##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 0-26272
 NATURAL HEALTH TRENDS CORP.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    59-2705336
(I.R.S. Employer
Identification No.)
 2050 Diplomat Drive
Dallas, Texas
(Address of principal executive offices)
    
    75234
(Zip code)
   None
  Common Stock, $0.001 par value
 o þ
 o þ
 o þ
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-Accelerated filer
þ
 o þ
   Documents Incorporated by Reference




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##### 



PagePART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 8. Financial Statements and Supplementary Data
    
    
    45Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    75PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    75Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    75Item 13. Certain Relationships and Related Transactions
    
    
    75Item 14. Principal Accountant Fees and Services
    
    
    75PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    76Signatures
    
    
    79Specimen CertificateOption Agreement - Terry LaCoreOption Agreement - LaCore and Woodburn PartnershipOption Agreement - LaCore and Woodburn PartnershipOption Agreement - Terry LaCoreOption Agreement - Capital Development S.A.Option Agreement - Randall A. MasonSubsidiariesCertification of the Interim Principal Executive OfficerCertification of the Chief Financial OfficerCertification of the Interim Principal Executive OfficerCertification of the Chief Financial Officer




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
    §
    
    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.
    1




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##### Table of Contents



PART I
 
 Item 1. BUSINESS
 Overview of Business
     Recent Developments
   2




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3




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Audit Committee
    
    Compensation Committee
    
    Nominating CommitteeAnthony B. Martino (Chairman)
    
    Colin J. OBrien (Chairman)
    
    Sir Brian Wolfson (Chairman)Colin J. OBrien
    
    Terrence M. Morris
    
    Terrence M. MorrisTerrence M. Morris
      4




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##### Table of Contents



Our Principal Products
  
    
    Skindulgence® is a skin care system that includes a 30-Minute Non-Surgical FaceLift as
well as a spa collection for hands, feet and all-over body. The 30-Minute Non-Surgical
FaceLife is designed to create a more youthful appearance by helping to tone and firm
facial muscles, by helping to diminish fine lines and wrinkles and by helping to improve
skin tone and color. The facelift masque is coupled with a cleanser and moisturizer.
    
    Alura® is an intimacy enhancing cream for women.
    
    Valura Xtremeis an intimacy enhancing herbal supplement for men that will be offered
for sale in 2006 to replace the Valuraproduct previously offered for sale.
 5




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
    
    Premium Noni Juiceis a reconstituted morinda citrifolia fruit juice, made from organic
noni puree. Noni is a fruit native in the Samoan Islands of the South Pacific. Marketed as
a refreshing and energizing beverage, its natural flavor has been enhanced with white grape
concentrate, concord grape concentrate, pineapple juice puree and other natural flavors.
    
    LexLipsis a lip enhancing gloss designed to create the effect of fuller lips and to
help reduce fine lines and wrinkles around the mouth.
    
    La Vieis an energy-boosting dietary supplement described as a non-alcoholic red wine.
    
    180° Life System®-Carb Blocker is a weight management product.
    
    Trioteinis a lactose-free whey protein powder that provides amino acid substrates
needed to stimulate the bodys production of an anti-oxidant, intracellular glutathione
peroxidase, in an effort to optimize the bodys ability to heal itself.
    
    Cluster Concentrateis a product created for increased and more efficient cell
hydration.
 Pycnogenol  ® Enzogenol, OptiMSM, OptiPure®, Phase2 & ActivAloe  .
 Operations of the Business
 Sourcing of Products
 Skindulgence ® Alura ® Premium Noni Juice
 Skindulgence ® Alura ® Premium Noni Juice
 Marketing and Distribution
  6




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Year Ended December 31,2003
    
    2004
    
    2005United States
    
    
    5,295
    
    
    
    8,876
    
    
    
    7,309Canada
    
    
    1,793
    
    
    
    4,020
    
    
    
    4,662North America
    
    
    7,088
    
    
    
    12,896
    
    
    
    11,971Hong Kong
    
    
    28,971
    
    
    
    63,114
    
    
    
    86,661Taiwan
    
    
    2,323
    
    
    
    2,533
    
    
    
    2,873Greater China
    
    
    31,294
    
    
    
    65,647
    
    
    
    89,534Singapore
    
    
    797
    
    
    
    735
    
    
    
    527Philippines
    
    
    1,139
    
    
    
    2,799
    
    
    
    341Southeast Asia
    
    
    1,936
    
    
    
    3,534
    
    
    
    868Australia
    
    
    214
    
    
    
    374
    
    
    
    710New Zealand
    
    
    34
    
    
    
    32
    
    
    
    75Australia/NZ
    
    
    248
    
    
    
    406
    
    
    
    785Russia and Eastern Europe1
    
    
    26,775
    
    
    
    40,727
    
    
    
    52,679South Korea
    
    
    3,510
    
    
    
    4,780
    
    
    
    6,257Latin America
    
    
    192
    
    
    
    87
    
    
    
    1,456Central Europe
    
    
    
    
    
    
    891
    
    
    
    1,895Japan
    
    
    
    
    
    
    848
    
    
    
    5,947India
    
    
    883
    
    
    
    25
    
    
    
    Total Lexxus distributors
    
    
    71,916
    
    
    
    129,841
    
    
    
    171,392Less KGC1
    
    
    (26,775
    )
    
    
    (40,727
    )
    
    
    (52,679
    )Total Lexxus distributors without KGC
    
    
    45,151
    
    
    
    89,114
    
    
    
    118,713eKaire
    
    
    4,671
    
    
    
    3,656
    
    
    
    3,008Total distributors
    
    
    49,822
    
    
    
    92,770
    
    
    
    121,721
   
 1
    
    The Company will no longer consolidate the
operating results of KGC for periods beginning after December 31, 2005 as it
sold its 51% equity interest to Bannks Foundation effective December 31, 2005. 7




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.
   Management Information Systems
   Corporate History
   8




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Geographic Locations
  
    
    Lexxus has active physical presence in the following markets:
 o
    
    North America (United States and Canada)o
    
    Greater China (Hong Kong, Macau, Taiwan and China) and Southeast Asia (Singapore,
the Philippines and Indonesia)o
    
    Australia and New Zealando
    
    South Koreao
    
    Japano
    
    Latin America (primarily Mexico)o
    
    Slovenia
 
    
    eKaire has active physical presence in the following markets:
 o
    
    North America (United States and Canada)o
    
    Australia and New Zealand
 
    
    Natural Health Trends Corp. is headquartered and mainly staffed in Dallas, Texas.
    
    MarketVision is staffed in Minneapolis, Minnesota.
    
    Until December 31, 2005, the Company owned a 51% interest in KGC, which has a physical
presence in Russia and Eastern Europe.
  Employees
  Seasonality
  Intellectual Property
  9




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Alura ® Alura ®
   Insurance
  Working with Distributors
 Sponsorship
    10




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Compensation Plans
   
    
    Through retail markups on sales of products purchased by distributors at wholesale prices; and
    
    Through a series of commissions paid on product purchases made by their down-line distributors.
  Distributor Support
    Teleconferences.
 Internet. www.naturalhealthtrendscorp.com
 Product Literature.
 11




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Toll Free Access.
 Broadcast E-mail.
 Technology and Internet Initiatives
 www.naturalhealthtrendscorp.com
 Rules Affecting Distributors
    Government Regulations
 Government Regulation of Direct Selling Activities
  
    
    impose cancellation/product return, inventory buy backs and cooling off rights for consumers and distributors;
    
    require us or our distributors to register with governmental agencies;
    
    impose reporting requirements; and
    
    impose upon us requirements, such as requiring distributors to maintain levels of
retail sales to qualify to receive commissions, to ensure that distributors are being
compensated for sales of products and not for recruiting new distributors.
  12




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Regulation of Our Products
  Alura ® Alura ® Alura ®
   13




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Other Regulatory Issues
  Product Warranties and Returns
   Our Industry
   14




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##### Table of Contents



Sales perRetail Sales
    
    
    Number of Distributors
    
    
    Distributor(In Millions)
    
    
    (In Thousands)United States
    
    $
    29,900
    
    
    
    13,600
    
    
    $
    2,199Japan
    
    
    23,000
    
    
    
    2,000
    
    
    
    11,500South Korea
    
    
    8,030
    
    
    
    4,650
    
    
    
    1,727Brazil
    
    
    3,921
    
    
    
    1,539
    
    
    
    2,548Mexico
    
    
    3,346
    
    
    
    1,850
    
    
    
    1,809United Kingdom
    
    
    3,032
    
    
    
    520
    
    
    
    5,831Italy
    
    
    2,979
    
    
    
    272
    
    
    
    10,952Germany
    
    
    2,875
    
    
    
    206
    
    
    
    13,956Taiwan
    
    
    2,000
    
    
    
    3,877
    
    
    
    516France
    
    
    1,718
    
    
    
    170
    
    
    
    10,106Russia
    
    
    1,268
    
    
    
    2,305
    
    
    
    550Malaysia
    
    
    1,400
    
    
    
    3,000
    
    
    
    467Australia
    
    
    1,083
    
    
    
    700
    
    
    
    1,547Canada
    
    
    1,000
    
    
    
    898
    
    
    
    1,114Thailand
    
    
    880
    
    
    
    4,100
    
    
    
    215Argentina
    
    
    662
    
    
    
    683
    
    
    
    969Poland
    
    
    644
    
    
    
    585
    
    
    
    1,101Indonesia
    
    
    625
    
    
    
    5,427
    
    
    
    115Spain
    
    
    623
    
    
    
    136
    
    
    
    4,581Colombia
    
    
    583
    
    
    
    650
    
    
    
    897Other
    
    
    6,308
    
    
    
    7,798
    
    
    
    809Total
    
    $
    95,877
    
    
    
    54,966
    
    
    
    1,744
 www.wfdsa.org
 Competition
  15




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Item 1A. RISK FACTORS
 Risks Related to Our Business
 As A Network Marketing Company, We Rely On An Independent Sales Force and We Do Not Have Direct
Control Over The Marketing Of Our Products.
  Since We Cannot Exert The Same Level Of Influence Or Control Over Our Independent Distributors As
We Could Were They Our Own Employees, Our Distributors Could Fail To Comply With Our Distributor
Policies and Procedures, Which Could Result in Claims Against Us That Could Harm Our Financial
Condition and Operating Results.
  Loss Of Key Personnel Could Adversely Affect Our Business.
  We May Be Unable To Protect Our Proprietary Technology Rights.
  16




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Claims May Arise Against the Company From Unknown Oral Agreements and Misconduct of Former Officers
and Directors.
  Adverse Publicity Associated With Our Products, Ingredients or Network Marketing Program, or Those
of Similar Companies, Could Harm Our Financial Condition and Operating Results.
    Our Failure To Maintain and Expand Our Distributor Relationships Could Adversely Affect Our
Business.
  If The Number Or Productivity Of Independent Distributors Does Not Increase, Our Revenue Could Not
Increase.
  17




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Because Our Hong Kong Operations Account For A Majority Of Our Business, Any Adverse Changes In Our
Business Operations In Hong Kong Would Materially Harm Our Business.
  Our Proposed Operations in China Could Have An Adverse Effect on Our Hong Kong Revenue.
  Our Business In Hong Kong, Which Represented 62% Of Our Revenue in 2005, May Be Harmed By The Results Of Increased Government Scrutiny of Our
Current and Proposed Operations in China.
  We Could Be Required To Modify Our Compensation Plan In China In A Way That Could
Make It Less Attractive To Members, And This Could Have A Significant Adverse Affect On Our Revenue.
  The
Companys E-Commerce Business In Hong Kong, Which Represents A
Significant Portion Of The Companys Total Revenue, Could Be Adversely Affected By The Activities
Of The Members In China, If Members In China Engage In Activities That Are Deemed
To Violate Chinas Anti-Multilevel Marketing Laws.
   18




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If We Fail To Obtain a Direct Selling License in China, Our Future Business Could Be Harmed.
  Intellectual Property Rights Are Difficult To Enforce In China.
  Failure
to Properly Pay Business Taxes, Including Those in China, Could Have a Material Adverse Effect.
  As We Continue To Expand Into Foreign Markets Our Business Becomes Increasingly Subject To
Political and Economic Risks. Changes In These Markets Could Adversely Affect Our Business.
   19




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An Increase In The Amount Of Compensation Paid To Distributors Would Reduce Profitability.
  There May be Unfavorable Reactions to or Challenges to Our Use the New Name We Have Selected for
our Lexxus Subsidiaries, Internet Sites and Certain Products.
  We Do Not Have Product Liability Insurance And Product Liability Claims Could Hurt Our Business.
  
    
    our products contain contaminants;
    
    our products include inadequate instructions as to their uses; or
    
    our products include inadequate warnings concerning side effects and interactions with other substances.
   20




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Our Internal Controls and Accounting Methods Require Further Modification.
   Non-Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 Could Materially Adversely Affect
Us.
  We Rely On And Are Subject To Risks Associated With Our Reliance Upon Information Technology
Systems.
  Our Lexxus Subsidiaries Have a Limited Operating History Which May Not be Indicative of Future
Performance
    21




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Regulatory Matters Governing Our Industry Could Have A Significant Negative Effect On Our Business.
  Product Regulations
  Product Claims, Advertising and Distributor Activities
  Direct Selling System
   Transfer Pricing and Similar Regulations
   22




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Taxation Relating To Distributors
  Other Regulations
   Currency Exchange Rate Fluctuations Could Lower Our Revenue And Net Income.
    23




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Failure Of New Products To Gain Distributor And Market Acceptance Could Harm Our Business.
  System Failures Could Harm Our Business.
  Limited Product Line.
 Premium Noni Juice Skindulgence ® Alura ® La Vie
 We Do Not Manufacture Our Own Products So We Must Rely On Independent Third Parties For The
Manufacturing And Supply Of Our Products.
  The High Level Of Competition In Our Industry Could Adversely Affect Our Business.
   24




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Terrorist Attacks, Acts Of War, Epidemics Or Other Communicable Diseases Or Any Other Natural
Disasters May Seriously Harm Our Business.
  Risks Related To Our Common Stock
 Disappointing Quarterly Revenue Or Operating Results Could Cause The Price Of Our Common Stock To Fall.
  Our Common Stock Is Particularly Subject To Volatility Because Of The Industry That We Are In.
  Substantial Dilution May Occur From The Exercise of Outstanding Options or Warrants
    25




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Future Sales By the Company or Existing Security Holders Could Depress The Market Price Of Our
Common Stock.
  There is No Assurance That an Active Public Trading Market Would Continue.
  If Securities Analysts Do Not Publish Research Or Reports About Our Business Or If They Downgrade
Our Stock, The Price Of Our Stock Could Decline.
  
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
   
 Item 3. LEGAL PROCEEDINGS
   26




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27




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  28




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Part II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
   Quarter Ended:
    
    High
    
    
    LowMarch 31, 2004
    
    $
    21.10
    
    
    $
    10.80June 30, 2004
    
    
    25.75
    
    
    
    11.40September 30, 2004
    
    
    18.60
    
    
    
    11.99December 31, 2004
    
    
    12.70
    
    
    
    9.15March 31, 2005
    
    $
    18.89
    
    
    $
    11.00June 30, 2005
    
    
    15.00
    
    
    
    11.12September 30, 2005
    
    
    17.07
    
    
    
    12.66December 31, 2005
    
    
    16.00
    
    
    
    8.27
   Dividend Policy
  29




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Equity Compensation Plan Information
  Number of Securities
    
    
    Weighted-Average
    
    
    Number of Securities Remainingto be Issued Upon
    
    
    Exercise Price of
    
    
    Available for Future IssuanceExercise of
    
    
    Outstanding
    
    
    Under Equity CompensationOutstanding Options,
    
    
    Options, Warrants
    
    
    Plans (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    Reflected in Column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    592,124
    
    
    $
    14.41
    
    
    
    957,876
    1Equity compensation
plans or
arrangements not
approved by
security holders
    
    
    1,330,000
    2
    
    $
    1.06
    
    
    
    Total
    
    
    1,922,124
    
    
    $
    5.17
    
    
    
    957,876
 
 1
    
    On June 1, 2005, an amendment was approved
which increased the number of shares of common stock reserved under the 2002
Stock Option Plan to 1,550,000 shares.2
    
    Includes (i) options exercisable for 570,000
shares of common stock issued to the LaCore and Woodburn Partnership, (ii)
options exercisable for 570,000 shares of common stock issued to Mr. LaCore,
(iii) options exercisable for 30,000 shares of common stock issued to Benchmark
Consulting Group (which was subsequently assigned to the LaCore and Woodburn
Partnership), (iv) options exercisable for 30,000 shares of common stock issued
to Mr. LaCore, (v) options exercisable for 125,000 shares of common stock
issued to certain employees and members of the Companys board of
directors, and (vi) options exercisable for 5,000 shares of common stock
issued to an unrelated party. See Item 1.  Recent
Developments regarding the exercise of stock options issued to the
LaCore and Woodburn Partnership and to Mr. LaCore. 30




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Item 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(In Thousands, Except Per Share Data)Consolidated Statement of Operations Data:Net sales
    
    $
    22,989
    
    
    $
    36,968
    
    
    $
    62,576
    
    
    $
    133,225
    
    
    $
    194,472Gross profit
    
    
    17,691
    
    
    
    29,216
    
    
    
    48,900
    
    
    
    103,904
    
    
    
    149,726Distributor commissions
    
    
    12,449
    
    
    
    16,834
    
    
    
    27,555
    
    
    
    68,579
    
    
    
    101,021Selling, general and administrative expenses
    
    
    5,187
    
    
    
    10,710
    
    
    
    15,770
    
    
    
    33,102
    
    
    
    49,000Provision for KGC receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759Income (loss) from operations
    
    
    (65
    )
    
    
    238
    
    
    
    5,575
    
    
    
    2,223
    
    
    
    (3,054
    )Net income (loss)
    
    
    466
    
    
    
    2,139
    
    
    
    4,728
    
    
    
    1,241
    
    
    
    (5,502
    )Diluted income (loss) from continuing operations per
share1:
    
    $
    (0.98
    )
    
    $
    (0.11
    )
    
    $
    0.83
    
    
    $
    0.18
    
    
    $
    (0.79
    )Diluted weighted-average number of shares
outstanding1:
    
    
    1,342
    
    
    
    3,118
    
    
    
    5,688
    
    
    
    6,822
    
    
    
    6,934Consolidated Balance Sheet Data (at end of period)2:Cash and cash equivalents
    
    $
    324
    
    
    $
    3,864
    
    
    $
    11,133
    
    
    $
    22,324
    
    
    $
    18,470Working capital
    
    
    (4,858
    )
    
    
    (1,187
    )
    
    
    2,889
    
    
    
    17,519
    
    
    
    11,296Total assets
    
    
    3,075
    
    
    
    10,319
    
    
    
    20,340
    
    
    
    62,105
    
    
    
    63,315Total debt
    
    
    1,021
    
    
    
    684
    
    
    
    199
    
    
    
    818
    
    
    
    109Total stockholders equity (deficit)
    
    
    (4,370
    )
    
    
    (398
    )
    
    
    4,824
    
    
    
    37,029
    
    
    
    36,536
 
 1
    
    All share and earnings per share data gives
effect to a 1-for-100 reverse stock split, which took effect in March 2003.2
    
    The Company sold its 51% equity interest in
KGC effective December 31, 2005. As a result, its balance sheet was not
included in the Companys consolidated financial statements at December
31, 2005. 31




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Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
         Actual
    
    
    As AdjustedNet sales
    
    $
    194,472
    
    
    $
    160,214Gross profit
    
    
    149,726
    
    
    
    123,171Distributor commissions
    
    
    101,021
    
    
    
    85,388Loss from operations
    
    
    (3,054
    )
    
    
    (2,301
    )
    
    
    The Company set up a school in Macau to train members about the applicable Chinese
legal requirements and the need for distributors to accurately and fairly describe
business opportunities available to potential members. The schools were operated from May
2004 to November 2005.
    
    The Company suspended shipment of product to certain members until they had completed
the required training.
    
    The Company extended its existing 14-day return policy in Hong Kong to 180 days to
allow distributors and customers who purchased products during the two-week period prior
to, and the two-week period after, the airing of the television program to return
purchased merchandise for a full refund.
    
    The Company began posting announcements on its Hong Kong website to the effect that the
resale of its products in China without the appropriate license would result in
termination of membership. Since then, the Company has terminated at least four members in
China for engaging in activities in violation of Chinese law.
    
    In June 2004 the Company completed formation of its Chinese subsidiary (Lexxus
China}, and by the end of 2005 had invested $12.0 million as capital in that entity.
    
    Lexxus China is working to file an application for a direct selling license under
proposed legislation.
    
    Lexxus China has leased space in Zhuhai, purchased equipment and finished out a
manufacturing plant. Although Lexxus China now has a license to manufacture and employee
personnel at the plant, it does not yet have a license to sell any product manufactured
there and will not begin manufacturing operations until it has obtained that license.
    
    On November 1, 2005, Lexxus China obtained its general cosmetic manufacturing permit
and has begun trial production testing.
     32




---



##### Table of Contents



Income Statement Presentation
  Year Ended December 31,2003
    
    
    2004
    
    
    2005North America
    
    $
    8,779
    
    
    
    14.0
    %
    
    $
    15,631
    
    
    
    11.7
    %
    
    $
    15,297
    
    
    
    7.9
    %Hong Kong
    
    
    30,763
    
    
    
    49.2
    
    
    
    74,293
    
    
    
    55.8
    
    
    
    120,968
    
    
    
    62.2Taiwan
    
    
    3,097
    
    
    
    4.9
    
    
    
    3,261
    
    
    
    2.5
    
    
    
    3,722
    
    
    
    1.9Southeast Asia
    
    
    1,570
    
    
    
    2.5
    
    
    
    1,786
    
    
    
    1.3
    
    
    
    6,438
    
    
    
    3.3Russia and Eastern Europe1
    
    
    13,157
    
    
    
    21.0
    
    
    
    30,248
    
    
    
    22.7
    
    
    
    34,258
    
    
    
    17.6South Korea
    
    
    2,492
    
    
    
    4.0
    
    
    
    5,524
    
    
    
    4.1
    
    
    
    8,495
    
    
    
    4.4Australia/New Zealand
    
    
    226
    
    
    
    0.4
    
    
    
    623
    
    
    
    0.5
    
    
    
    1,455
    
    
    
    0.7Japan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,659
    
    
    
    0.9Latin America
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518
    
    
    
    0.3Other
    
    
    175
    
    
    
    0.3
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    Total Lexxus1
    
    
    60,259
    
    
    
    96.3
    
    
    
    131,407
    
    
    
    98.6
    
    
    
    192,810
    
    
    
    99.2North America
    
    
    1,889
    
    
    
    3.0
    
    
    
    1,283
    
    
    
    1.0
    
    
    
    1,231
    
    
    
    0.6Australia/New Zealand
    
    
    428
    
    
    
    0.7
    
    
    
    535
    
    
    
    0.4
    
    
    
    431
    
    
    
    0.2Total eKaire
    
    
    2,317
    
    
    
    3.7
    
    
    
    1,818
    
    
    
    1.4
    
    
    
    1,662
    
    
    
    0.8$
    62,576
    
    
    
    100
    %
    
    $
    133,225
    
    
    
    100
    %
    
    $
    194,472
    
    
    
    100
    %
   
    
    Through retail markups on sales of products purchased by distributors at wholesale prices; and
    
    Through a series of commissions paid on product purchases made by their down-line distributors.
  
 1
    
    The Company will no longer consolidate the
operating results of KGC for periods beginning after December 31, 2005 as it
sold its 51% interest in KGC to Bannks Foundation effective December 31, 2005. 33




---



##### Table of Contents



Critical Accounting Policies
   Inventory Valuation.
 Valuation of Goodwill and Impairment Analysis.
 34




---



##### Table of Contents



Allowance for Sales Returns.
 Revenue Recognition.
   Tax Valuation Allowance.
 35




---



##### Table of Contents



Results of Operations
  Year Ended December 31,2003
    
    
    2004
    
    
    2005Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    21.9
    
    
    
    22.0
    
    
    
    23.0Gross profit
    
    
    78.1
    
    
    
    78.0
    
    
    
    77.0Operating expenses:Distributor commissions
    
    
    44.0
    
    
    
    51.5
    
    
    
    51.9Selling, general and administrative expenses
    
    
    25.2
    
    
    
    24.8
    
    
    
    25.2Provision for KGC receivable
    
    
    
    
    
    
    
    
    
    
    1.4Total operating expenses
    
    
    69.2
    
    
    
    76.3
    
    
    
    78.5Income (loss) from operations
    
    
    8.9
    
    
    
    1.7
    
    
    
    (1.5
    )Other income (expense)
    
    
    
    
    
    
    0.1
    
    
    
    (0.5
    )Income (loss) before income taxes and minority interest
    
    
    8.9
    
    
    
    1.8
    
    
    
    (2.0
    )Income tax provision
    
    
    (1.4
    )
    
    
    (0.5
    )
    
    
    (0.8
    )Minority interest
    
    
    
    
    
    
    (0.4
    )
    
    
    Net income (loss)
    
    
    7.5
    %
    
    
    0.9
    %
    
    
    (2.8
    )%
 2005 Compared to 2004
 Net Sales.
   Cost of Sales.
 36




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##### Table of Contents



Gross Profit.
 Distributor Commissions.
 Selling, General and Administrative Expenses.
 
    
    costs of opening new markets in Mexico ($1.6 million) and Japan ($3.9 million);
    
    costs of expansion into China ($1.4 million);
    
    increased personnel costs and credit card charges and assessments in Hong Kong ($2.5 million);
    
    increased marketing and professional fees in Russia and Eastern Europe by KGC ($2.7 million); and
    
    higher professional fees and personnel cost in North America ($3.2 million).
 Other Income (Expense).
 Income Taxes.
 Minority Interest.
 Net Income(Loss).
 2004 Compared to 2003
 Net Sales.
 Cost of Sales.
 37




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##### Table of Contents



Gross Profit.
 Distributor Commissions.
 Selling, General and Administrative Expenses.
 
    
    Marketing and promotional activities world-wide of $7.8 million (The Company resorted to
the increase in marketing activities in most of the Companys markets around the world to
drive the increase in the number of active distributors);
    
    Credit card charges and assessments totaling $2.7 million;
    
    Professional fees of $2.3 million;
    
    Personnel costs mainly in the U.S. and Hong Kong of $2.2 million;
    
    Costs for building the Chinese market totaling $600,000; and
    
    Amortization of intangibles of $600,000 related to the MarketVision acquisition.
 Other Income (Expense).
 Income Taxes.
 Minority Interest.
 Net Income.
 Liquidity and Capital Resources
   38




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##### Table of Contents



Year Ended December 31,Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterDebt
    
    $
    109
    
    
    $
    109
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    6,740
    
    
    
    1,891
    
    
    
    1,527
    
    
    
    875
    
    
    
    707
    
    
    
    505
    
    
    
    1,235Purchase commitments1
    
    
    7,028
    
    
    
    1,489
    
    
    
    1,489
    
    
    
    1,350
    
    
    
    1,350
    
    
    
    1,350
    
    
    
    Construction commitment
    
    
    580
    
    
    
    580
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    14,457
    
    
    $
    4,069
    
    
    $
    3,016
    
    
    $
    2,225
    
    
    $
    2,057
    
    
    $
    1,855
    
    
    $
    1,235
  Concentrate
   
 1
    
    Purchase commitments include the
Companys agreement with the supplier of its Alura® product to
purchase a minimum volume of 15 barrels of product per quarter to maintain
exclusivity and volume discounts. The total product cost is $1.4 million
before any volume discounts. The Company intends to maintain this contract.
The contract does not terminate unless the Company fails to purchase at least
$350,000 a quarter. 39




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##### Table of Contents



Related Party Transactions
    40




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##### Table of Contents



Skindulgence ® LaVie
 41




---



##### Table of Contents



Recent Accounting Pronouncements
   
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and based on the requirements of SFAS 123 for all awards
granted to employees prior to the adoption date of SFAS 123(R) that remain unvested on the
adoption date.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate either all prior
periods presented or prior interim periods of the year of adoption based on the amounts
previously recognized under SFAS 123 for purposes of pro forma disclosures.
   OffBalance Sheet Arrangements
  42




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##### Table of Contents



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
    2004
    
    20051st
    
    2nd
    
    3rd
    
    4th
    
    1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterHong Kong
    
    $
    7.78
    
    
    $
    7.80
    
    
    $
    7.80
    
    
    $
    7.78
    
    
    $
    7.80
    
    
    $
    7.79
    
    
    $
    7.77
    
    
    $
    7.75Taiwan
    
    
    33.49
    
    
    
    33.38
    
    
    
    34.01
    
    
    
    32.99
    
    
    
    31.54
    
    
    
    31.44
    
    
    
    32.31
    
    
    
    33.49Singapore
    
    
    1.70
    
    
    
    1.70
    
    
    
    1.71
    
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.66
    
    
    
    1.68
    
    
    
    1.69Philippines
    
    
    56.13
    
    
    
    56.11
    
    
    
    56.15
    
    
    
    56.38
    
    
    
    55.09
    
    
    
    54.73
    
    
    
    56.11
    
    
    
    54.62Russia and Eastern
Europe1
    
    
    0.80
    
    
    
    0.83
    
    
    
    0.82
    
    
    
    0.77
    
    
    
    0.76
    
    
    
    0.79
    
    
    
    0.83
    
    
    
    0.84South Korea
    
    
    1,180.03
    
    
    
    1,166.47
    
    
    
    1,155.44
    
    
    
    1,102.18
    
    
    
    1,027.27
    
    
    
    1,009.24
    
    
    
    1,030.00
    
    
    
    1,043.65Australia
    
    
    1.31
    
    
    
    1.40
    
    
    
    1.41
    
    
    
    1.32
    
    
    
    1.29
    
    
    
    1.30
    
    
    
    1.32
    
    
    
    1.34New Zealand
    
    
    1.49
    
    
    
    1.59
    
    
    
    1.53
    
    
    
    1.43
    
    
    
    1.40
    
    
    
    1.40
    
    
    
    1.45
    
    
    
    1.44Japan2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111.19
    
    
    
    117.20Latin America2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.72
    
    
    
    10.72
 Hedging
  
 1
    
    Functional currency of is the euro. The Company will no longer consolidate the operating results of KGC for periods
beginning after December 31, 2005 as it sold its 51% interest in KGC to Bannks
Foundation effective December 31, 2005.2
    
    No significant revenue generating activities occurred until the third quarter of 2005. 43




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##### Table of Contents



Seasonality
   Interest Rate Risk
  44




---



##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
   PageReport of Independent Registered Public Accounting Firm
    
    
    46Consolidated Balance Sheets
    
    
    47Consolidated Statements of Operations
    
    
    48Consolidated Statements of Stockholders Equity
    
    
    49Consolidated Statements of Cash Flows
    
    
    50Notes to Consolidated Financial Statements
    
    
    51
 45




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46




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##### Table of Contents



December 31,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,324
    
    
    $
    18,470Restricted cash
    
    
    2,395
    
    
    
    2,236Accounts receivable
    
    
    209
    
    
    
    300Inventories, net
    
    
    13,991
    
    
    
    12,360Other current assets
    
    
    2,096
    
    
    
    4,632Total current assets
    
    
    41,015
    
    
    
    37,998Property and equipment, net
    
    
    579
    
    
    
    3,143Goodwill
    
    
    14,145
    
    
    
    14,145Intangible assets, net
    
    
    5,474
    
    
    
    4,529Deferred tax assets
    
    
    434
    
    
    
    Other assets
    
    
    458
    
    
    
    3,500Total assets
    
    $
    62,105
    
    
    $
    63,315LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,344
    
    
    $
    2,023Income taxes payable
    
    
    1,797
    
    
    
    1,308Accrued distributor commissions
    
    
    4,259
    
    
    
    4,001Other accrued expenses
    
    
    4,154
    
    
    
    6,827Deferred revenue
    
    
    9,551
    
    
    
    9,897Current portion of debt
    
    
    796
    
    
    
    109Other current liabilities
    
    
    1,595
    
    
    
    2,537Total current liabilities
    
    
    23,496
    
    
    
    26,702Debt
    
    
    22
    
    
    
    Total liabilities
    
    
    23,518
    
    
    
    26,702Commitments and contingenciesMinority interest
    
    
    598
    
    
    
    77Mezzanine common stock
    
    
    960
    
    
    
    Stockholders equity:Preferred stock, $0.001 par value; 1,500,000
and 5,000,000 shares authorized at December
31, 2004 and 2005, respectively; none issued
and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 500,000,000
and 50,000,000 shares authorized, 6,819,667
and 7,108,867 shares issued and outstanding
at December 31, 2004 and December 31, 2005,
respectively
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    64,933
    
    
    
    69,417Accumulated deficit
    
    
    (27,799
    )
    
    
    (33,301
    )Accumulated other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (112
    )
    
    
    413Total stockholders equity
    
    
    37,029
    
    
    
    36,536Total liabilities and stockholders equity
    
    $
    62,105
    
    
    $
    63,315
  47




---



##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005Net sales
    
    $
    62,576
    
    
    $
    133,225
    
    
    $
    194,472Cost of sales
    
    
    13,676
    
    
    
    29,321
    
    
    
    44,746Gross profit
    
    
    48,900
    
    
    
    103,904
    
    
    
    149,726Operating expenses:Distributor commissions
    
    
    27,555
    
    
    
    68,579
    
    
    
    101,021Selling, general and administrative expenses
    
    
    15,770
    
    
    
    33,102
    
    
    
    49,000Provision for KGC receivable
    
    
    
    
    
    
    
    
    
    
    2,759Total operating expenses
    
    
    43,325
    
    
    
    101,681
    
    
    
    152,780Income (loss) from operations
    
    
    5,575
    
    
    
    2,223
    
    
    
    (3,054
    )Other income (expense), net
    
    
    (1
    )
    
    
    137
    
    
    
    (910
    )Income (loss) before income taxes and minority interest
    
    
    5,574
    
    
    
    2,360
    
    
    
    (3,964
    )Income tax provision
    
    
    (860
    )
    
    
    (663
    )
    
    
    (1,587
    )Minority interest
    
    
    14
    
    
    
    (456
    )
    
    
    49Net income (loss)
    
    
    4,728
    
    
    
    1,241
    
    
    
    (5,502
    )Preferred stock dividends
    
    
    1
    
    
    
    
    
    
    
    Net income (loss) available to common stockholders
    
    $
    4,727
    
    
    $
    1,241
    
    
    $
    (5,502
    )Income (loss) per share:Basic
    
    $
    1.03
    
    
    $
    0.22
    
    
    $
    (0.79
    )Diluted
    
    $
    0.83
    
    
    $
    0.18
    
    
    $
    (0.79
    )Weighted-average number of shares outstanding:Basic
    
    
    4,609
    
    
    
    5,580
    
    
    
    6,934Diluted
    
    
    5,688
    
    
    
    6,822
    
    
    
    6,934
  48




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Deferred
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Compensation
    
    
    Income (Loss)
    
    
    TotalBALANCE, December 31, 2002
    
    
    16
    
    
    $
    16
    
    
    
    4,239,495
    
    
    $
    4
    
    
    $
    33,504
    
    
    $
    (33,767
    )
    
    $
    (146
    )
    
    $
    (9
    )
    
    $
    (398
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,728
    
    
    
    
    
    
    
    
    
    
    
    4,728Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    (138
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,590Conversion of Series J preferred stock
    
    
    (16
    )
    
    
    (16
    )
    
    
    28,468
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued in acquisition
    
    
    
    
    
    
    
    
    
    
    360,000
    
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Shares issued for services
    
    
    
    
    
    
    
    
    
    
    28,500
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    146BALANCE, December 31, 2003
    
    
    
    
    
    
    
    
    
    
    4,656,463
    
    
    
    4
    
    
    
    34,007
    
    
    
    (29,040
    )
    
    
    
    
    
    
    (147
    )
    
    
    4,824Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,241
    
    
    
    
    
    
    
    
    
    
    
    1,241Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    35Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,276Shares issued in acquisitions
    
    
    
    
    
    
    
    
    
    
    790,000
    
    
    
    1
    
    
    
    14,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,705Exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Issuance of common stock and common
stock purchase warrants in private
placement
    
    
    
    
    
    
    
    
    
    
    1,369,704
    
    
    
    2
    
    
    
    16,065
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,067Imputed compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132BALANCE, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    6,819,667
    
    
    
    7
    
    
    
    64,933
    
    
    
    (27,799
    )
    
    
    
    
    
    
    (112
    )
    
    
    37,029Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,502
    )
    
    
    
    
    
    
    
    
    
    
    (5,502
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    451Less: reclassification adjustment on
sale of KGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,977
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    289,200
    
    
    
    
    
    
    
    3,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606Offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )Expiration of put right
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Imputed compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33BALANCE, December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    7,108,867
    
    
    $
    7
    
    
    $
    69,417
    
    
    $
    (33,301
    )
    
    $
    
    
    
    $
    413
    
    
    $
    36,536
  49




---



##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    4,728
    
    
    $
    1,241
    
    
    $
    (5,502
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net:Depreciation and amortization of property and equipment
    
    
    418
    
    
    
    495
    
    
    
    529Amortization of intangibles
    
    
    115
    
    
    
    801
    
    
    
    945Minority interest
    
    
    (14
    )
    
    
    456
    
    
    
    (49
    )Deferred income taxes
    
    
    
    
    
    
    (515
    )
    
    
    515Imputed compensation
    
    
    
    
    
    
    132
    
    
    
    33Common stock issued for services and penalties
    
    
    53
    
    
    
    14
    
    
    
    Change in deferred compensation
    
    
    146
    
    
    
    
    
    
    
    Changes in
assets and liabilities, net of acquisitions and dispositions:Accounts receivable
    
    
    301
    
    
    
    50
    
    
    
    (863
    )Inventories, net
    
    
    (364
    )
    
    
    (10,366
    )
    
    
    (3,702
    )Other current assets
    
    
    43
    
    
    
    (1,630
    )
    
    
    (2,077
    )Other assets
    
    
    (375
    )
    
    
    330
    
    
    
    1,164Accounts payable
    
    
    482
    
    
    
    230
    
    
    
    1,040Income taxes payable
    
    
    933
    
    
    
    406
    
    
    
    (293
    )Accrued distributor commissions
    
    
    322
    
    
    
    3,213
    
    
    
    1,362Other accrued expenses
    
    
    (496
    )
    
    
    2,099
    
    
    
    3,221Deferred revenue
    
    
    3,493
    
    
    
    2,560
    
    
    
    3,847Other current liabilities
    
    
    (160
    )
    
    
    912
    
    
    
    1,256Net cash provided by operating activities
    
    
    9,625
    
    
    
    428
    
    
    
    1,426CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (580
    )
    
    
    (150
    )
    
    
    (3,120
    )Increase in restricted cash
    
    
    (1,022
    )
    
    
    (980
    )
    
    
    (2,753
    )Increase in certificate of deposit
    
    
    
    
    
    
    
    
    
    
    (1,267
    )Net cash reduction from sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    (1,307
    )Business acquired
    
    
    
    
    
    
    (1,357
    )
    
    
    Purchase of minority interest
    
    
    
    
    
    
    (141
    )
    
    
    Purchase of database
    
    
    (191
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (1,793
    )
    
    
    (2,628
    )
    
    
    (8,447
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on debt
    
    
    (339
    )
    
    
    (2,600
    )
    
    
    (709
    )Proceeds from issuance of common stock, net
    
    
    
    
    
    
    16,078
    
    
    
    3,491Net cash provided by (used in) financing activities
    
    
    (339
    )
    
    
    13,478
    
    
    
    2,782Effect of exchange rates on cash and cash equivalents
    
    
    (224
    )
    
    
    (87
    )
    
    
    385Net increase (decrease) in cash and cash equivalents
    
    
    7,269
    
    
    
    11,191
    
    
    
    (3,854
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    3,864
    
    
    
    11,133
    
    
    
    22,324CASH AND CASH EQUIVALENTS, end of period
    
    $
    11,133
    
    
    $
    22,324
    
    
    $
    18,470
  50




---



##### Table of Contents



Nature of Operations
   Principles of Consolidation
   Use of Estimates
   Reclassification
  Cash and Cash Equivalents
  51




---



##### Table of Contents



Restricted Cash
   Inventories
  Property and Equipment
  Office equipment and software
    
    3  5 yearsFurniture and fixtures
    
    5  7 yearsPlant Equipment
    
    5 yearsLeasehold improvements
    
    Shorter of estimated useful life or lease term
 Goodwill and Other Intangible Assets
   Impairment of Long-Lived Assets
  Income Taxes
  Foreign Currency
  52




---



##### Table of Contents



Revenue Recognition
      Stock-Based Compensation
  Year Ended December 31,2003
    
    
    2004
    
    
    2005Net income (loss) available to
common stockholders, as reported
    
    $
    4,727
    
    
    $
    1,241
    
    
    $
    (5,502
    )Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (38
    )
    
    
    (3,893
    )
    
    
    (393
    )Pro forma net income (loss)
available to common stockholders
    
    $
    4,689
    
    
    $
    (2,652
    )
    
    $
    (5,895
    )
 53




---



##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005Basic income (loss) per share:As reported
    
    $
    1.03
    
    
    $
    0.22
    
    
    $
    (0.79
    )Pro forma
    
    $
    1.02
    
    
    $
    (0.48
    )
    
    $
    (0.85
    )Diluted income (loss) per share:As reported
    
    $
    0.83
    
    
    $
    0.18
    
    
    $
    (0.79
    )Pro forma
    
    $
    0.82
    
    
    $
    (0.48
    )
    
    $
    (0.85
    )
  Year Ended December 31,2003
    
    2004
    
    2005Risk-free interest rate
    
    
    4.25
    %
    
    
    2.50
    %
    
    
    4.38
    %Expected volatility
    
    
    100
    %
    
    
    97
    %
    
    
    94
    %Expected life (in years)
    
    
    3
    
    
    
    4
    
    
    
    3Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 Income Per Share
   Certain Risks and Concentrations
  Premium Noni Juice, Skindulgence ® Alura ® La Vie Skindulgence ® La Vie Premium Noni Juice Alura ®
 54




---



##### Table of Contents



Fair Value of Financial Instruments
  Recent Accounting Pronouncements
   
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and based on the requirements of SFAS 123 for all awards
granted to employees prior to the adoption date of SFAS 123(R) that remain unvested on the
adoption date.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate either all prior
periods presented or prior interim periods of the year of adoption based on the amounts
previously recognized under SFAS 123 for purposes of pro forma disclosures.
 123(R)
  55




---



##### Table of Contents



56




---



##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005Gain (loss) on foreign exchange
    
    $
    (77
    )
    
    $
    215
    
    
    $
    (1,082
    )Interest income
    
    
    5
    
    
    
    19
    
    
    
    241Interest expense
    
    
    (68
    )
    
    
    (101
    )
    
    
    (31
    )Other
    
    
    139
    
    
    
    4
    
    
    
    (38
    )$
    (1
    )
    
    $
    137
    
    
    $
    (910
    )
 57




---



##### Table of Contents



December 31,2004
    
    
    2005Property and equipment:Office equipment
    
    $
    615
    
    
    $
    1,236Office software
    
    
    157
    
    
    
    1,029Furniture and fixtures
    
    
    422
    
    
    
    430Plant equipment
    
    
    
    
    
    
    127Leasehold improvements
    
    
    311
    
    
    
    1,628Property and equipment, at cost
    
    
    1,505
    
    
    
    4,450Accumulated depreciation and amortization
    
    
    (926
    )
    
    
    (1,307
    )$
    579
    
    
    $
    3,143Other accrued expenses:Sales returns
    
    $
    1,541
    
    
    $
    1,743Employee-related expense
    
    
    443
    
    
    
    1,222Professional fees
    
    
    202
    
    
    
    1,264Warehousing and inventory-related expense
    
    
    711
    
    
    
    846Other
    
    
    1,257
    
    
    
    1,752$
    4,154
    
    
    $
    6,827Deferred revenue:Unshipped product
    
    $
    4,842
    
    
    $
    1,468Enrollment package revenue
    
    
    4,709
    
    
    
    6,849Unrecognized coffee revenue
    
    
    
    
    
    
    1,580$
    9,551
    
    
    $
    9,897
    December 31, 2004
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetComputer software and programs
    
    $
    5,600
    
    
    $
    600
    
    
    $
    5,000
    
    
    $
    5,600
    
    
    $
    1,400
    
    
    $
    4,200Distributor database
    
    
    790
    
    
    
    316
    
    
    
    474
    
    
    
    790
    
    
    
    461
    
    
    
    329$
    6,390
    
    
    $
    916
    
    
    $
    5,474
    
    
    $
    6,390
    
    
    $
    1,861
    
    
    $
    4,529
 58




---



##### Table of Contents



2006
    
    $
    9582007
    
    
    9582008
    
    
    8132009
    
    
    8002010
    
    
    800Thereafter
    
    
    200$
    4,529
  MarketVision Communications Corp.
      59




---



##### Table of Contents



Property and equipment
    
    $
    25Computer software and programs
    
    
    5,600Goodwill
    
    
    11,958Deferred tax liabilities
    
    
    (1,904
    )Deferred tax assets recognized by the Company resulting from
offset against MarketVisions deferred tax liabilities
    
    
    1,904Total purchase price allocation
    
    $
    17,583
   Year Ended December 31,2003
    
    2004Net sales
    
    $
    62,576
    
    
    $
    133,225Net income
    
    $
    4,533
    
    
    $
    1,342Income per share:Basic
    
    $
    0.86
    
    
    $
    0.21Diluted
    
    $
    0.71
    
    
    $
    0.18
 Acquisitions of Minority Interests
      60




---



##### Table of Contents



Actual
    
    As AdjustedNet sales
    
    $
    194,472
    
    
    $
    160,214Gross profit
    
    
    149,726
    
    
    
    123,171Distributor commissions
    
    
    101,021
    
    
    
    85,388Loss from operations
    
    
    (3,054
    )
    
    
    (2,301
    )
   December 31,2004
    
    
    2005MarketVision promissory note
    
    $
    682
    
    
    $
    Notes payable a distributor, due upon demand, interest at 1% per annum
    
    
    86
    
    
    
    86Note payable to a governmental agency, monthly installments of
$2,200, interest at 7% per annum, maturing May 2006
    
    
    34
    
    
    
    9Notes payable to a vendor, monthly installments of $580, interest at
25.49% per annum, maturing October 2008
    
    
    16
    
    
    
    14818
    
    
    
    109Current maturities
    
    
    (796
    )
    
    
    (109
    )Debt
    
    $
    22
    
    
    $
    
  61




---



##### Table of Contents



Operating Leases
   2006
    
    $
    1,8912007
    
    
    1,5272008
    
    
    8752009
    
    
    7072010
    
    
    505Thereafter
    
    
    1,235Total minimum lease obligations
    
    $
    6,740
 Purchase Commitments
 Cluster
Concentrate
 Alura ®
 Construction Commitment
  Employment Agreements
  Legal Matters
   62




---



##### Table of Contents



63




---



##### Table of Contents



Other Matters
   
    
    The Company set up a school in Macau to train members about the applicable Chinese
legal requirements and the need for distributors to accurately and fairly describe
business opportunities available to potential members. The schools were operated from May
2004 to November 2005.
    
    The Company suspended shipment of product to certain members until they had completed
the required training.
    
    The Company extended its existing 14-day return policy in Hong Kong to 180 days to
allow distributors and customers who purchased products during the two-week period prior
to, and the two-week period after, the airing of the television program to return
purchased merchandise for a full refund.
    
    The Company began posting announcements on its Hong Kong website to the effect that the
resale of its products in China without the appropriate license would result in
termination of membership. Since then, the Company has terminated at least four members in
China for engaging in activities in violation of Chinese law.
    
    In June 2004 the Company completed formation of its Chinese subsidiary (Lexxus
China}, and by the end of 2005 had invested $12.0 million as capital in that entity.
    
    Lexxus China is working to file an application for a direct selling license under
proposed legislation.
    
    Lexxus China has leased space in Zhuhai, purchased equipment and finished out a
manufacturing plant. Although Lexxus China now has a license to manufacture and employee
personnel at the plant, it does not yet have a license to sell any product manufactured
there and will not begin manufacturing operations until it has obtained that license.
    
    On November 1, 2005, Lexxus China obtained its general cosmetic manufacturing permit
and has begun trial production testing.
         Authorized Shares
  Stock Split
  Private Placement of Units
   64




---



##### Table of Contents



Stock Options
  2003
    
    
    2004
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of year
    
    
    1,321,500
    
    
    $
    1.05
    
    
    
    1,331,500
    
    
    $
    1.06
    
    
    
    1,674,124
    
    
    $
    4.42Granted
    
    
    10,000
    
    
    
    1.80
    
    
    
    344,124
    
    
    
    17.44
    
    
    
    248,000
    
    
    
    10.21Exercised
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    1.10
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    1,331,500
    
    
    
    1.06
    
    
    
    1,674,124
    
    
    
    4.42
    
    
    
    1,922,124
    
    
    
    5.17Exercisable at end of year
    
    
    1,291,504
    
    
    $
    1.03
    
    
    
    1,640,000
    
    
    $
    4.28
    
    
    
    1,698,322
    
    
    $
    4.49
  Options Outstanding
    
    
    Options ExercisableWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageShares
    
    
    Exercise
    
    
    Contractual
    
    
    Shares
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Price
    
    
    Life
    
    
    Exercisable
    
    
    Price$1.00 to $1.80
    
    
    1,330,000
    
    
    $
    1.06
    
    
    6.2 years
    
    
    1,330,000
    
    
    $
    1.06$11.40 to $18.11
    
    
    592,124
    
    
    
    14.41
    
    
    5.3 years
    
    
    368,322
    
    
    
    16.90$1.00 to $18.11
    
    
    1,922,124
    
    
    
    5.17
    
    
    5.9 years
    
    
    1,698,322
    
    
    
    4.49
 Common Stock Purchase Warrants
   Private Placement of
Units
 65




---



##### Table of Contents



Restricted Stock
  Income Per Share
 Year Ended December 31,2003
    
    
    2004
    
    
    2005(In Thousands, Except Per Share Data)Net income (loss) available to common stockholders
    
    $
    4,727
    
    
    $
    1,241
    
    
    $
    (5,502
    )Basic weighted-average number of shares outstanding
    
    
    4,609
    
    
    
    5,580
    
    
    
    6,934Effect of dilutive stock options and warrants
    
    
    1,079
    
    
    
    1,242
    
    
    
    Diluted weighted-average number of shares outstanding
    
    
    5,688
    
    
    
    6,822
    
    
    
    6,934Income (loss) per share:Basic
    
    $
    1.03
    
    
    $
    0.22
    
    
    $
    (0.79
    )Diluted
    
    $
    0.83
    
    
    $
    0.18
    
    
    $
    (0.79
    )
     Year Ended December 31,2003
    
    
    2004
    
    
    2005Domestic
    
    $
    4,482
    
    
    $
    (2,108
    )
    
    $
    (8,637
    )Foreign
    
    
    1,092
    
    
    
    4,468
    
    
    
    4,673Income (loss) before income taxes
    
    $
    5,574
    
    
    $
    2,360
    
    
    $
    (3,964
    )
 66




---



##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005Current taxes:Federal
    
    $
    256
    
    
    $
    248
    
    
    $
    103State
    
    
    40
    
    
    
    171
    
    
    
    168Foreign
    
    
    564
    
    
    
    759
    
    
    
    801860
    
    
    
    1,178
    
    
    
    1,072Deferred taxes
    
    
    
    
    
    
    (515
    )
    
    
    515Provision for income taxes
    
    $
    860
    
    
    $
    663
    
    
    $
    1,587
  Year Ended December 31,2003
    
    
    2004
    
    
    2005Income tax at federal statutory rate
    
    $
    1,895
    
    
    $
    802
    
    
    $
    (1,348
    )Effect of permanent differences
    
    
    37
    
    
    
    709
    
    
    
    3,054Increase (decrease) in valuation allowance
    
    
    (1,066
    )
    
    
    (602
    )
    
    
    497Foreign rate differential
    
    
    (32
    )
    
    
    (471
    )
    
    
    (787
    )State income taxes, net of federal benefit
    
    
    26
    
    
    
    113
    
    
    
    111Other reconciling items
    
    
    
    
    
    
    112
    
    
    
    60Income tax provision
    
    $
    860
    
    
    $
    663
    
    
    $
    1,587
  December 31,2004
    
    
    2005Deferred tax assets:Net operating losses
    
    $
    3,144
    
    
    $
    2,051Stock-based compensation
    
    
    488
    
    
    
    488Accrued expenses
    
    
    255
    
    
    
    468Tax credits
    
    
    80
    
    
    
    183Deferred revenue
    
    
    
    
    
    
    133Provision for KGC receivable
    
    
    
    
    
    
    938Other
    
    
    12
    
    
    
    12Total deferred tax assets
    
    
    3,979
    
    
    
    4,273Valuation allowance
    
    
    (1,492
    )
    
    
    (2,652
    )2,487
    
    
    
    1,621Deferred tax liabilities:Intangible assets
    
    
    (1,861
    )
    
    
    (1,540
    )Depreciation
    
    
    (34
    )
    
    
    (17
    )Prepaids
    
    
    (50
    )
    
    
    (64
    )Other
    
    
    (27
    )
    
    
    Total deferred tax liabilities
    
    
    (1,972
    )
    
    
    (1,621
    )Deferred tax assets, net
    
    $
    515
    
    
    $
    
  67




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##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005(In Thousands)Cash paid during the year for:Income taxes
    
    $
    42
    
    
    $
    552
    
    
    $
    1,436Interest
    
    
    50
    
    
    
    86
    
    
    
    22Non-cash investing and financing activities:Receivable from KGC
    
    
    
    
    
    
    
    
    
    
    3,100Conversion of preferred stock to common stock
    
    
    16
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    1
    
    
    
    
    
    
    
    Common stock issued for acquisitions
    
    
    433
    
    
    
    15,665
    
    
    
    Debt issued for acquisitions
    
    
    
    
    
    
    3,203
    
    
    
    Common stock issued for services
    
    
    53
    
    
    
    
    
    
    
    
     68




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##### Table of Contents



Skindulgence ® LaVie
 69




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##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005Net sales to external customers:North America
    
    $
    10,668
    
    
    $
    16,914
    
    
    $
    16,528Hong Kong
    
    
    30,763
    
    
    
    74,293
    
    
    
    120,968Taiwan
    
    
    3,097
    
    
    
    3,261
    
    
    
    3,722Southeast Asia
    
    
    1,570
    
    
    
    1,786
    
    
    
    6,438Russia and Eastern Europe 1
    
    
    13,157
    
    
    
    30,248
    
    
    
    34,258South Korea
    
    
    2,492
    
    
    
    5,524
    
    
    
    8,495Australia/New Zealand
    
    
    654
    
    
    
    1,158
    
    
    
    1,886Japan
    
    
    
    
    
    
    
    
    
    
    1,659Latin America
    
    
    
    
    
    
    
    
    
    
    518Other
    
    
    175
    
    
    
    41
    
    
    
    Total net sales
    
    $
    62,576
    
    
    $
    133,225
    
    
    $
    194,472
 December 31,2003
    
    
    2004
    
    
    2005Long-lived assets:North America
    
    $
    1,203
    
    
    $
    20,124
    
    
    $
    19,504Hong Kong
    
    
    217
    
    
    
    247
    
    
    
    554Taiwan
    
    
    271
    
    
    
    117
    
    
    
    179Southeast Asia
    
    
    202
    
    
    
    133
    
    
    
    47China
    
    
    
    
    
    
    
    
    
    
    3,265South Korea
    
    
    389
    
    
    
    398
    
    
    
    323Australia/New Zealand
    
    
    46
    
    
    
    35
    
    
    
    33Japan
    
    
    
    
    
    
    
    
    
    
    834Latin America
    
    
    
    
    
    
    
    
    
    
    573Other
    
    
    51
    
    
    
    36
    
    
    
    5Total long-lived assets
    
    $
    2,379
    
    
    $
    21,090
    
    
    $
    25,317
    
 1
    
    The Company will no longer consolidate the
operating results of KGC for periods ending after December 31, 2005 as it sold
its 51% interest in KGC to Bannks Foundation effective December 31, 2005. 70




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##### Table of Contents



Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(In Thousands, Except Per Share Data)Fiscal 2004:Net sales
    
    $
    38,745
    
    
    $
    17,686
    
    
    $
    40,482
    
    
    $
    36,312Gross profit
    
    
    30,491
    
    
    
    12,823
    
    
    
    31,612
    
    
    
    28,978Distributor commissions
    
    
    19,745
    
    
    
    12,578
    
    
    
    17,422
    
    
    
    18,834Selling, general and administrative expenses
    
    
    5,968
    
    
    
    8,194
    
    
    
    8,288
    
    
    
    10,652Income (loss) from operations
    
    
    4,778
    
    
    
    (7,949
    )
    
    
    5,902
    
    
    
    (508
    )Net income (loss)
    
    
    3,761
    
    
    
    (6,746
    )
    
    
    5,028
    
    
    
    (802
    )Income (loss) per share:Basic
    
    $
    0.81
    
    
    $
    (1.24
    )
    
    $
    0.92
    
    
    $
    (0.12
    )Diluted
    
    $
    0.64
    
    
    $
    (1.24
    )
    
    $
    0.75
    
    
    $
    (0.12
    )Weighted-average number of shares outstanding:Basic
    
    
    4,667
    
    
    
    5,447
    
    
    
    5,450
    
    
    
    6,745Diluted
    
    
    5,909
    
    
    
    5,447
    
    
    
    6,692
    
    
    
    6,745
 Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(In Thousands, Except Per Share Data)Fiscal 2005:Net sales
    
    $
    42,759
    
    
    $
    49,959
    
    
    $
    58,071
    
    
    $
    43,683Gross profit
    
    
    34,593
    
    
    
    37,519
    
    
    
    45,087
    
    
    
    32,527Distributor commissions
    
    
    21,273
    
    
    
    27,599
    
    
    
    29,087
    
    
    
    23,062Selling, general and administrative expenses
    
    
    9,246
    
    
    
    12,308
    
    
    
    15,108
    
    
    
    12,338Provision for KGC receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759Income (loss) from operations
    
    
    4,074
    
    
    
    (2,388
    )
    
    
    892
    
    
    
    (5,632
    )Net income (loss)
    
    
    2,795
    
    
    
    (2,159
    )
    
    
    119
    
    
    
    (6,257
    )Income (loss) per share:Basic
    
    $
    0.41
    
    
    $
    (0.32
    )
    
    $
    0.02
    
    
    $
    (0.88
    )Diluted
    
    $
    0.34
    
    
    $
    (0.32
    )
    
    $
    0.01
    
    
    $
    (0.88
    )Weighted-average number of shares outstanding:Basic
    
    
    6,820
    
    
    
    6,853
    
    
    
    6,951
    
    
    
    7,109Diluted
    
    
    8,254
    
    
    
    6,853
    
    
    
    8,418
    
    
    
    7,109
 71




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##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect
on the financial statements.
   72




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##### Table of Contents




    
    We did not maintain an effective control environment because (1) we lack an effective
anti-fraud program to detect and prevent fraud, for example, relating to the previous top
two executive officers of the Company, Mark Woodburn and Terry LaCore, in terms of (i)
conflicts of interests related to executive officers, especially their financial dealings
with independent distributors and other vendors, and (ii) proper supervision of the
executives conduct separating their executive duties from personal financial interests
outside the Company, (2) we failed to perform background checks consistently on personnel
being placed into positions of responsibility, (3) an adequate tone was not set from the
top as control measures in place were ignored by the previous top two executives and the
importance of controls was not properly emphasized and communicated throughout the Company
and (4) we did not effectively address the control deficiencies noted in the fiscal year
2004 audit;
    
    We did not maintain effective monitoring controls over financial reporting because (1)
our policies regarding review, supervision and monitoring of our accounting operations
throughout the Company were not fully designed, in place, or operating effectively and (2)
we do not have an internal audit function;
    
    We did not maintain effective control over period-end financial close and reporting
because (1) we lacked sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of GAAP commensurate with
our financial reporting requirements to prepare, review and approve account reconciliations
and supporting schedules, and (2) our legacy accounting systems do not facilitate the
appropriate review and approval over the recording of journal entries to ensure the
accuracy and completeness of the journal entries recorded;
    
    We did not maintain effective controls over the disbursement function since we (1)
lacked adequate segregation of duties and (2) lacked appropriate review, approval, and
supporting documentation;
    
    We did not maintain effective controls over the payroll function since we (1) lacked
adequate segregation of duties and (2) lacked appropriate review, approval, and supporting
documentation;
    
    We did not maintain effective controls over the inventory function since we (1) did not
maintain restricted access to the inventory detail schedule used to support the general
ledger balances and (2) used the periodic inventory system and performed monthly inventory
counts using physical inventory count sheets lacking reviewer documentation;
    
    We lacked documentation with respect to certain related party
transactions, subsidiary operations and expense reimbursement
procedures. In addition, sufficient policies regarding loans to
employees and third parties had not been adopted or implemented, and
policies related to independent distributor relationships were
inadequate;
    
    We lacked timely resolution of identified accounting and legal issues, and as a result,
did not timely complete period-end financial statements and reporting; and
    
    We do not have all material contracts in writing and approved by all parties.
    73




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
   
    
    We plan to devote more resources to developing an anti-fraud
program to detect and prevent fraud. The program may include the hiring of outside or
in-house counsel to be dedicated to the development and enforcement of compliance programs.
Background checks will be performed on personnel being placed into positions of material
responsibility. The compliance program also will include a communication project to set
the right tone from the top. Additionally, we also plan to put more resources to following
up on addressing control deficiencies identified in the previous audits;
    
    The Company intends to develop additional policies and procedures to further strengthen
its reporting, including the areas of revenue recognition, sales and expense cut-off and
sales returns. In addition, we plan to evaluate hiring additional resources to perform the
internal audit function;
    
    The Company began implementation of the Oracle E-Business Suite during the fourth quarter of 2005 and
commenced use of certain functionality on January 1, 2006 that address certain of the
material weaknesses listed above, including the effective control over period-end financial
close and reporting and the effective control over certain accounting functions. The Oracle
implementation should facilitate the appropriate review and approval over the recording of
journal entries to ensure the accuracy and completeness of the journal entries recorded.
Additionally, the Company has made changes to its corporate accounting staff, including the
hiring or contracting of additional personnel in the U.S. In December 2005, the Company
hired a new general counsel to assist in the legal and compliance effort. The new general
counsel commenced work in January 2006;
    
    Additional segregation of duties and appropriate review, approval, and supporting
documentation were installed in 2006 to maintain effective controls over the disbursement
function. We are developing policies for proper documentation, review and approval related
to related party transactions, subsidiary operations, distributor compensation adjustments, employee loans, expense reimbursements, and
distributor relationships;
    
    Additional segregation of duties and appropriate review, approval, and supporting
documentation have been implemented since 2005 year end to maintain effective controls over
the payroll function;
    
    With the implementation of the Oracle e-Business Suites financial reporting package, we
should be able to further restrict access to the inventory detail schedule used to support the
general ledger balances. With additional implementation of Oracle applications, we plan to
eventually replace the current periodic inventory system, relying on monthly inventory
counts using physical inventory count sheets, with a perpetual inventory system.
Meanwhile, more procedures will be installed for review of inventory count documentation;
    
    Additional processes will be instituted to timely resolve identified accounting and
legal issues so that period-end financial statements and reporting can be timely completed;
and
    
    Stronger policy enforcement will be pushed down throughout the Company to eliminate
executives making verbal agreements ahead of properly approved written contracts.
 74




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##### Table of Contents



Item 9B. OTHER INFORMATION
  
 Part III
  75




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##### Table of Contents



Part IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  1.
    
    Financial Statements. See index to Consolidated Financial Statements under
Item 8 of Part II.2.
    
    Financial Statement Schedules. Financial statement schedules have been omitted
because they are not required or are not applicable, or because the required information is
shown in the financial statements or notes thereto.3.
    
    Exhibits. The following exhibits are filed with this Form 10-K:
 ExhibitNumber
    
    Exhibit Description
    
    Reference3.1
    
    Certificate of Incorporation of Natural Health Trends Corp.
    
    (a)3.2
    
    By-Laws of Natural Health Trends Corp.
    
    (a)4.1
    
    Specimen Certificate for shares of common stock, $.001 par value per share, of Natural
Health Trends Corp.
    
    *4.2
    
    Form of Common Stock Purchase Warrant issued in October 2004 Private Placement
    
    (b)10.1
    
    2002 Stock Plan, as amended
    
    (c)10.2
    
    Forms of Notice of Grant of Stock Option Agreement under the Companys 2002 Stock
Option Plan.
    
    (h)10.3
    
    Option Agreement dated as of January 18, 2001, granting option for 30,000 shares to
Terry LaCore, as amended.
    
    *10.4
    
    Option Agreement dated as of January 18, 2001, granting option for 30,000 shares to the
LaCore and Woodburn Partnership, assignee of Benchmark Consulting, as amended.
    
    *10.5
    
    Option Agreement dated as October 14, 2002 granting 570,000 options to the LaCore and
Woodburn Partnership, as amended.
    
    *10.6
    
    Option Agreement dated as October 14, 2002 granting 570,000 options to Terry LaCore, as
amended.
    
    *10.7
    
    Option Agreement dated as July 24, 2002 granting 60,000 options to Capital Development
S.A., an affiliate of Sir Brian Wolfson.
    
    *10.8
    
    Option Agreement dated as July 24, 2002 granting 60,000 options to Randall A. Mason.
    
    *10.9
    
    Distributorship Agreement dated March 1, 2002 between the Company and 40Js.
    
    (d)10.10
    
    Founder Compensation Agreement by and among Lexxus International, Inc., Natural Health
Trends Corp., Rodney Sullivan and Pam Sullivan, Michael Bray, and Jeff Provost.
    
    (d)10.11
    
    Amendment No. 1 to Founder Compensation Agreement by and among Lexxus International,
Inc., Natural Health Trends Corp., Rodney Sullivan and Pam Sullivan, Michael Bray, and
Jeff Provost.
    
    (l)10.12
    
    Database Purchase Agreement, dated as of January 31, 2003, by and among NuEworld.com
Commerce, Inc., a Delaware corporation, Lighthouse Marketing Corporation, a Delaware
corporation), and the Company.
    
    (l)10.13
    
    KGC Agreement dated March 17, 2004 between the Company and Bannks Foundation.
    
    (l)10.14
    
    Stock Purchase Agreement dated March 29, 2004 between Michael Bray, Jeff Provost,
Rodney Sullivan and Pam Sullivan and the Company.
    
    (l)10.15
    
    Agreement and Plan of Merger, dated as of March 31, 2004, by and among the Company,
MergerCo and MarketVision.
    
    (e)10.16
    
    Stockholders Agreement, dated as of March 31, 2004, by and among the Company, John
Cavanaugh, Terry LaCore and Jason Landry.
    
    (e)10.17
    
    Employment Agreement, dated as of March 31, 2004, between MarketVision and John
Cavanaugh.
    
    (e)10.18
    
    Employment Agreement, dated as of March 31, 2004, between MarketVision and Jason Landry.
    
    (e)10.19
    
    Guaranty of the Employment Agreements dated as of March 31, 2004 executed by Lexxus U.S.
    
    (e)10.20
    
    Software License Agreement dated as of March 31, 2004 among the Company, MergerCo and
MarketVision Consulting Group, LLC.
    
    (e)10.21
    
    Employment Agreement, dated as of August 1, 2004, by and between the Company and Chris
Sharng.
    
    (b)10.22
    
    Employment Agreement, dated as of October 7, 2004, by and between Lexxus International
(Mexico), S.A. and Jose Raul Villarreal Patino
    
    (l)
 76




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Reference10.23
    
    Employment Agreement, dated as of October 7, 2004, by and between Lexxus International
(Mexico), S.A. and Oscar de la Mora
    
    (l)10.24
    
    Amended Employment Agreement, dated as of February 1, 2006, by and between the Company,
Natural Health Trends Japan, Inc. and Richard Johnson.
    
    (m)10.25
    
    Securities Purchase Agreement dated October 6, 2004 by and among the Company and the
investors signatory thereto.
    
    (f)10.26
    
    Subscription Agreement (Canada) dated October 6, 2004 by and among the Company and the
investors signatory thereto.
    
    (f)10.27
    
    Form of Registration Rights Agreement between the Company and the investors in the
Companys October 2004 private placement.
    
    (b)10.28
    
    Amendment No. 1 to Registration Rights Agreement dated February 23, 2005 between the
Company and the investors in the Companys October 2004 private placement.
    
    (l)10.29
    
    Amendment No. 1 to Founder Compensation Agreement by and among Lexxus International, Inc.,
Natural Health Trends Corp., Rodney Sullivan and Pam Sullivan, Michael Bray, and Jeff
Provost.
    
    (l)10.30
    
    Royalty Agreement dated March 1, 2005 by and among Steve Francisco, Dan Catto, and the
Company.
    
    (l)10.31
    
    Lease by and between CLP Properties Texas, LLP and Natural Health Trends Corp. dated as of
June 18, 2005.
    
    (g)10.32
    
    Agreement and Plan of Merger dated March 23, 2005, between Natural Health Trends Corp., a
Florida corporation, and Natural Health Trends Corp., a Delaware corporation.
    
    (a)10.33
    
    Form of Indemnification Agreement dated December 13, 2005, between Natural Health Trends
Corp. and each of its directors.
    
    (i)10.34
    
    Stock Purchase Agreement dated December 21, 2005 between Natural Health Trend Corp. and
Bannks Foundation.
    
    (j)10.35
    
    Agreement dated December 21, 2005 between Natural Health Trends Corp. and KGC Networks Pte
Ltd.
    
    (j)10.36
    
    Escrow Agreement dated February 10, 2006, among Natural Health Trends Corp., Terry L.
LaCore, Mark D. Woodburn, LaCore and Woodburn Partnership and Krage and Janvey LLP, as
escrow agent.
    
    (k)10.37
    
    Letter agreement dated as of March 1, 2006 between Natural Health Trends Corp. and Robert
H. Hesse
    
    (m)14.1
    
    Worldwide Code of Business Conduct.
    
    (l)14.2
    
    Code of Ethics for Senior Financial Officers.
    
    (l)21.1
    
    Subsidiaries of the Company.
    
    *31.1
    
    Certification of the Interim Principal Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange Act).
    
    *31.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
    
    *32.1
    
    Certification of the Interim Principal Executive Officer pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    *32.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
    
    *
 
 *
    
    Filed herewith.(a)
    
    Previously filed July 12, 2005, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(b)
    
    Previously filed November 12, 2004, as an Exhibit to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, and incorporated herein by reference.(c)
    
    Previously filed April 27, 2005, as Appendices to the Companys Definitive Proxy Statement,
and incorporated herein by reference.(d)
    
    Previously filed on April 1, 2002 as an Exhibit to the Companys Annual Report on Form 10-KSB
for the year ended December 31, 2001, and incorporated herein by reference.(e)
    
    Previously filed on April 15, 2004, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference. 77




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##### Table of Contents



(f)
    
    Previously filed October 12, 2004, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(g)
    
    Previously filed June 24, 2005, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(h)
    
    Previously filed December 1, 2005, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(i)
    
    Previously filed December 13, 2005, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference.(j)
    
    Previously filed December 28, 2005, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference.(k)
    
    Previously filed February 16, 2006, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference.(l)
    
    Previously filed March 31, 2005, as an Exhibit to the Companys Annual Report on Form 10-K
for the year ended December 31, 2004, and incorporated herein by reference.(m)
    
    Previously filed March 16, 2006, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference. 78




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##### Table of Contents



SIGNATURES
  NATURAL HEALTH TRENDS CORP.Date:
May 8, 2006
    
    
    
    /s/ Chris T. SharngChris T. Sharng
Executive Vice President and Chief Financial Officer
  Signature
    
    Title
    
    Date/s/ Chris T. Sharng

Chris Sharng
    
    Executive Vice President and Chief
Financial Officer

(Interim Principal Executive Officer and Principal Financial Officer)
    
    May 8, 2006/s/ Timothy S. Davidson

Timothy S. Davidson
    
    Chief Accounting Officer
(Principal Accounting Officer)
    
    May 8, 2006/s/ Randall A. Mason

Randall A. Mason
    
    Chairman of the Board and Director
    
    May 8, 2006/s/ Sir Brian Wolfson

Sir Brian Wolfson
    
    Vice Chairman of the Board and Director
    
    May 8, 2006/s/ Anthony B. Martino

Anthony B. Martino
    
    Director
    
    May 8, 2006/s/ Colin J. OBrien

Colin J. OBrien
    
    Director
    
    May 8, 2006/s/ Terrence M. Morris

Terrence M. Morris
    
    Director
    
    May 8, 2006
 79