Full Press Release Details
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.
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
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