##### 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, 2006
 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 DriveDallas, Texas
    
    75234(Address of principal executive offices)
    
    (Zip code)
   Title of each classCommon Stock, $0.001 par value
    
    Name of each exchange on which registeredThe NASDAQ Stock Market LLC
 None
 o þ
 o þ
 þ o
 o
  o o þ
 o þ




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##### 



PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    11Item 1B.
    
    Unresolved Staff Comments
    
    
    22Item 2.
    
    Properties
    
    
    22Item 3.
    
    Legal Proceedings
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 8.
    
    Financial Statements and Supplementary Data
    
    
    41Item 9.
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    70Item 9A.
    
    Controls and Procedures
    
    
    71Item 9B.
    
    Other Information
    
    
    73PART III
    
    
    74PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    74Signatures
    
    
    77Worldwide Code of Business Conduct, as RevisedSubsidiariesCertification of the PresidentCertification of the Chief Financial OfficerCertification of the PresidentCertification of the Chief Financial Officer




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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;
    
    our need to raise additional capital if revenues continue to decline;
    
    risks related to an SEC investigation and securities litigation;
    
    adverse consequences from audit committee investigations or management changes;
    
    our dependence on our Hong Kong and China market for most of our revenues;
    
    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 and consultants;
    
    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.




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Item 1. BUSINESS
 Overview of Business
      Recent Developments
 Management Transitions
     1




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##### Table of Contents



SEC Investigation
  Class Action Securities Lawsuit
  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
FaceLift 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.
    
    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.
    
    TriFusion PlusTM is a beverage with a unique blend of exotic fruits and
berries rich in antioxidants, lycopene, and more. Its main ingredients are Acai berry,
Goji berry, the Mangosteen fruit, and the Gac fruit; each containing phytonutrients.
Phytonutrients are compounds having antioxidative properties found naturally in plant-based
foods such as fruit and vegetables.
 2




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Operations of the Business
 Operating Strategy
  
    
    Developing a global approach to revenue generation and resource management;
    
    Accelerating new product introductions;
    
    Improving distributor communications and support;
    
    Enhancing profitability through commission restructuring and cost controls;
    
    Addressing and revamping our operations infrastructure, policies, procedures and our controls.
     Sourcing of Products
 Skindulgence ® Alura ® Premium Noni Juice
 Skindulgence ® Alura ® Premium Noni Juice
 3




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Marketing and Distribution
   Year Ended December 31,2004
    
    2005
    
    2006North America
    
    
    12,896
    
    
    
    11,971
    
    
    
    8,839Hong Kong
    
    
    63,114
    
    
    
    86,661
    
    
    
    59,972Taiwan
    
    
    2,533
    
    
    
    2,873
    
    
    
    3,621Southeast Asia
    
    
    3,534
    
    
    
    868
    
    
    
    1,377Russia and Eastern Europe1
    
    
    40,727
    
    
    
    52,679
    
    
    
    South Korea
    
    
    4,780
    
    
    
    6,257
    
    
    
    9,247Australia/New Zealand
    
    
    406
    
    
    
    785
    
    
    
    574Japan
    
    
    848
    
    
    
    5,947
    
    
    
    6,239Latin America
    
    
    87
    
    
    
    1,456
    
    
    
    4,300Other
    
    
    916
    
    
    
    1,895
    
    
    
    1,881Total NHT Global distributors1
    
    
    129,841
    
    
    
    171,392
    
    
    
    96,050eKaire2
    
    
    3,656
    
    
    
    3,008
    
    
    
    Total distributors
    
    
    133,497
    
    
    
    174,400
    
    
    
    96,050
 
 1
    
    The Company no longer consolidates 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, 2005.2
    
    The Company no longer consolidates the operating results of the Kaire Entities for
periods beginning after June 30, 2006 as it sold its interests in the Kaire Entities to Kaire
International (Canada) Ltd. Effective July 1, 2006. 4




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.
   Management Information Systems
  Geographic Locations
 
    
    The Companys business is generally organized along geographic lines. NHT Global has
active physical presence in the following markets:
 o
    
    North America (United States and Canada)o
    
    Greater China (Hong Kong, Macau, Taiwan and China)o
    
    Southeast Asia (Singapore, the Philippines and Indonesia)o
    
    Australia and New Zealando
    
    South Koreao
    
    Japano
    
    Latin America (primarily Mexico)o
    
    Slovenia
 
    
    Natural Health Trends Corp. is headquartered and mainly staffed in Dallas, Texas.
    
    MarketVision is staffed in Minneapolis, Minnesota.
  Employees
  5




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Seasonality
   Intellectual Property
  Alura ® Alura ®
   Insurance
  Working with Distributors
 Sponsorship
  6




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Compensation Plans
   
    
    through retail markups on sales of products purchased by distributors at wholesale
prices (this retail markup is not available in all of our markets); and
    
    through a series of commissions paid on product purchases made by their down-line
distributors.
  Distributor Support
   7




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
    
    Teleconferences  we hold teleconferences with company management and associate field
leadership on various subjects such as technical product discussions, distributor
organization building and management techniques.
    
    Internet  we maintain our main website at www.naturalhealthtrendscorp.com.
On this website, the user can read company news, learn more about various products, sign
up to be a distributor, place orders, and track the fulfillment and delivery of their
order.
    
    Product Literature  we offer a variety of literature to distributors, including
product catalogs, informational brochures, pamphlets and posters for individual
products.
    
    Toll Free Access  we offer live consumer support where a customer service
representative can address general questions or concerns.
    
    Broadcast E-mail  announcements from the Company are sent via e-mail to all active
distributors.
 Technology and Internet Initiatives
 www.naturalhealthtrendscorp.com
 Rules Affecting Distributors
    8




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Government Regulations
 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.
      Regulation of Our Products
  9




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Other Regulatory Issues
   Product Warranties and Returns
   10




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Our Industry
   Competition
  
 Item 1A. RISK FACTORS
  We May Continue To Experience Substantial Negative Cash Flows, Which May Have A Significant Adverse
Effect On Our Business And Could Threaten Our Solvency.
  If We Continue To Experience Negative Cash Flows, We May Need To Seek Debt Or Equity Financing,
Which May Not Be Available On Acceptable Terms Or At All. If Available, It Could Have A Dilutive
Effect On The Holdings Of Existing Stockholders.
  We Face Risks Related To An SEC Investigation And Securities Litigation That Could Have A Material
Adverse Effect On Our Relationships With Our Distributors, Business, Financial Condition And
Results Of Operations. We May Face Additional Litigation In The Future That Could Also Harm Our
Business.
  11




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Continued Adverse News About The Company Could Have A Material Adverse Effect On Our Ability To
Attract And Maintain Distributors.
  Loss Of Key Personnel Could Adversely Affect 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.
  12




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We May Be Unable To Protect or Use Our Intellectual Property Rights.
  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.
    13




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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.
  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 Business In Hong Kong, Which Represented 67% Of Our Revenue in 2006, May Be Harmed By The
Results Of Increased Government Scrutiny of Our Current and Proposed Operations in China.
  14




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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.
     If We Fail To Obtain a Direct Selling License in China, Our Future Business Could Be Harmed.
  15




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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.
    An Increase In The Amount Of Compensation Paid To Distributors Would Reduce Profitability.
  16




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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.
  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.
  17




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Regulatory Matters Governing Our Industry Could Have A Significant Negative Effect On Our Business.
  Direct Selling System
    18




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Product Regulations
   Product Claims, Advertising and Distributor Activities
  Transfer Pricing and Similar Regulations
    19




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Taxation Relating To Distributors
  Other Regulations
   Currency Exchange Rate Fluctuations Could Lower Our Revenue And Net Income.
    Failure Of New Products To Gain Distributor And Market Acceptance Could Harm Our Business.
  System Failures Could Harm Our Business.
  20




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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.
   Terrorist Attacks, Acts Of War, Epidemics Or Other Communicable Diseases Or Any Other Natural
Disasters May Seriously Harm Our Business.
  21




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Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
    
 Item 3. LEGAL PROCEEDINGS
    22




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Name of Director Nominee
    
    Votes For
    
    Votes WithheldStephanie S. Hayano
    
    
    5,832,700
    
    
    
    76,001Randall A. Mason
    
    
    5,815,719
    
    
    
    92,982Anthony B. Martino
    
    
    5,839,024
    
    
    
    69,677Terrence M. Morris
    
    
    5,839,026
    
    
    
    69,675Colin J. OBrien
    
    
    5,575,593
    
    
    
    333,108Sir Brian Wolfson
    
    
    5,815,619
    
    
    
    93,082
    23




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##### Table of Contents



Part II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   Quarter Ended:
    
    High
    
    LowMarch 31, 2005
    
    $
    18.89
    
    
    $
    11.00June 30, 2005
    
    
    15.00
    
    
    
    11.12September 30, 2005
    
    
    17.07
    
    
    
    12.66December 31, 2005
    
    
    16.00
    
    
    
    8.27March 31, 2006
    
    $
    12.09
    
    
    $
    6.35June 30, 2006
    
    
    7.45
    
    
    
    3.25September 30, 2006
    
    
    3.99
    
    
    
    2.35December 31, 2006
    
    
    2.75
    
    
    
    1.26
   24




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2002
    
    2003
    
    2004
    
    20052
    
    2006(In Thousands, Except Per Share Data)Consolidated Statement of Operations Data:Net sales
    
    $
    36,968
    
    
    $
    62,576
    
    
    $
    133,225
    
    
    $
    194,472
    
    
    $
    133,428Gross profit
    
    
    29,216
    
    
    
    48,900
    
    
    
    103,904
    
    
    
    150,359
    
    
    
    100,362Distributor commissions
    
    
    16,834
    
    
    
    27,555
    
    
    
    68,579
    
    
    
    101,021
    
    
    
    68,265Selling, general and administrative expenses
    
    
    10,710
    
    
    
    15,770
    
    
    
    33,102
    
    
    
    49,000
    
    
    
    45,735Provision for (recovery of) KGC receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759
    
    
    
    (1,405
    )Income (loss) from operations
    
    
    238
    
    
    
    5,575
    
    
    
    2,223
    
    
    
    (2,421
    )
    
    
    (12,233
    )Net income (loss)
    
    
    2,139
    
    
    
    4,728
    
    
    
    1,241
    
    
    
    (4,869
    )
    
    
    (11,460
    )Diluted income (loss) from continuing operations
per share1:
    
    $
    (0.11
    )
    
    $
    0.83
    
    
    $
    0.18
    
    
    $
    (0.70
    )
    
    $
    (1.42
    )Diluted weighted-average number of shares
outstanding1:
    
    
    3,118
    
    
    
    5,688
    
    
    
    6,822
    
    
    
    6,934
    
    
    
    8,079Consolidated Balance Sheet Data (at end of period):Cash and cash equivalents
    
    $
    3,864
    
    
    $
    11,133
    
    
    $
    22,234
    
    
    $
    18,470
    
    
    $
    11,936Working capital
    
    
    (1,187
    )
    
    
    2,889
    
    
    
    17,519
    
    
    
    10,596
    
    
    
    1,038Total assets
    
    
    10,319
    
    
    
    20,340
    
    
    
    62,105
    
    
    
    63,948
    
    
    
    48,585Total debt
    
    
    684
    
    
    
    199
    
    
    
    818
    
    
    
    109
    
    
    
    Total stockholders equity (deficit)
    
    
    (398
    )
    
    
    4,824
    
    
    
    37,029
    
    
    
    37,169
    
    
    
    26,975
 
 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. 25




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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
    
    
    150,359
    
    
    
    123,804Distributor commissions
    
    
    101,021
    
    
    
    85,388Loss from operations
    
    
    (2,421
    )
    
    
    (1,668
    )
  26




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
    
    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 (NHT Global
China), and by the end of 2005 had invested $12.0 million as capital in that entity.
    
    NHT Global China is working to file an application for a direct selling license under
proposed legislation.
    
    NHT Global China has leased space in Zhuhai, purchased equipment and finished out a
manufacturing facility. Although NHT Global China now has a license to manufacture and
employee personnel, 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, NHT Global China obtained its general cosmetic manufacturing permit
and has begun trial production testing.
   27




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Income Statement Presentation
  Year Ended December 31,2004
    
    
    2005
    
    
    2006North America
    
    $
    15,631
    
    
    
    11.7
    %
    
    $
    15,297
    
    
    
    7.9
    %
    
    $
    13,637
    
    
    
    10.2
    %Hong Kong
    
    
    74,293
    
    
    
    55.8
    
    
    
    120,968
    
    
    
    62.2
    
    
    
    88,835
    
    
    
    66.6Taiwan
    
    
    3,261
    
    
    
    2.5
    
    
    
    3,722
    
    
    
    1.9
    
    
    
    4,367
    
    
    
    3.3Southeast Asia
    
    
    1,786
    
    
    
    1.3
    
    
    
    6,438
    
    
    
    3.3
    
    
    
    1,710
    
    
    
    1.3Russia and Eastern Europe1
    
    
    30,248
    
    
    
    22.7
    
    
    
    34,258
    
    
    
    17.6
    
    
    
    
    
    
    
    South Korea
    
    
    5,524
    
    
    
    4.1
    
    
    
    8,495
    
    
    
    4.4
    
    
    
    12,538
    
    
    
    9.4Australia/New Zealand
    
    
    623
    
    
    
    0.5
    
    
    
    1,455
    
    
    
    0.7
    
    
    
    1,100
    
    
    
    0.8Japan
    
    
    
    
    
    
    
    
    
    
    1,659
    
    
    
    0.9
    
    
    
    6,761
    
    
    
    5.1Latin America
    
    
    
    
    
    
    
    
    
    
    518
    
    
    
    0.3
    
    
    
    3,496
    
    
    
    2.6Other
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    0.2Total NHT Global
    
    
    131,407
    
    
    
    98.6
    
    
    
    192,810
    
    
    
    99.2
    
    
    
    132,737
    
    
    
    99.5North America
    
    
    1,283
    
    
    
    1.0
    
    
    
    1,231
    
    
    
    0.6
    
    
    
    507
    
    
    
    0.4Australia/New Zealand
    
    
    535
    
    
    
    0.4
    
    
    
    431
    
    
    
    0.2
    
    
    
    184
    
    
    
    0.1Total eKaire2
    
    
    1,818
    
    
    
    1.4
    
    
    
    1,662
    
    
    
    0.8
    
    
    
    691
    
    
    
    0.5$
    133,225
    
    
    
    100
    %
    
    $
    194,472
    
    
    
    100
    %
    
    $
    133,428
    
    
    
    100
    %
 
 1
    
    The Company no longer consolidates 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
    
    The Company no longer consolidates the operating results of the eKaire.com and other
subsidiaries that distribute Kaire branded products (the Kaire Entities) for periods beginning
after June 30, 2006 as it sold its interests in the Kaire Entities to Kaire International (Canada)
Ltd. Effective July 1, 2006. 28




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
    
    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.
    Critical Accounting Policies
   29




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##### Table of Contents



Inventory Valuation. TM TM
 Valuation of Intangible Assets and Other Long-Lived Assets.
  Allowance for Sales Returns.
 Revenue Recognition.
 TM TM TM
  30




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##### Table of Contents



Tax Valuation Allowance.
 Results of Operations
  Year Ended December 31,2004
    
    2005
    
    2006Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    22.0
    
    
    
    22.7
    
    
    
    24.8Gross profit
    
    
    78.0
    
    
    
    77.3
    
    
    
    75.2Operating expenses:Distributor commissions
    
    
    51.5
    
    
    
    51.9
    
    
    
    51.2Selling, general and administrative expenses
    
    
    24.8
    
    
    
    25.2
    
    
    
    34.3Provision for (recovery of) KGC receivable
    
    
    
    
    
    
    1.4
    
    
    
    (1.1
    )Total operating expenses
    
    
    76.3
    
    
    
    78.5
    
    
    
    84.4Income (loss) from operations
    
    
    1.7
    
    
    
    (1.2
    )
    
    
    (9.2
    )Other income (expense), net
    
    
    0.1
    
    
    
    (0.5
    )
    
    
    0.7Income (loss) before income taxes and minority interest
    
    
    1.8
    
    
    
    (1.7
    )
    
    
    (8.5
    )Income tax provision
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    (0.1
    )Minority interest
    
    
    (0.4
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    0.9
    %
    
    
    (2.5
    )%
    
    
    (8.6
    )%
 2006 Compared to 2005
 Net Sales.
 31




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##### Table of Contents



TM
 Cost of Sales. TM
 Gross Profit.
 Distributor Commissions.
 Selling, General and Administrative Expenses.
 
    
    costs of opening new markets in Mexico ($1.3 million) and Japan ($1.9 million);
    
    costs to vacate the Japan distributor gallery by August 2007 ($0.9 million);
    
    costs of expansion into China ($0.6 million);
    
    higher personnel costs, event costs, professional fees and credit card charges and
assessments in South Korea ($0.6 million);
    
    higher accounting fees ($0.6 million), legal fees ($1.2 million), other professional
fees ($0.3 million), personnel costs (including stock-based compensation) ($2.0 million),
and Oracle support costs in North America ($0.3 million);
    
    increased personnel costs, professional fees, and rent expense in Hong Kong ($1.1 million); partly offset by
    
    lower distributor training costs and credit card charges and assessments in Hong Kong ($2.2 million).
 Other Income (Expense).
 Income Taxes.
 32




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##### Table of Contents



Minority Interest.
 Net Income(Loss).
 2005 Compared to 2004
 Net Sales.
  TM TM
 Cost of Sales.
 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).
 33




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##### Table of Contents



Other Income (Expense).
 Income Taxes.
 Minority Interest.
 Net Income(Loss).
 Liquidity and Capital Resources
       34




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##### Table of Contents



Year Ended December 31,Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterOperating leases
    
    $
    5,520
    
    
    $
    1,912
    
    
    $
    946
    
    
    $
    776
    
    
    $
    573
    
    
    $
    507
    
    
    $
    806Purchase commitments
    
    
    7,639
    
    
    
    1,699
    
    
    
    1,485
    
    
    
    1,485
    
    
    
    1,485
    
    
    
    1,485
    
    
    
    Totals
    
    $
    13,159
    
    
    $
    3,611
    
    
    $
    2,431
    
    
    $
    2,261
    
    
    $
    2,058
    
    
    $
    1,992
    
    
    $
    806
  Concentrate
 Alura ®
  Related Party Transactions
      35




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##### Table of Contents



Skindulgence ® LaVie
 36




---



##### Table of Contents



37




---



##### Table of Contents



Adoption of SFAS 123(R)
     Recent Accounting Pronouncements
  38




---



##### Table of Contents



OffBalance Sheet Arrangements
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     39




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##### Table of Contents



2005
    
    20061st
    
    2nd
    
    3rd
    
    4th
    
    1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterHong Kong
    
    $
    7.80
    
    
    $
    7.79
    
    
    $
    7.77
    
    
    $
    7.75
    
    
    $
    7.76
    
    
    $
    7.76
    
    
    $
    7.78
    
    
    $
    7.78China1
    
    
    8.29
    
    
    
    8.29
    
    
    
    8.15
    
    
    
    8.09
    
    
    
    8.06
    
    
    
    8.02
    
    
    
    7.98
    
    
    
    7.87Taiwan
    
    
    31.54
    
    
    
    31.44
    
    
    
    32.31
    
    
    
    33.49
    
    
    
    32.35
    
    
    
    32.21
    
    
    
    32.79
    
    
    
    32.87Singapore
    
    
    1.64
    
    
    
    1.66
    
    
    
    1.68
    
    
    
    1.69
    
    
    
    1.63
    
    
    
    1.59
    
    
    
    1.58
    
    
    
    1.56Philippines
    
    
    55.09
    
    
    
    54.73
    
    
    
    56.11
    
    
    
    54.62
    
    
    
    51.92
    
    
    
    52.33
    
    
    
    51.51
    
    
    
    49.89Russia and Eastern
Europe2
    
    
    0.76
    
    
    
    0.79
    
    
    
    0.83
    
    
    
    0.84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    South Korea
    
    
    1,027.27
    
    
    
    1,009.24
    
    
    
    1,030.00
    
    
    
    1,043.65
    
    
    
    992.64
    
    
    
    964.91
    
    
    
    970.11
    
    
    
    952.38Australia
    
    
    1.29
    
    
    
    1.30
    
    
    
    1.32
    
    
    
    1.34
    
    
    
    1.35
    
    
    
    1.34
    
    
    
    1.32
    
    
    
    1.30New Zealand
    
    
    1.40
    
    
    
    1.40
    
    
    
    1.45
    
    
    
    1.44
    
    
    
    1.50
    
    
    
    1.60
    
    
    
    1.58
    
    
    
    1.49Japan3
    
    
    
    
    
    
    
    
    
    
    111.19
    
    
    
    117.20
    
    
    
    116.91
    
    
    
    114.49
    
    
    
    116.14
    
    
    
    117.80Latin
America3
    
    
    
    
    
    
    
    
    
    
    10.72
    
    
    
    10.72
    
    
    
    10.60
    
    
    
    11.18
    
    
    
    10.97
    
    
    
    10.90
 
 1
    
    Until July 2005, the Chinese currency was pegged to the U.S. dollar.2
    
    The functional currency of KGC 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, 2005.3
    
    No significant revenue generating activities occurred until the third quarter of 2005. 40




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##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   PageReport of Lane Gorman Trubitt, L.L.P., Independent Registered Public Accounting Firm
    
    
    42Report of BDO Seidman, LLP, Independent Registered Public Accounting Firm
    
    
    43Consolidated Balance Sheets
    
    
    44Consolidated Statements of Operations
    
    
    45Consolidated Statements of Stockholders Equity
    
    
    46Consolidated Statements of Cash Flows
    
    
    47Notes to Consolidated Financial Statements
    
    
    48
 41




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##### Table of Contents



42




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##### Table of Contents



43




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##### Table of Contents



December 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,470
    
    
    $
    11,936Restricted cash
    
    
    903
    
    
    
    455Certificates of deposit
    
    
    1,276
    
    
    
    1,277Accounts receivable
    
    
    300
    
    
    
    462Inventories, net
    
    
    12,993
    
    
    
    5,857Other current assets
    
    
    3,356
    
    
    
    2,639Total current assets
    
    
    37,298
    
    
    
    22,626Property and equipment, net
    
    
    3,143
    
    
    
    2,944Goodwill
    
    
    14,145
    
    
    
    14,145Intangible assets, net
    
    
    4,529
    
    
    
    3,400Restricted cash
    
    
    3,859
    
    
    
    4,142Deferred tax assets
    
    
    
    
    
    
    208Other assets
    
    
    974
    
    
    
    1,120Total assets
    
    $
    63,948
    
    
    $
    48,585LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,023
    
    
    $
    3,424Income taxes payable
    
    
    1,308
    
    
    
    281Accrued distributor commissions
    
    
    4,001
    
    
    
    3,852Other accrued expenses
    
    
    6,827
    
    
    
    5,255Deferred revenue
    
    
    9,897
    
    
    
    5,641Debt
    
    
    109
    
    
    
    Other current liabilities
    
    
    2,537
    
    
    
    3,135Total current liabilities
    
    
    26,702
    
    
    
    21,588Commitments and contingenciesMinority interest
    
    
    77
    
    
    
    22Stockholders equity:Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000,000 shares authorized; 7,108,867 and 8,199,933
shares issued and outstanding at December 31, 2005 and 2006, respectively
    
    
    7
    
    
    
    8Additional paid-in capital
    
    
    69,417
    
    
    
    70,042Accumulated deficit
    
    
    (32,668
    )
    
    
    (44,128
    )Accumulated other comprehensive income:Foreign currency translation adjustments
    
    
    413
    
    
    
    1,053Total stockholders equity
    
    
    37,169
    
    
    
    26,975Total liabilities and stockholders equity
    
    $
    63,948
    
    
    $
    48,585
  44




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##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Net sales
    
    $
    133,225
    
    
    $
    194,472
    
    
    $
    133,428Cost of sales
    
    
    29,321
    
    
    
    44,113
    
    
    
    33,066Gross profit
    
    
    103,904
    
    
    
    150,359
    
    
    
    100,362Operating expenses:Distributor commissions
    
    
    68,579
    
    
    
    101,021
    
    
    
    68,265Selling, general and administrative expenses
    
    
    33,102
    
    
    
    49,000
    
    
    
    45,735Provision for (recovery of) KGC receivable
    
    
    
    
    
    
    2,759
    
    
    
    (1,405
    )Total operating expenses
    
    
    101,681
    
    
    
    152,780
    
    
    
    112,595Income (loss) from operations
    
    
    2,223
    
    
    
    (2,421
    )
    
    
    (12,233
    )Other income (expense), net
    
    
    137
    
    
    
    (910
    )
    
    
    946Income (loss) before income taxes and minority interest
    
    
    2,360
    
    
    
    (3,331
    )
    
    
    (11,287
    )Income tax provision
    
    
    (663
    )
    
    
    (1,587
    )
    
    
    (182
    )Minority interest
    
    
    (456
    )
    
    
    49
    
    
    
    9Net income (loss)
    
    $
    1,241
    
    
    $
    (4,869
    )
    
    $
    (11,460
    )Income (loss) per share:Basic
    
    $
    0.22
    
    
    $
    (0.70
    )
    
    $
    (1.42
    )Diluted
    
    $
    0.18
    
    
    $
    (0.70
    )
    
    $
    (1.42
    )Weighted-average number of shares outstanding:Basic
    
    
    5,580
    
    
    
    6,934
    
    
    
    8,079Diluted
    
    
    6,822
    
    
    
    6,934
    
    
    
    8,079
  45




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    TotalBALANCE, 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 acquisition
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,869
    )
    
    
    
    
    
    
    (4,869
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    451Less: reclassification adjustment on sale of KGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,344
    )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
    
    
    
    (32,668
    )
    
    
    413
    
    
    
    37,169Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,460
    )
    
    
    
    
    
    
    (11,460
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    640Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,820
    )Exercise of stock options
    
    
    1,091,066
    
    
    
    1
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    18Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    608
    
    
    
    
    
    
    
    
    
    
    
    608BALANCE, December 31, 2006
    
    
    8,199,933
    
    
    $
    8
    
    
    $
    70,042
    
    
    $
    (44,128
    )
    
    $
    1,053
    
    
    $
    26,975
  46




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##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,241
    
    
    $
    (4,869
    )
    
    $
    (11,460
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities, net:Depreciation and amortization of property and equipment
    
    
    495
    
    
    
    529
    
    
    
    1,152Amortization of intangibles
    
    
    801
    
    
    
    945
    
    
    
    958Minority interest
    
    
    456
    
    
    
    (49
    )
    
    
    (9
    )Stock-based compensation
    
    
    14
    
    
    
    
    
    
    
    608Imputed compensation
    
    
    132
    
    
    
    33
    
    
    
    Imputed interest on KGC installment payable
    
    
    
    
    
    
    
    
    
    
    (671
    )Provision for (recovery of) KGC receivable
    
    
    
    
    
    
    2,759
    
    
    
    (1,405
    )Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    1,063Deferred income taxes
    
    
    (515
    )
    
    
    515
    
    
    
    (215
    )Changes in assets and liabilities, net of acquisitions and dispositions:Accounts receivable
    
    
    50
    
    
    
    (863
    )
    
    
    (136
    )Inventories, net
    
    
    (10,366
    )
    
    
    (4,335
    )
    
    
    7,067Other current assets
    
    
    (1,630
    )
    
    
    (3,092
    )
    
    
    780Other assets
    
    
    330
    
    
    
    (580
    )
    
    
    (120
    )Accounts payable
    
    
    230
    
    
    
    1,040
    
    
    
    1,446Income taxes payable
    
    
    406
    
    
    
    (293
    )
    
    
    (1,036
    )Accrued distributor commissions
    
    
    3,213
    
    
    
    1,362
    
    
    
    (122
    )Other accrued expenses
    
    
    2,099
    
    
    
    3,221
    
    
    
    (1,599
    )Deferred revenue
    
    
    2,560
    
    
    
    3,847
    
    
    
    (4,280
    )Other current liabilities
    
    
    912
    
    
    
    1,256
    
    
    
    575Net cash provided by (used in) operating activities
    
    
    428
    
    
    
    1,426
    
    
    
    (7,404
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (150
    )
    
    
    (3,120
    )
    
    
    (1,815
    )Decrease (increase) in restricted cash
    
    
    (980
    )
    
    
    (2,753
    )
    
    
    363Decrease (increase) in certificate of deposit
    
    
    
    
    
    
    (1,267
    )
    
    
    105Proceeds from KGC receivable (see Note 5)
    
    
    
    
    
    
    
    
    
    
    2,028Net cash reduction from sale of subsidiary
    
    
    
    
    
    
    (1,307
    )
    
    
    (28
    )Business acquired
    
    
    (1,357
    )
    
    
    
    
    
    
    Purchase of minority interest
    
    
    (141
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (2,628
    )
    
    
    (8,447
    )
    
    
    653CASH FLOWS FROM FINANCING ACTIVITIES:Payments on debt
    
    
    (2,600
    )
    
    
    (709
    )
    
    
    (23
    )Proceeds from issuance of common stock, net
    
    
    16,078
    
    
    
    3,491
    
    
    
    18Net cash provided by (used in) financing activities
    
    
    13,478
    
    
    
    2,782
    
    
    
    (5
    )Effect of exchange rates on cash and cash equivalents
    
    
    (87
    )
    
    
    385
    
    
    
    222Net increase (decrease) in cash and cash equivalents
    
    
    11,191
    
    
    
    (3,854
    )
    
    
    (6,534
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,133
    
    
    
    22,324
    
    
    
    18,470CASH AND CASH EQUIVALENTS, end of period
    
    $
    22,324
    
    
    $
    18,470
    
    
    $
    11,936
  47




---



##### Table of Contents



Nature of Operations
   Principles of Consolidation
   Use of Estimates
   Reclassification
  Cash and Cash Equivalents
  48




---



##### Table of Contents



Restricted Cash
   Certificates of Deposit
  Inventories
 TM
 Property and Equipment
  Goodwill and Other Intangible Assets
   Impairment of Long-Lived Assets
  Income Taxes
  49




---



##### Table of Contents



Foreign Currency
  Revenue Recognition
   TM TM TM
   Income Per Share
  50




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006(In Thousands, Except Per Share Data)Net income (loss) available to common stockholders
    
    $
    1,241
    
    
    $
    (4,869
    )
    
    $
    (11,460
    )Basic weighted-average number of shares outstanding
    
    
    5,580
    
    
    
    6,934
    
    
    
    8,079Effect of dilutive stock options and warrants
    
    
    1,242
    
    
    
    
    
    
    
    Diluted weighted-average number of shares outstanding
    
    
    6,822
    
    
    
    6,934
    
    
    
    8,079Income (loss) per share:Basic
    
    $
    0.22
    
    
    $
    (0.70
    )
    
    $
    (1.42
    )Diluted
    
    $
    0.18
    
    
    $
    (0.70
    )
    
    $
    (1.42
    )
   Certain Risks and Concentrations
  Premium Noni Juice, Skindulgence ® Alura ® La Vie Skindulgence ® La Vie Premium Noni Juice Alura ®
  51




---



##### Table of Contents



Fair Value of Financial Instruments
  Recent Accounting Pronouncements
       Year Ended December 31,2004
    
    
    2005
    
    
    2006Gain (loss) on foreign exchange
    
    $
    215
    
    
    $
    (1,082
    )
    
    $
    (204
    )Interest income
    
    
    19
    
    
    
    241
    
    
    
    1,154Interest expense
    
    
    (101
    )
    
    
    (31
    )
    
    
    (9
    )Other
    
    
    4
    
    
    
    (38
    )
    
    
    5$
    137
    
    
    $
    (910
    )
    
    $
    946
  52




---



##### Table of Contents



December 31,2005
    
    
    2006Property and equipment:Office equipment
    
    $
    1,236
    
    
    $
    1,640Office software
    
    
    1,029
    
    
    
    1,062Furniture and fixtures
    
    
    430
    
    
    
    457Plant equipment
    
    
    127
    
    
    
    149Leasehold improvements
    
    
    1,628
    
    
    
    2,025Property and equipment, at cost
    
    
    4,450
    
    
    
    5,333Accumulated depreciation and amortization
    
    
    (1,307
    )
    
    
    (2,389
    )$
    3,143
    
    
    $
    2,944Other accrued expenses:Sales returns
    
    $
    1,743
    
    
    $
    1,797Employee-related expense
    
    
    1,222
    
    
    
    1,283Professional fees
    
    
    1,264
    
    
    
    478Warehousing and inventory-related expense
    
    
    846
    
    
    
    525Other
    
    
    1,752
    
    
    
    1,172$
    6,827
    
    
    $
    5,255Deferred revenue:Unshipped product
    
    $
    1,468
    
    
    $
    1,059Enrollment package revenue
    
    
    6,849
    
    
    
    4,582Unrecognized coffee revenue
    
    
    1,580
    
    
    
    $
    9,897
    
    
    $
    5,641Other current liabilities:Unclaimed checks
    
    $
    1,753
    
    
    $
    2,349Other taxes payable
    
    
    514
    
    
    
    496Other
    
    
    270
    
    
    
    290$
    2,537
    
    
    $
    3,135
    December 31, 2005
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetComputer software and programs
    
    $
    5,600
    
    
    $
    1,400
    
    
    $
    4,200
    
    
    $
    5,600
    
    
    $
    2,200
    
    
    $
    3,400Distributor database
    
    
    790
    
    
    
    461
    
    
    
    329
    
    
    
    619
    
    
    
    619
    
    
    
    $
    6,390
    
    
    $
    1,861
    
    
    $
    4,529
    
    
    $
    6,219
    
    
    $
    2,819
    
    
    $
    3,400
 53




---



##### Table of Contents



2007
    
    $
    8002008
    
    
    8002009
    
    
    8002010
    
    
    8002011
    
    
    200$
    3,400
  KGC Networks
     Actual
    
    As AdjustedNet sales
    
    $
    194,472
    
    
    $
    160,214Gross profit
    
    
    150,359
    
    
    
    123,804Distributor commissions
    
    
    101,021
    
    
    
    85,388Loss from operations
    
    
    (2,421
    )
    
    
    (1,668
    )
 Kaire Entities
  54




---



##### Table of Contents



Operating Leases
   2007
    
    $
    1,9122008
    
    
    9462009
    
    
    7762010
    
    
    5732011
    
    
    507Thereafter
    
    
    806Total minimum lease obligations
    
    $
    5,520
 Purchase Commitments
 Cluster
Concentrate
 Alura ®
 Employment Agreements
  Legal Matters
  55




---



##### Table of Contents



Other Matters
  56




---



##### Table of Contents




    
    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 (NHT Global
China}, and by the end of 2005 had invested $12.0 million as capital in that entity.
    
    NHT Global China is working to file an application for a direct selling license under
proposed legislation.
    
    NHT Global China has leased space in Zhuhai, purchased equipment and finished out a
manufacturing facility. Although NHT Global China now has a license to manufacture and
employee personnel, 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, NHT Global China obtained its general cosmetic manufacturing permit
and has begun trial production testing.
    57




---



##### Table of Contents



Re-Incorporation and Authorized Shares
   Common Stock Purchase Warrants
    Restricted Stock
  58




---



##### Table of Contents



59




---



##### Table of Contents



Adoption of SFAS 123(R) and Transition
     Pro Forma Information Under SFAS No. 123(R) for Periods Prior to January 1, 2006
  Year Ended December 31,2004
    
    
    2005Net income (loss) available to common stockholders, as reported
    
    $
    1,241
    
    
    $
    (4,869
    )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
    
    
    (3,893
    )
    
    
    (393
    )Pro forma net loss available to common stockholders
    
    $
    (2,652
    )
    
    $
    (5,262
    )Basic income (loss) per share:As reported
    
    $
    0.22
    
    
    $
    (0.70
    )Pro forma
    
    $
    (0.48
    )
    
    $
    (0.76
    )Diluted income (loss) per share:As reported
    
    $
    0.18
    
    
    $
    (0.70
    )Pro forma
    
    $
    (0.48
    )
    
    $
    (0.76
    )
 Valuation and Expense Information under SFAS No. 123(R)
  60




---



##### Table of Contents



Year Ended December 31,2004
    
    2005
    
    2006Risk-free interest rate
    
    
    2.50
    %
    
    
    4.38
    %
    
    
    4.8
    %Expected volatility
    
    
    97
    %
    
    
    94
    %
    
    
    96
    %Expected life (in years)
    
    
    4
    
    
    
    3
    
    
    
    4Dividend yield
    
    
    
    
    
    
    
    
    
    
    
  Wtd. Avg.Wtd. Avg.
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life
    
    
    Value1Outstanding at December 31, 2003
    
    
    1,331,500
    
    
    $
    1.06
    
    
    
    8.2
    
    
    $
    11,875Granted
    
    
    344,124
    
    
    
    17.44
    
    
    
    
    
    
    
    Exercised
    
    
    (1,500
    )
    
    
    1.10
    
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    1,674,124
    
    
    
    4.42
    
    
    
    7.1
    
    
    
    12,486Granted
    
    
    248,000
    
    
    
    10.21
    
    
    
    
    
    
    
    Outstanding at December 31, 2005
    
    
    1,922,124
    
    
    
    5.17
    
    
    
    5.9
    
    
    
    11,431Granted
    
    
    373,500
    
    
    
    2.60
    
    
    
    
    
    
    
    Exercised
    
    
    (1,091,066
    )
    
    
    1.01
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (163,100
    )
    
    
    3.45
    
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    1,041,458
    
    
    
    8.88
    
    
    
    3.9
    
    
    
    20Vested and expected to vest at December 31, 2006
    
    
    1,010,994
    
    
    
    8.97
    
    
    
    3.9
    
    
    
    20Exercisable at December 31, 2006
    
    
    567,295
    
    
    
    12.72
    
    
    
    3.4
    
    
    
    20
 
 1
    
    Aggregate intrinsic value is defined as the
positive difference between the current market value and the exercise price and
is estimated using the closing price of the Companys common stock on the
last trading day of the periods ended as of the dates indicated (in thousands). 61




---



##### Table of Contents



Wtd. Avg.Fair Valueat GrantShares
    
    
    DateNon-vested at December 31, 2003
    
    
    39,996
    
    
    $
    0.95Granted
    
    
    34,124
    
    
    
    7.87Vested
    
    
    (39,996
    )
    
    
    0.95Non-vested at December 31, 2004
    
    
    34,124
    
    
    
    7.87Granted
    
    
    203,000
    
    
    
    6.63Vested
    
    
    (14,144
    )
    
    
    7.87Non-vested at December 31, 2005
    
    
    222,980
    
    
    
    6.74Granted
    
    
    365,500
    
    
    
    1.61Vested
    
    
    (77,651
    )
    
    
    7.31Forfeited or expired
    
    
    (36,666
    )
    
    
    6.50Non-vested at December 31, 2006
    
    
    474,163
    
    
    
    2.80
  Options Outstanding
    
    
    Options ExercisableWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageShares
    
    
    Exercise
    
    
    Contractual
    
    
    Shares
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Price
    
    
    Life
    
    
    Exercisable
    
    
    Price$1.00 to $2.79
    
    
    473,500
    
    
    $
    2.04
    
    
    
    3.7
    
    
    
    120,000
    
    
    $
    1.50$9.18 to $11.40
    
    
    257,958
    
    
    
    10.33
    
    
    
    4.0
    
    
    
    137,295
    
    
    
    10.36$18.11
    
    
    310,000
    
    
    
    18.11
    
    
    
    4.2
    
    
    
    310,000
    
    
    
    18.11$1.00 to $18.11
    
    
    1,041,458
    
    
    
    8.88
    
    
    
    3.9
    
    
    
    567,295
    
    
    
    12.72
   Year Ended December 31,2004
    
    
    2005
    
    
    2006Domestic
    
    $
    (2,108
    )
    
    $
    (8,637
    )
    
    $
    (2,279
    )Foreign
    
    
    4,468
    
    
    
    5,306
    
    
    
    (9,008
    )Income (loss) before income taxes
    
    $
    2,360
    
    
    $
    (3,331
    )
    
    $
    (11,287
    )
 62




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Current taxes:Federal
    
    $
    248
    
    
    $
    103
    
    
    $
    29State
    
    
    171
    
    
    
    168
    
    
    
    (176
    )Foreign
    
    
    759
    
    
    
    801
    
    
    
    5371,178
    
    
    
    1,072
    
    
    
    390Deferred taxes
    
    
    (515
    )
    
    
    515
    
    
    
    (208
    )Provision for income taxes
    
    $
    663
    
    
    $
    1,587
    
    
    $
    182
  Year Ended December 31,2004
    
    
    2005
    
    
    2006Income tax at federal statutory rate
    
    $
    802
    
    
    $
    (1,348
    )
    
    $
    (3,838
    )Effect of permanent differences
    
    
    709
    
    
    
    3,054
    
    
    
    1,558Increase (decrease) in valuation allowance
    
    
    (602
    )
    
    
    497
    
    
    
    1,630Foreign rate differential
    
    
    (471
    )
    
    
    (787
    )
    
    
    1,093State income taxes, net of federal benefit
    
    
    113
    
    
    
    111
    
    
    
    (116
    )Other reconciling items
    
    
    112
    
    
    
    60
    
    
    
    (145
    )Income tax provision
    
    $
    663
    
    
    $
    1,587
    
    
    $
    182
  December 31,2005
    
    
    2006Deferred tax assets:Net operating losses
    
    $
    2,051
    
    
    $
    2,761Stock-based compensation
    
    
    488
    
    
    
    488Accrued expenses
    
    
    468
    
    
    
    645Tax credits
    
    
    183
    
    
    
    124Deferred revenue
    
    
    133
    
    
    
    Provision for KGC receivable
    
    
    938
    
    
    
    460Other
    
    
    12
    
    
    
    12Total deferred tax assets
    
    
    4,273
    
    
    
    4,490Valuation allowance
    
    
    (2,652
    )
    
    
    (2,949
    )1,621
    
    
    
    1,541Deferred tax liabilities:Intangible assets
    
    
    (1,540
    )
    
    
    (1,156
    )Depreciation
    
    
    (17
    )
    
    
    (16
    )Prepaids
    
    
    (64
    )
    
    
    (161
    )Total deferred tax liabilities
    
    
    (1,621
    )
    
    
    (1,333
    )Deferred tax assets, net
    
    $
    
    
    
    $
    208
  63




---



##### Table of Contents



Year Ended December 31,2004
    
    2005
    
    2006(In Thousands)Cash paid during the year for:Income taxes
    
    $
    552
    
    
    $
    1,376
    
    
    $
    1,453Interest
    
    
    86
    
    
    
    22
    
    
    
    1Non-cash investing and financing activities:Receivable from KGC
    
    
    
    
    
    
    3,100
    
    
    
    Common stock issued for acquisitions
    
    
    15,665
    
    
    
    
    
    
    
    Debt issued for acquisitions
    
    
    3,203
    
    
    
    
    
    
    
    
       64




---



##### Table of Contents



65




---



##### Table of Contents



Skindulgence ® LaVie
       66




---



##### Table of Contents



67




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Net sales to external customers:North America
    
    $
    16,914
    
    
    $
    16,528
    
    
    $
    14,144Hong Kong
    
    
    74,293
    
    
    
    120,968
    
    
    
    88,835Taiwan
    
    
    3,261
    
    
    
    3,722
    
    
    
    4,367Southeast Asia
    
    
    1,786
    
    
    
    6,438
    
    
    
    1,710Russia and Eastern Europe1
    
    
    30,248
    
    
    
    34,258
    
    
    
    South Korea
    
    
    5,524
    
    
    
    8,495
    
    
    
    12,538Australia/New Zealand
    
    
    1,158
    
    
    
    1,886
    
    
    
    1,284Japan
    
    
    
    
    
    
    1,659
    
    
    
    6,761Latin America
    
    
    
    
    
    
    518
    
    
    
    3,496Other
    
    
    41
    
    
    
    
    
    
    
    293Total net sales
    
    $
    133,225
    
    
    $
    194,472
    
    
    $
    133,428December 31,2004
    
    
    2005
    
    
    2006Long-lived assets:North America
    
    $
    20,124
    
    
    $
    19,504
    
    
    $
    18,259Hong Kong
    
    
    247
    
    
    
    554
    
    
    
    393Taiwan
    
    
    117
    
    
    
    179
    
    
    
    157Southeast Asia
    
    
    133
    
    
    
    47
    
    
    
    151China
    
    
    
    
    
    
    3,265
    
    
    
    3,550South Korea
    
    
    398
    
    
    
    1,656
    
    
    
    2,200Australia/New Zealand
    
    
    35
    
    
    
    33
    
    
    
    26Japan
    
    
    
    
    
    
    834
    
    
    
    649Latin America
    
    
    
    
    
    
    573
    
    
    
    562Other
    
    
    36
    
    
    
    5
    
    
    
    12Total long-lived assets
    
    $
    21,090
    
    
    $
    26,650
    
    
    $
    25,959
 
 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. 68




---



##### Table of Contents



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
    
    
    
    33,160Distributor 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
    
    
    
    (4,999
    )Net income (loss)
    
    
    2,795
    
    
    
    (2,159
    )
    
    
    119
    
    
    
    (5,624
    )Income (loss) per share:Basic
    
    $
    0.41
    
    
    $
    (0.32
    )
    
    $
    0.02
    
    
    $
    (0.79
    )Diluted
    
    $
    0.34
    
    
    $
    (0.32
    )
    
    $
    0.01
    
    
    $
    (0.79
    )Weighted-average number of shares outstanding:Basic
    
    
    6,820
    
    
    
    6,853
    
    
    
    6,951
    
    
    
    7,109Diluted
    
    
    8,254
    
    
    
    6,853
    
    
    
    8,418
    
    
    
    7,109
 69




---



##### Table of Contents



Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In Thousands, Except Per Share Data)Fiscal 2006:Net sales
    
    $
    39,474
    
    
    $
    36,321
    
    
    $
    29,945
    
    
    $
    27,688Gross profit
    
    
    31,232
    
    
    
    27,790
    
    
    
    23,299
    
    
    
    18,041Distributor commissions
    
    
    20,685
    
    
    
    18,761
    
    
    
    15,456
    
    
    
    13,363Selling, general and administrative expenses
    
    
    11,555
    
    
    
    12,183
    
    
    
    10,630
    
    
    
    11,367Recovery of KGC receivable
    
    
    
    
    
    
    (314
    )
    
    
    (338
    )
    
    
    (753
    )Loss from operations
    
    
    (1,008
    )
    
    
    (2,840
    )
    
    
    (2,449
    )
    
    
    (5,936
    )Net loss
    
    
    (1,134
    )
    
    
    (2,815
    )
    
    
    (2,475
    )
    
    
    (5,036
    )Loss per share:Basic
    
    $
    (0.15
    )
    
    $
    (0.34
    )
    
    $
    (0.30
    )
    
    $
    (0.61
    )Diluted
    
    $
    (0.15
    )
    
    $
    (0.34
    )
    
    $
    (0.30
    )
    
    $
    (0.61
    )Weighted-average number of shares outstanding:Basic
    
    
    7,711
    
    
    
    8,200
    
    
    
    8,200
    
    
    
    8,200Diluted
    
    
    7,711
    
    
    
    8,200
    
    
    
    8,200
    
    
    
    8,200
 
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
      
    
    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 external audit;
 70




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##### Table of Contents




    
    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.
    
 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
 71




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##### Table of Contents




    
    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 consolidated financial statements.
   
    
    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, and (2) an adequate tone was not set from the top as control measures
in place were ignored by the previous two executives and the importance of controls was not
properly emphasized and communicated throughout the Company;
    
    We did not maintain effective monitoring controls over financial reporting because we do
not have an internal audit function; and
    
    We lacked documentation with respect to certain related party transactions, subsidiary
operations and expense reimbursement procedures. In addition, policies related to
independent distributor relationships were inadequate.
    Changes in Internal Control Over Financial Reporting
  
    
    We are devoting more resources to develop an anti-fraud program to detect and prevent
fraud. We have subscribed to compliance training programs provided by WeComply, Inc.
concerning fraud awareness, insider trading, and the Foreign Corrupt Practices Act, and
intend to require substantially all employees to complete such programs. We intend to
engage outside counsel in each market to review our distributor-related policies,
procedures and business practices. Additionally, 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 have been performed on all personnel being placed
into positions of material responsibility;
    
    The Company developed additional policies and procedures to further strengthen its
reporting, including the areas of revenue recognition, sales and expense cut-off and sales
returns. During 2006, the Company hired an analyst to assist in revenue reporting and
reconciliation. The Company also developed and distributed to all international
subsidiaries formal checklists
 72




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##### Table of Contents



to provide guidance regarding matters to consider in the period end close process. In
addition, we will evaluate whether to engage outside resources to perform internal audit
projects;
 
    
    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
addressed certain of the material weaknesses listed in the 2005 Annual Report on Form 10-K,
including the effective control over period-end financial close and reporting and the
effective control over certain accounting functions. The Oracle implementation facilitated
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 made
changes to its corporate accounting staff, including the hiring or contracting of
additional personnel in the U.S.;
    
    Additional segregation of duties and appropriate review, approval, and supporting
documentation were installed in 2006 to maintain effective controls over the disbursement
function. We developed policies and procedures for distributor compensation adjustments and
employee loans, and continue to develop policies and procedures for proper documentation,
review and approval related to related party transactions, subsidiary operations, 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;
    
    We have taken steps to restrict access to the inventory detail schedule used to support
the general ledger balances. Additionally, we have hired an inventory accountant and
developed additional inventory-related tools to assist our international controllers. We
may eventually implement additional Oracle applications to replace the current periodic
inventory system, relying on monthly inventory counts using physical inventory count
sheets, with a perpetual inventory system. Meanwhile, more procedures have been installed
for review of inventory count documentation;
    
    Additional processes have been 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.
    
 Item 9B. OTHER INFORMATION
  73




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Part III
  
 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.
    
    (b)4.2
    
    Form of Common Stock Purchase Warrant issued in October 2004 Private Placement.
    
    (c)10.1
    
    2002 Stock Plan, as amended.
    
    (q)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.
    
    (b)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.
    
    (b)10.5
    
    Option Agreement dated as
October 14, 2002 granting 570,000 options to the LaCore and Woodburn Partnership, as amended.
    
    (b)10.6
    
    Option Agreement dated as October 14, 2002 granting 570,000 options to Terry LaCore, as amended.
    
    (b)10.7
    
    Option Agreement dated as
July 24, 2002 granting 60,000 options to Capital Development S.A., an affiliate of Sir Brian Wolfson.
    
    (b)10.8
    
    Option Agreement dated as July 24, 2002 granting 60,000 options to Randall A. Mason.
    
    (b)10.9
    
    2007 Annual Incentive Plan
    
    (w)10.10
    
    2007 Equity Incentive Plan
    
    (w)10.11
    
    Distributorship Agreement dated March 1, 2002 between the Company and 40Js.
    
    (q)10.12
    
    Founder Compensation Agreement by
and among Lexxus International, Inc., Natural Health Trends Corp., Rodney Sullivan and Pam Sullivan, Michael Bray, and Jeff Provost.
    
    (d)10.13
    
    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)10.14
    
    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)10.15
    
    KGC Agreement dated March 17, 2004 between the Company and Bannks Foundation.
    
    (l)10.16
    
    Stock Purchase Agreement dated
March 29, 2004 between Michael Bray, Jeff Provost, Rodney Sullivan and Pam Sullivan and the Company.
    
    (l)10.17
    
    Agreement and Plan of Merger, dated
as of March 31, 2004, by and among the Company, MergerCo and MarketVision.
    
    (e)10.18
    
    Stockholders Agreement, dated as of
March 31, 2004, by and among the Company, John Cavanaugh, Terry LaCore and Jason Landry.
    
    (e)10.19
    
    Software License Agreement dated as
of March 31, 2004 among the Company, MergerCo and MarketVision Consulting Group, LLC.
    
    (e)10.20
    
    Employment Agreement, dated as of August 1, 2004, by and between the Company and Chris Sharng.
    
    (c)
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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Reference10.21
    
    Securities Purchase Agreement dated October 6, 2004 by and among the Company and the investors
signatory thereto.
    
    (f)10.22
    
    Subscription Agreement (Canada) dated October 6, 2004 by and among the Company and the investors
signatory thereto.
    
    (f)10.23
    
    Form of Registration Rights Agreement between the Company and the investors in the Companys
October 2004 private placement.
    
    (c)10.24
    
    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)10.25
    
    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)10.26
    
    Royalty Agreement dated March 1, 2005 by and among Steve Francisco, Dan Catto, and the Company.
    
    (l)10.27
    
    Lease by and between CLP Properties Texas, LLP and Natural Health Trends Corp. dated as of June
18, 2005.
    
    (g)10.28
    
    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)10.29
    
    Form of Indemnification Agreement dated December 13, 2005, between Natural Health Trends Corp. and
each of its directors.
    
    (i)10.30
    
    Stock Purchase Agreement dated December 21, 2005 between Natural Health Trend Corp. and Bannks
Foundation.
    
    (j)10.31
    
    Agreement dated December 21, 2005 between Natural Health Trends Corp. and KGC Networks Pte Ltd.
    
    (j)10.32
    
    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)10.33
    
    Letter agreement dated as of March 1, 2006 between Natural Health Trends Corp. and Robert H. Hesse.
    
    (m)10.34
    
    Employment letter agreement dated as of July 31, 2006 between Natural Health Trends Corp. and
Stephanie Hayano.
    
    (p)10.35
    
    Non-competition and proprietary rights assignment agreement dated as of July 31, 2006 between
Natural Health Trends Corp. and Stephanie Hayano.
    
    (p)10.36
    
    Settlement agreement dated as of October 31, 2006, by and among Terry LaCore, Mark D. Woodburn and
Natural Health Trends Corp.
    
    (s)10.37
    
    Non-recourse promissory notes from Terry L. LaCore and Mark D. Woodburn to pay to the order of
Natural Health Trends Corp. the aggregate principal amount of Two Million Five Hundred Thousand
Dollars ($2,500,000) by no later than October 31, 2008.
    
    (s)10.38
    
    Indemnification agreement effective as of October 31, 2006 by and among Natural Health Trends Corp.
    
    (s)10.39
    
    Voting agreement, dated as of October 31, 2006, by and among Natural Health Trends Corp., Terry L.
LaCore and Mark D. Woodburn.
    
    (s)10.40
    
    Consulting engagement with Mark D. Woodburn, commencing on October 31, 2006.
    
    (s)10.41
    
    Restricted activity and proprietary rights assignment agreement dated October 31, 2006 with Mark
D. Woodburn.
    
    (s)10.42
    
    Restricted activity and proprietary rights assignment agreement dated October 31, 2006 with Terry
L. LaCore.
    
    (s)10.43
    
    Employment letter agreement dated as of December 8, 2006 between Natural Health Trends Corp. and
John Cavanaugh.
    
    (t)10.44
    
    Non-competition and proprietary rights assignment agreement dated as of December 8, 2006 between
Natural Health Trends Corp. and John Cavanaugh.
    
    (t)10.45
    
    Employment letter agreement dated as of January 3, 2007 between Natural Health Trends Corp. and
Gernot Senke
    
    (u)10.46
    
    Non-competition and proprietary rights assignment agreement dated as of January 3, 2007 between
Natural Health Trends Corp. and Gernot Senke.
    
    (u)10.47
    
    Severance Agreement dated as of February 21, 2007 between Natural Health Trends Corp. and
Stephanie Hayano.
    
    (v)10.48
    
    Severance Agreement dated as of February 21, 2007 between Natural Health Trends Corp. and Gernot
Senke.
    
    (v)14.1
    
    Worldwide Code of Business Conduct, as revised.
    
    *14.2
    
    Code of Ethics for Senior Financial Officers.
    
    (l)16.1
    
    Letter from BDO Siedman, LLP. dated September 12, 2006.
    
    (r)
 75




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Reference21.1
    
    Subsidiaries of the Company.
    
    *31.1
    
    Certification of the President 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 President 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 May 8, 2006, as an Exhibit to the Companys Annual Report on Form 10-K, and
incorporated herein by reference.(c)
    
    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.(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.(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.(n)
    
    Previously filed May 26, 2006, as an Exhibit to the Companys Current Report on Form 8-K, and
incorporated herein by reference.(o)
    
    Previously filed June 23, 2006, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(p)
    
    Previously filed August 3, 2006, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(q)
    
    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.(r)
    
    Previously filed September 13, 2006, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference.(s)
    
    Previously filed November 1, 2006, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(t)
    
    Previously filed December 13, 2006, as an Exhibit to the Companys Current Report on Form
8-K, and incorporated herein by reference.(u)
    
    Previously filed January 9, 2007, as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(v)
    
    Previously filed February 26, 2007 as an Exhibit to the Companys Current Report on Form 8-K,
and incorporated herein by reference.(w)
    
    Previously filed October 20, 2006 as an Appendix to the Companys Definitive Proxy
Statement, and incorporated herein by reference. 76




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##### Table of Contents



SIGNATURES
  NATURAL HEALTH TRENDS CORP.Date: March 28, 2007
    
    /s/ Chris T. SharngChris T. SharngPresident(Principal Executive Officer)
  Signature
    
    Title
    
    Date/s/ Chris T. Sharng

Chris T. Sharng
    
    President
(Principal Executive Officer)
    
    March 28, 2007/s/ Timothy S. Davidson

Timothy S. Davidson
    
    Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
    
    March 28, 2007/s/ Randall A. Mason

Randall A. Mason
    
    Chairman of the Board and Director
    
    March 28, 2007/s/ Sir Brian Wolfson

Sir Brian Wolfson
    
    Vice Chairman of the Board and Director
    
    March 28, 2007/s/ Anthony B. Martino

Anthony B. Martino
    
    Director
    
    March 28, 2007
 77