Natural Health Trends Corp. Announces Fourth Quarter and Twelve Months 2005 Results

DALLAS, May 09, 2006 (BUSINESS WIRE) -- Natural Health Trends Corp. (BHIP) , an international direct-selling company, today announced its financial results for the fourth quarter ended December 31, 2005.

Net sales in the fourth quarter of 2005 were $43.7 million, up 20% from the $36.3 million for the comparable period a year ago. For the twelve months ended December 31, 2005, net sales rose 46% to $194.5 million compared to $133.2 million for the same period during 2004.

For the fourth quarter of 2005, the Company incurred a net loss of $6.3 million, or $0.88 per fully diluted share, compared to a net loss of $0.8 million or $0.12 per fully diluted share a year ago in the comparable quarter. For the full year of 2005, the Company recorded net loss of $5.5 million, or $0.79 per fully diluted share, compared to $1.2 million net income in 2004, or $0.18 per fully diluted share.

The growth in sales continued to be driven by the significant increase in the Hong Kong-based business, as well as the new markets of Japan and Mexico. 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 December 31, 2005, the operating subsidiaries of Natural Health Trends Corp. had 174,000 active distributors, compared to 133,000 at the end of 2004.
Gross profit margin for the fourth quarter was 74.5% of net sales, versus 79.8% for the same period a year ago. The decrease in the gross profit percentage over a year ago was mainly due to $0.5 million write-offs of expiring inventories, increased warehouse costs for KGC and certain additional logistic processes for our Hong Kong-based business.

Distributor commissions were 52.8% of net sales for the three months ended December 31, 2005 compared with 51.9% of net sales for the same period in the prior year. The increase in distributor commissions as a percentage of net sales was attributable to the significant rise of distributor count as well as higher promotional spending.

Selling, general and administrative expenses ("SG&A") were $12.3 million or 28.2% of net sales for the three months ended December 31, 2005 compared with $10.7 million or 29.3% of net sales for the same period in the prior year. This increase of $1.6 million or 15% was mainly attributable to the new markets of Japan ($1.6 million), Mexico ($0.6 million) and China ($0.9 million), partly offset by decreases in the U.S. and KGC.

The Company consummated the sale of its 51% equity interest in KGC Networks Pte Ltd. ("KGC") as of December 31, 2005. As a result, the Company no longer consolidates the balance sheet of KGC, but KGC's 2005 financial results were included in the Company's statement of operations for the entire year. For the full year of 2005, KGC posted $34.3 million net sales and $0.8 million operating loss. Upon the sale, the Company recorded a reserve of $2.8 million on its $3.1 million receivable from KGC, which represents the on-going monthly payments KGC will continue to pay the Company through December 2007.
Thus, the $5.5 million unfavorable variance between the net loss of $6.3 million in 2005 and $0.8 million in 2004 is attributed to the gross margin decrease, the SG&A increase and the charge for collection uncertainty on its receivable from KGC, partly offset by the effect of increased sales.

Mr. Curtis Broome, President of NHT Global (formerly Lexxus International), a subsidiary of Natural Health Trends Corp., said "In the fourth quarter, we witnessed the adoption of the official Direct Selling Regulations in China. These regulations represent a significant difference compared to other markets in which we operate. As with many of our peer group companies, we experienced a reduction in revenue pace as our worldwide distributor force, and particularly those registered in the Greater China and Asia Pacific regions, realized that adjustments will have to be made to our global plan to meet the requirements of the regulations. We have had our sales, marketing and technology teams working on the development of a revised model that we believe will meet the regulations in the exciting China market. We are in the process of amending our direct selling license application and anticipate that its submission should be imminent. We have been providing more detailed education to our distribution member leadership throughout Greater China and Asia regarding our anticipated China operating model and they are very excited about our prospects. "

The net sales increase for the twelve months of 2005 over a year ago was due to growth in the Hong Kong-based business (contributing $46.7 million of the total increase) and the opening of the Japanese office (about $6.8 million of the increase, including advance sales recorded in Singapore). KGC ($4.0 million), South Korea ($3.0 million), Taiwan ($0.5 million) and Australia ($0.8 million) accounted for the rest of the sales growth.

Gross profit was 77.0% of net sales for the twelve months ended December 31, 2005 compared with 78.0% of net sales for the same period in the prior year. This decrease in gross profit percentage was caused by inventory write-off as well as certain additional logistic processes for our Hong Kong-based business, partly offset 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.

Distributor commissions for the full year were 51.9% in 2005, compared to 51.5% in 2004. The increase in distributor commissions as a percentage of net sales was attributable to the significant rise of distributor count as well as higher promotional spending, partly offset by the 5% price increase implemented in early 2005.

SG&A were $49.0 million or 25.2% of net sales for the twelve months ended December 31, 2005 compared with $33.1 million or 24.8% of net sales for the same period in the prior year. The increase of $15.9 million was due to preparing the opening of new markets in Mexico and Japan, cost of expansion into China, increased personnel costs and credit card charges in Hong Kong, increased marketing and professional fees in Eastern Europe by our former KGC subsidiary, and higher professional fees and personnel cost in North America.

Other expense included foreign exchange loss due to a stronger dollar, primarily against euro, resulting in $1.1 million adverse effect compared to the same account for 2004.

Income tax expense was $1.6 million for the twelve months ended December 31, 2005 compared with $0.7 million for the twelve months ended December 31, 2004. The Company's income tax provision was negatively impacted by the repatriation of foreign earnings into the U.S., the taxable gain on the KGC transaction, and an increase in the current year valuation allowance on its net deferred tax assets.

Therefore, the $6.7 million unfavorable variance between the $5.5 million net loss in 2005 and $1.2 million net income in 2004 is primarily due to the increase in SG&A spending, the $2.8 million reserve provided against the Company's KGC receivable, gross margin decrease, exchange loss and greater tax provision, partly offset by the effect of increased sales.

At the end of the year the Company's cash and cash equivalents totaled $18.5 million, which represents a decrease of $3.9 million from prior year end. The Company experienced a $1.3 million net cash reduction from the sale of KGC as it is no longer consolidated with the Company. Also, $2.5 million of the capital infusion the Company made to capitalize our Chinese entity is required by the Chinese laws for setting aside a consumer protection fund and therefore classified as non-current.

Deferred revenue was $9.9 million of which $1.5 million pertained to product orders and $6.8 million to enrollment package revenue. During the second quarter of 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, the Company has deferred all revenue generated from the sale of coffee machines and the related coffee and tea pods until sufficient return and warranty experience on the product can be established. As a result, deferred revenue also includes $1.6 million of Gourmet Coffee Cafe product shipped through December 31, 2005.
The Company will host a conference call at 11 a.m. EST, May 9, 2006. Those who wish to participate in the conference call may telephone 866-406-5369, reference conference I.D. 7374267, 15 minutes before 11 a.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 1 1/2 hours after the completion of the call.

Natural Health Trends Corp. is an international direct-selling company operating in more than 15 markets throughout Asia, North America, and Latin America. The Company markets premium quality personal care, health and lifestyle products under the Lexxus brand and markets its nutritional supplement products under the Kaire brand. Additional information can be found on the Company's website, and management encourages interested parties to register for updated corporate information via e-mail on the Company's homepage, www.naturalhealthtrendscorp.com.

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.

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