NATURAL HEALTH TRENDS CORP.
ANNOUNCES THIRD QUARTER AND NINE MONTHS 2005 RESULTS
QUARTERLY SALES REACHED $58 MILLION
CONFERENCE CALL TODAY AT 4:15 P.M. EST
DALLAS, TX, NOVEMBER 15, 2005 -- Natural Health Trends Corp. (NASDAQ NMS: BHIP),
an international direct-selling company, today announced its financial results
for the third quarter ended September 30, 2005 and preliminary results from its
Audit Committee investigation.
Financial Results
Net sales in the third quarter of 2005 were approximately $58.1 million, up 43%
from the $40.5 million for the comparable period a year ago. For the nine months
ended September 30, 2005, net sales rose 56% to approximately $150.8 million
compared to $96.9 million for the same period during 2004.
For the third quarter of 2005, the Company recorded net income of approximately
$0.1 million, or $0.01 per fully diluted share.
The growth in sales was largely due to significant increase in the Hong
Kong-based business, which recorded approximately $37.7 million net sales in the
three months ended September 30, 2005, up from $23.8 million during the
comparable period last year. Sales growth in 2005 over 2004 was also
attributable to a 5% product price increase in January 2005 and an increase in
the number of independent distributors. As of September 30, 2005, the operating
subsidiaries of Natural Health Trends Corp. had approximately 169,000 active
distributors, compared to 133,000 at the end of 2004 and 101,000 a year ago.
At the end of the third quarter, the Company had on its balance sheet deferred
revenue of approximately $13.5 million of which $4.9 million pertained to
product orders and $7.1 million to enrollment package revenue. During April
2005, the Company launched a new product line, Gourmet Coffee Cafe, with its
coffee machines, coffee and tea pods, in the North American market. Since the
Gourmet Coffee Cafe is a very different product than the Company's other
products, relevant accounting rules require that none of the revenue generated
from the sale of the coffee machines be recognized until sufficient experience
on the product has been established. As a result, deferred revenue also includes
approximately $1.5 million of Gourmet Coffee Cafe product shipped through
September 30, 2005.
Gross profit margin for the third quarter was 77.6% of revenue, versus 78.1% for
the same period a year ago. The percentage of revenue declined over a year ago,
mainly due to significant revenue being deferred from the second into the third
quarter a year ago related to the Hong Kong market. Gross margin in the third
quarter improved from the 75.1% in the second quarter as the Company is in the
process of reducing certain duplicated logistic processes for our Hong
Kong-based business.
Distributor commissions were 50.1% of net sales for the three months ended
September 30, 2005 compared with 43.0% of net sales for the same period in the
prior year. A year ago, due to special events in Hong Kong that occurred in the
second quarter, approximately $6 million of the revenue recognized in the third
quarter had its associated commissions already recorded in the second
quarter. Distributor commissions of 50.1% in the third quarter were lower than
the 55.3% in the second quarter, mainly due to scaling back local promotional
programs in Hong Kong.
Selling, general and administrative expenses ("SG&A") were approximately $15.1
million or 26.0% of net sales for the three months ended September 30, 2005
compared with approximately $8.3 million or 20.5% of net sales for the same
period in the prior year. This increase of approximately $6.8 million or 82% was
mainly attributable to additional marketing-related expenses primarily in
Eastern Europe ($1.6 million) and Hong Kong/China ($2.3 million), preparing the
opening of new markets in Mexico and Japan ($1.6 million) and higher
professional fees and personnel costs in North America ($1.3 million). SG&A are
expected to continue to increase in the fourth quarter driven by the opening of
the Japanese operations.
Robert H. Hesse, the Interim Chief Executive Officer of Natural Health Trends
Corp., said "In the third quarter, we are pleased with the progress of improved
profit margin by reducing duplicated logistic process and promotional costs in
Hong Kong as we have promised."
The revenue increase for the first nine months of 2005 over a year ago was due
to growth in Hong Kong, the anticipated opening of the Japanese office, and
additional sales from our KGC subsidiary and Lexxus business in North America.
Gross profit was 77.7% of net sales for the nine months ended September 30, 2005
compared with 77.3% of net sales for the same period in the prior year. This
margin increase in gross profit percentage was primarily driven by the 5% price
increase as well as the elimination of the commissions paid to MarketVision
Communications Corp. after its acquisition by the Company on March 31, 2004.
SG&A were approximately $36.7 million or 24.3% of net sales for the nine months
ended September 30, 2005 compared with approximately $22.5 million or 23.2% of
net sales for the same period in the prior year. The increase of approximately
$14.2 million was due to increased marketing in Eastern Europe by our KGC
subsidiary and in North America, higher professional fees and personnel cost in
North America, preparing the opening of new markets in Mexico and Japan, and
increased personnel costs in Hong Kong.
Mr. Hesse said, "Our strong sales momentum continued in the third quarter. As a
cautionary note, we should point out that we are not immune to the uncertainty
created by China's pending adoption of the direct selling laws, as other direct
selling companies have experienced. The opening of our Japanese operations is
our most important event in the fourth quarter, and we are expecting a
significant impact from the beginning."
Investigation Results
As previously disclosed, the Company's Audit Committee of the Board of Directors
initiated an investigation in August 2005 regarding allegations of misconduct by
Messrs. Mark Woodburn and Terry LaCore asserted by an unrelated third party
arising out of a lawsuit involving Mr. LaCore and such unrelated third party.
On November 10, 2005, an independent investigator retained by the Company's
Audit Committee learned that an entity controlled by Messrs. Woodburn and LaCore
received payments from an independent distributor of the Company's products
during 2001 through August 2005. The Company believes that Messrs. Woodburn and
LaCore received from such independent
distributor a total of approximately $1.4 million and $1.1 million,
respectively. The Company believes that the fees paid by the Company to such
independent distributor were not in excess of the amounts due under the
Company's regular distributor compensation plan.
Approximately $2.4 million of the funds paid by the independent distributor to
Messrs. Woodburn and LaCore were paid at the direction of Messrs. Woodburn and
LaCore to an entity that is partially owned by Mr. Woodburn's father and Randall
A. Mason, a member of the Company's Board of Directors and Chairman of the
Company's Audit Committee. The funds were subsequently paid to an entity
controlled by Messrs. Woodburn and LaCore at their direction. The Company
believes that Mr. Mason was unaware that these payments were directed by Messrs.
Woodburn and LaCore to an entity partially owned by him until uncovered by the
Audit's Committee's independent investigator on November 10, 2005. Further, the
Company believes that Mr. Mason received no pecuniary benefit from the payments
made by the independent distributor. Since payments were directed into an entity
that is partially owned by Mr. Mason, he no longer can be considered
"independent" in accordance with the rules of The Nasdaq Stock Market and under
the federal securities laws. Therefore, effective November 11, 2005, Mr. Mason
resigned as Chairman and a member of the Company's Audit Committee. Mr. Mason
remains as a director.
On November 14, 2005, in light of the information learned by the Company's Audit
Committee on November 10, 2005, the Company has terminated the employment of
each of Messrs. Woodburn and LaCore. No severance has been paid by the Company
to Messrs. Woodburn and LaCore and the Company is investigating claims of action
against them.
In addition, a loan made by the Company under the direction of Mr. Woodburn in
the aggregate principal amount of $256,000 in February 2004 was previously
recorded as a loan to a third party. On November 10, 2005, the Audit Committee
investigator learned that the Company actually loaned the funds to an entity
owned and controlled by the parents of Mr. Woodburn. The loan was repaid in
full, partially by an entity controlled by a third party and partially by an
entity controlled by Mr. Woodburn in December 2004.
The Audit Committee's investigation is ongoing and the Company is seeking
additional independent directors for its Board of Directors and the committees
thereof. The Company intends to amend certain disclosures in previous filings
with the Securities and Exchange Commission related to payments made by the
independent distributor to Messrs. Woodburn and LaCore and to re-characterize
the loan made by the Company to the entity controlled by Mr. Woodburn's parents.
Mr. Hesse said, "As soon as we confirmed the improprieties committed by Mark and
Terry, the Company acted as soon as possible to discipline them to protect the
Company's best interest. We feel strongly that the right ethical tone has to be
set from the top. Meanwhile, we believe that the Company has a strong and deep
bench of management members around the world, who are proactively working with
our distributor leadership and assuring them of the Company's strong financial
position and unwavering support for their continued business development."
The Company will host a conference call today at 4:15 p.m. EST. Those who wish
to participate in the conference call may telephone 888-335-6674 approximately
15 minutes before 4:15 p.m. EST. If you cannot participate in the call, but wish
to hear it, you may login to Natural Health Trends Corp.'s homepage at
www.naturalhealthtrendscorp.com and click on either Windows Media or Real Player
approximately 1 1/2 hours after the completion of the call.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- -- Forward-looking statements in this release do not constitute guarantees of
future performance. Such forward-looking statements are subject to risks and
uncertainties that could cause our actual results to differ materially from
those anticipated. Such statements may relate, among other things, to our
relationship with our distributors; our need to continually recruit new
distributors; our internal controls and accounting methods that may require
further modification; regulatory matters governing our products and network
marketing system; our relationship with our majority owned subsidiary operating
in Russia and other Eastern European countries; our ability to recruit and
maintain key management; adverse publicity associated with our products or
direct selling organizations; product liability claims; our reliance on outside
manufacturers; risks associated with operating internationally, including
foreign exchange risks; product concentration; dependence on increased
penetration of existing markets; adverse consequences from audit committee
investigation and/or management reorganization; the competitive nature of our
business; and our ability to generate sufficient cash to operate and expand our
business. For a more detailed discussion of the risks and uncertainties of our
business, please refer to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004 filed with the Securities and Exchange Commission. We
assume no obligation to update any forward-looking information contained in this
press release or with respect to the announcements described herein.
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<Table>
<Caption>
December September
31, 2004 30, 2005
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $22,324 $28,324
Restricted cash 2,395 2,127
Accounts receivable 209 524
Inventories, net 13,991 16,918
Other current assets 2,096 6,352
------------ -------------
Total current assets 41,015 54,245
Property and equipment, net 579 2,171
Goodwill 14,145 14,145
Intangible assets, net 5,474 4,769
Deferred tax assets 434 430
Other assets 458 1,050
------------ -------------
Total assets $62,105 $76,810
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,344 $2,418
Income taxes payable 1,797 2,370
Accrued distributor commissions 4,259 5,794
Other accrued expenses 4,154 7,080
Deferred revenue 9,551 13,511
Current portion of debt 796 278
Other current liabilities 1,595 2,189
------------ -------------
Total current liabilities 23,496 33,640
Debt 22 11
------------ -------------
Total liabilities 23,518 33,651
Commitments and contingencies
Minority interest 598 736
Mezzanine common stock 960 --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $0.001 par value; 50,000,000 shares authorized,
6,819,667 and 7,108,867 shares issued and outstanding at December
31, 2004 and September 30, 2005, respectively 7 7
Additional paid-in capital 64,933 69,428
Accumulated deficit (27,799) (27,044)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (112) 32
------------ -------------
Total stockholders' equity 37,029 42,423
------------ -------------
Total liabilities and stockholders' equity $62,105 $76,810
============ =============
</Table>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data)
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2005 2004 2005
---------- --------- --------- ----------
As
Restated
Net sales $40,482 $58,071 $96,913 $150,789
Cost of sales 8,870 12,984 21,987 33,590
---------- --------- --------- ----------
Gross profit 31,612 45,087 74,926 117,199
Operating expenses:
Distributor commissions 17,422 29,087 49,745 77,959
Selling, general and administrative expenses 8,288 15,108 22,450 36,662
---------- --------- --------- ----------
Total operating expenses 25,710 44,195 72,195 114,621
---------- --------- --------- ----------
Income from operations 5,902 892 2,731 2,578
Other expense, net (91) (88) (121) (761)
---------- --------- --------- ----------
Income before income taxes and minority interest 5,811 804 2,610 1,817
Income tax provision (857) (610) (110) (924)
Minority interest 74 (75) (457) (138)
---------- --------- --------- ----------
Net income $5,028 $119 $2,043 $755
========== ========= ========= ==========
Income per share:
Basic $0.92 $0.02 $0.39 $0.11
========== ========= ========= ==========
Diluted $0.75 $0.01 $0.32 $0.09
========== ========= ========= ==========
Weighted-average number of shares outstanding:
Basic 5,450 6,951 5,189 6,875
========== ========= ========= ==========
Diluted 6,692 8,418 6,439 8,267
========== ========= ========= ==========
</Table>