its original credit
facility that provided for an additional $5,000,000 subordinated term loan (Term
Loan C) due September 2003. Up to $2,000,000 of the term loan is guaranteed by
an affiliate of H.I.G. Direct Marketing Holdings, the Company's majority
stockholder.
As of December 31, 2002, the Company was in violation of certain debt covenants
within its Ableco credit facility. Accordingly, on February 6, 2003, the Company
entered into an amendment to this credit facility that waived the existing
financial covenants as of December 31, 2002, set new financial covenants on a
quarterly basis going forward, terminated the revolving line of credit portion
of this facility under which no monies were borrowed and required acceleration
of the term loan payment originally due in September 2003. The Company paid
$1,000,000 of the term loan due September 2003 upon the execution of the
amendment and an additional $1,000,000 was paid as required prior to March 31,
2003. In addition, the original loan and security agreement with Congress was
assigned in its entirety to Ableco. All other terms of the original loan and
security agreement remained materially the same. Finally, the $2,000,000
guarantee discussed above was extended to all term loans under the Ableco credit
facility.
As of March 31, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on June 26, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of March 31, 2003 and set new financial
covenants on a quarterly basis going forward. In addition, the Company agreed to
use all the proceeds of its expected tax refund of approximately $4,500,000 to
satisfy the $3,000,000 balance of the term loan due September 2003 and to prepay
the other term loans. All other terms of the original loan and security
agreement remained materially the same.
As of September 30, 2003, the Company was in violation of certain debt covenants
under the current Ableco credit facility. Accordingly, on November 11, 2003, the
Company entered into an amendment to its credit facility that waived the
existing financial covenants as of September 30, 2003. Albeco and the Company
have agreed to further amend the credit facility prior to December 31, 2003 to
set new mutually acceptable financial covenants on a quarterly basis going
forward.
As of December 31, 2002, Krane was in default of its credit facility with
LaSalle Bank National Association due to violations of certain debt covenants.
In addition, this credit facility matured in February 2003. The Company was
unable to negotiate a waiver for these violations or a short-term extension of
this facility. As a result, on June 18, 2003, LaSalle exercised its secured
rights under this facility, and accordingly, took possession of 100% of the
capital stock of Krane. In addition, the Company's evaluation of the fair value
of Krane's assets indicated they were not sufficient to recover the recorded
costs. Therefore, as of March 31, 2003, Thane recognized a non-cash write-off of
100% of the goodwill associated with the Krane acquisition, or $21,762,000. In
conjunction with the Krane acquisition, Thane's current lenders entered into an
intercreditor agreement with LaSalle whereby they agreed that there would be no
cross-default between the credit facilities of Krane and Thane. Accordingly, the
aforementioned events did not result in a default under Thane's Ableco credit
facility.
As a result of LaSalle exercising its rights, the operations of Krane are
reflected as discontinued effective June 18, 2003 and the Company recorded a
non-taxable, extraordinary gain from extinguishments of debt of $5,157,000 in
the quarter ended June 30, 2003. The total Krane debt that existed on June 18,
2003 was $10,653,000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.3 Certification of Chief Accounting Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 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
On July 1, 2003, the Company filed a report on Form 8-K that: (a) announced
that on June 18, 2003, due to (i) a default by Krane Holdings, Inc., a
direct marketing company acquired by the Company in March 2002, under its
credit facility with LaSalle Bank National Association and (ii) the
Company's inability to negotiate an extension of the credit facility beyond
its February 2003 maturation date, LaSalle exercised their secured rights
under the credit facility and took possession of 100% of the capital stock
of Krane; and (b) attached a copy of the Company's press release, dated
July 1, 2003, announcing its preliminary financial results for the fiscal
year ended March 31, 2003.
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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)
November 14, 2003 By: /s/ William F. Hay
- -------------------- ----------------------------------------------
Date William F. Hay, Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
November 14, 2003 By: /s/ Kevin J. McKeon
- -------------------- ----------------------------------------------
Date Kevin J. McKeon, Chief Financial Officer
(Principal Financial Officer)
November 14, 2003 By: /s/ Joshua A. Chandler
- -------------------- ----------------------------------------------
Date Joshua A. Chandler, Chief Accounting Officer
(Principal Accounting Officer)
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