Natural Health Trends Corp. Announces Second Quarter and Six Months 2006 Results

DALLAS--(BUSINESS WIRE)--Aug. 11, 2006--Natural Health Trends Corp. (NASDAQ NMS: BHIP - News), an international direct-selling company, today announced its financial results for the second quarter ended June 30, 2006.

Net sales in the second quarter of 2006 were $36.3 million, compared to $50.0 million for the second quarter a year ago. This net decrease of $13.7 million, or 27%, was largely due to sale of the Company's 51% equity interest in KGC Networks ("KGC"), effective December 31, 2005. Excluding KGC, the Company's net sales decreased $5.4 million, or 13%, over the comparable period in the prior year. This decrease was primarily due to hesitation among the Hong Kong-registered members against an uncertain regulatory environment in China. Hong Kong net sales decreased $7.9 million, or 25%, over the comparable period a year ago. Also, net sales for North America were down $1.1 million, or 24%, versus the comparable period a year ago. Partly offsetting the decrease, South Korea net sales increased $1.4 million, or 66%, compared to the same period in 2005, as it experienced a significant increase in its distributor count and introduced new products to the local market. Japan registered $2.3 million in net sales, and Mexico about $0.8 million. A year ago, advanced sales to Japanese distributors from Singapore were approximately $1.4 million.

As of June 30, 2006, the operating subsidiaries of the Company had 117,000 active distributors, compared to 122,000 and 106,000 active independent distributors at the end of 2005 and the end of the second quarter of 2005, respectively, excluding KGC. This decrease is due to the uncertain regulatory environment in China that is currently impacting the Hong Kong-based business.

For the second quarter of 2006, the Company incurred a net loss of $2.8 million, or $0.34 per fully diluted share, compared to a net loss of $2.2 million, or $0.32 per fully diluted share, a year ago in the comparable quarter. For the first six months of 2006, the Company incurred a net loss of $3.9 million, or $0.50 per fully diluted share, compared to net income of $0.6 million, or $0.08 per fully diluted share, a year ago in the comparable period.

Gross profit margin for the second quarter was 76.6% of net sales, versus 75.1% for the same period a year ago. Excluding KGC, gross profit was 74.1% of net sales in the comparable period in the prior year. The percentage increase results from greater importation cost incurred in Hong Kong a year ago as the Company implemented changes in its logistical processes on product delivered into China.

Distributor commissions were 51.7% of net sales for the three months ended June 30, 2006, compared with 55.3% of net sales for the three months ended June 30, 2005. Excluding KGC, distributor commissions as a percentage of sales decreased five points from 56.7% a year ago primarily as a result of less supplemental commission programs in the current year, specifically in Hong Kong, and a reduction in the overall commission rate in South Korea.

Selling, general and administrative expenses ("SG&A") were $12.2 million for the second quarter of 2006, compared with $12.3 million for the same period in the prior year. Excluding KGC, SG&A increased by $3.3 million, or 37%, mainly due to increases in the costs of opening new markets in Mexico ($0.4 million) and Japan ($1.2 million); costs of expansion into China ($0.4 million); and higher audit fees, personnel costs (including stock-based compensation), and travel costs in North America ($1.5 million), partly offset by a decrease in convention cost as the North American Convention was held in the first quarter of 2006 as compared to the second quarter a year ago ($0.7 million).

Other income was $0.2 million for the three months ended June 30, 2006 compared with an expense of $0.4 million a year ago. This increase in other income results primarily from interest income, including imputed interest on the KGC receivable of $0.2 million, and a reduction in foreign currency losses of $0.3 million due to the elimination of the Company's exposure to the euro.

Ms. Stephanie Hayano, Chief Executive Officer of Natural Health Trends Corp. said, "With the relatively new direct selling environment in China, we anticipate more short-term volatility in the coming months with respect to our Hong Kong-based business. We are committed to developing long-term relationships with our Chinese members and are confident that we can work through the short-term challenges. But we are very excited about our progress in Japan, Mexico, South Korea, Taiwan and Southeast Asia where we are expecting more steady and solid progress."

Net sales for the six months ended June 30, 2006 were $75.8 million, compared to $92.7 million for the comparable period a year ago. This net decrease of $16.9 million, or 18%, was due to sale of the Company's 51% equity interest in KGC. Excluding KGC, the Company's net sales were approximately flat over the comparable period in the prior year. Decreases in Hong Kong net sales (down $4.0 million, or 7%, versus the comparable period a year ago) and North America (down $2.9 million, or 30%) were offset by net sales generated in Japan ($4.1 million), Mexico ($1.9 million), and an increase in South Korea net sales (up 72%, or $2.6 million). A year ago, advanced sales to Japanese distributors from Singapore were approximately $2.4 million.

Gross profit margin for the six months ended June 30, 2006 was 78.1% of net sales, versus 77.8% for the same period a year ago. Excluding KGC, gross profit was 77.3% of net sales in the comparable period in the prior year. The percentage increase results from greater importation cost incurred in Hong Kong a year ago as the Company implemented changes in its logistical processes on product delivered into China.

Distributor commissions were 52.0% of net sales for the six months ended June 30, 2006, compared with 52.7% of net sales for the six months ended June 30, 2005. Excluding KGC, distributor commissions as a percentage of sales decreased two points from 53.8% a year ago primarily as a result of fewer commissions earned in newer markets such as Japan and Mexico, and a reduction in the overall commission rate in South Korea.

SG&A was $23.9 million for the first six months of 2006, compared with $21.6 million for the same period in the prior year. Excluding KGC, SG&A increased by $7.7 million, or 48%, mainly due to increases in the costs of opening new markets in Mexico ($0.9 million) and Japan ($2.3 million); costs of expansion into China ($0.8 million); increased costs, mainly in personnel and professional fees in Hong Kong ($0.5 million); and higher audit fees, legal fees, personnel costs (including stock-based compensation), and travel costs in North America ($2.6 million).

Other income was $0.4 million for the six months ended June 30, 2006 compared with an expense of $0.7 million a year ago. This increase in other income results primarily from interest income, including imputed interest of $0.4 million on the KGC receivable, and a reduction in foreign currency losses of $0.6 million due to the elimination of the Company's exposure to the euro.

Income tax expense was $0.4 million for the six months ended June 30, 2006, compared with $0.3 million for the six months ended June 30, 2005.

As of June 30, 2006, the Company's cash and cash equivalents totaled $14.7 million, a decrease of $3.8 million from prior year end. Cash used in operations was $3.7 million for the six months ended June 30, 2006. Decreases in current liabilities, in particular, deferred revenue, in addition to the operating losses, were a major contributor to the cash balance decrease.

As of June 30, 2006, the Company had deferred revenue of $9.0 million, of which $1.1 million pertained to product sales and $6.2 million pertained to unamortized enrollment package revenue. Additionally, deferred revenue included $1.7 million of Gourmet Coffee Cafe product shipped but unrecognized as of June 30, 2006 ($1.2 million in Gourmet Coffee Cafe related costs are also deferred and recorded in other current assets as of June 30, 2006).

In August 2006, the Company was advised by the Staff of the SEC that it is conducting an informal inquiry into matters that are the subject of previously disclosed investigations by the Company's Audit Committee, including the payments received by two former officers and directors of the Company from an independent distributor. In connection with the inquiry, the SEC staff has requested that the Company voluntarily provide it with certain information and documents, including information gathered by the independent investigator engaged by the Company's Audit Committee. The Company intends to cooperate with the SEC inquiry.

The Company will host a conference call on Monday, August 14, 2006 at 11:00 A.M. EDT. Those who wish to participate in the conference call may telephone 888-335-6674 from the U.S. or 973-935-2100 for international callers, passcode 7739689, approximately 15 minutes before the call. A digital replay will be available by telephone for two weeks and may be accessed by dialing 877-519-4471 from the US or 973-341-3080 for international callers, passcode 7739689. The replay will also be on the Natural Health Trends Corp.'s homepage at www.naturalhealthtrendscorp.com and to access you may click on either Windows Media or Real Player 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 may require further modification; adverse consequences from audit committee investigations or management changes; regulatory matters governing our products and network marketing system; regulatory matters pertaining to direct-selling laws, specifically in China; 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; 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, 2005 filed with the Securities and Exchange Commission on May 8, 2006. 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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