<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-K/A

                               AMENDMENT NO.2 TO
                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the fiscal year ended December 31, 1996

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

For the transition period from _______________ to ___________________

                          Commission File No. 0-26568

                              USA DETERGENTS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                            11-2935430
--------------------------------                            -------------------
(State or other jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                             Identification No.)

     1735 Jersey Avenue
  North Brunswick, New Jersey                                      08902
--------------------------------                            -------------------
    (Address of principal                                        (Zip Code)
      executive offices)

Registrant's telephone number, including area code:  (732) 828-1800

Securities registered pursuant to 
Section 12(b) of the Act:                                Name of each exchange
    Title of each class                                  on which registered

           None                                             Not Applicable
        ----------                                       --------------------

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]  No [ ]

Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The number of shares outstanding of the Registrant's Common Stock, as of March
3, 1998, was 13,815,654 shares. The aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant (based upon the closing
price of such stock on the Nasdaq National Market on March 3, 1998 and the
assumption for this computation only that all directors and executive officers
are affiliates) was $137,252,184.

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         Unless otherwise indicated, all information in this Form 10-K/A has
been adjusted to reflect (i) a reorganization of the company into a Delaware
corporation effected in August 1995, (ii) the issuance of approximately 88,167
shares of Common Stock for each share of Common Stock of the Company's
predecessor in connection with the reorganization and (iii) a 3-for-2 stock
split effected in the form of a 50% stock dividend paid on February 9, 1996
(the "Stock Split"). Unless the context otherwise requires, the "Company" or
"USA Detergents" shall mean USA Detergents, Inc., its wholly-owned subsidiaries
and its predecessor to the reorganization.

         The Company's quarterly and annual operating results are affected by a
wide variety of other factors that could materially and adversely affect actual
results, including competition from other suppliers of laundry and household
cleaning products; changes in consumer preferences and spending habits; the
inability to successfully manage growth; seasonality; the ability to introduce
and the timing of the introduction of new products; the inability to obtain
adequate supplies or materials at acceptable prices; the inability to reduce
expenses to a level commensurate with revenues; and the inability to negotiate
acceptable credit terms with current or prospective lenders. As a result of
these and other factors, the Company may experience material fluctuations in
future operating results on a quarterly or annual basis, which could materially
and adversely affect its business, financial condition, operating results, and
stock price. Furthermore, this document and other documents filed by the
Company with the Securities and Exchange Commission (the "SEC") contain certain
forward looking statements with respect to the business of the Company,
including prospective financing arrangements. These forward-looking statements
are subject to certain risks and uncertainties, including those mentioned
above, which may cause actual results to differ significantly from these
forward-looking statements. These forward-looking statements speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. An investment in the Company involves
various risks, including those mentioned above and those which are detailed
from time to time in the Company's SEC filings.

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         This Report on Form 10-K/A is being filed to amend and restate Items
1-3, 6-8 and 10-11 of the Company's Report on Form 10-K filed March 31, 1997,
as amended by the Company's Report on Form 10-K/A filed April 29, 1997 (the
"Filed Reports"). Although not inaccurate at the time of filing of the Filed
Reports, certain Items contained in this Report on Form 10-K/A are being
presented as of a more recent date to reflect changes which may have occurred
in the Company's business operations or condition since the filing of the Filed
Reports.

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         USA Detergents is a leading manufacturer and marketer of quality
nationally distributed value brand laundry and household cleaning products. The
Company currently markets its products in eight laundry and household product
categories and features twelve distinct value brands. Two of the Company's
brands, XTRA(Registered Trademark) and Nice'n FLUFFY(Registered Trademark),
currently rank among the ten largest brands in their respective product
categories in terms of total retail sales in the United States. XTRA(Registered
Trademark) and Nice'n FLUFFY(Registered Trademark) represented 60% and 21%,
respectively, of the Company's net sales in 1996. The Company sells its
products to large and small retailers throughout the United States including
supermarkets, mass merchandisers, variety and dollar stores, drug stores and
small grocery stores, such as Wal-Mart, Consolidated Stores, K-Mart, Walgreens,
Super Value and Fleming Corp.

HOUSEHOLD PRODUCTS MARKET OVERVIEW

         The Company believes the market for laundry and household cleaning
products ("Household Products") in which it competes or intends to compete
consists of the following eleven product categories: liquid laundry detergent,
powder laundry detergent, liquid fabric softener, fabric softener sheets,
household cleaners, dish detergent, personal soap products, air fresheners,
bleaches, rug and upholstery cleaners and floor cleaners.

         While the leading supplier varies among different Household Products
categories, the overall market for Household Products is dominated by two
principal suppliers: Procter & Gamble Co. and Unilever N.V. The Company
believes these two premium-priced brand suppliers accounted for approximately
54%, in the aggregate, of retail sales of Household Products in 1996.

         The Company views the market for Household Products as being segmented
into four types of brands: value brands, store brands, mid-priced brands and
premium-priced brands. The Company believes that consumer purchases of laundry
and household cleaning products are determined, in large part, by price, with
certain consumers willing to pay a premium for leading national brand names and
the latest packaging and technology

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and other consumers demanding value-priced brands incorporating certain
features found in premium-priced products. The Company believes the primary
characteristics of each of these types of brands are as follows:

         Value Brands. Value brands are sold to retailers and consumers at
prices significantly below most other brands of Household Products. Value
brands generally incorporate packaging features and product quality comparable
to premium-priced and mid-priced brands and typically are offered with only the
most popular product features and in only the most popular sizes. Value brands
are not advertised or promoted directly to the consumer by the value brand
supplier.

         Store Brands. Store brands are marketed through various retail outlets
under retailer-affiliated (private) labels and are typically manufactured to
the specifications of individual retailers. Store brands typically are
supported by limited retailer advertising, do not incorporate state-of-the-art
packaging and are priced below mid-priced brands.

         Mid-Priced Brands. Mid-priced brands generally attempt to capitalize
on their existing or historical brand equity, are supported by limited consumer
advertising and are positioned as comparable but less expensive alternatives to
premium-priced brands.

         Premium-Priced Brands. Premium-priced brands focus on promoting brand
loyalty and consumer awareness of product features through significant national
advertising. Premium-priced brands are supported by extensive research and
development to design state-of-the-art packaging and product features and to
develop new products.

BUSINESS STRATEGY

         The Company's objective is to be the leading supplier of value brand
Household Products. The Company's business strategy is to enable retailers to
increase sales and realize attractive profit margins on the Company's products
while providing value to consumers. There can be no assurance that the Company
will be successful in meeting its objectives or in successfully pursuing its
strategies. The key elements of the Company's business strategy are described
below:

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Value to Retailers

         The Company focuses on assisting the retailer to profitably optimize
its retail space in traditionally low margin Household Products categories. The
Company provides retailers with merchandising support relating to product mix,
shelf display and pricing strategies, and promotional programs which are
designed to increase sales of the Company's products. The Company's emphasis on
being a low-cost supplier allows it to sell its Household Products to retailers
at prices which enable these retailers to offer a lower price to consumers
while realizing relatively attractive margins. The Company also seeks to build
strong relationships with retailers by providing them with a high level of
customized service including direct shipments, electronic data interchange,
mixed product pallets and flexible, prompt delivery.

Value to Consumers

         The Company offers consumers attractively packaged, quality brand name
products at prices significantly below most other brands. This combination of
high product quality and low prices offers consumers an attractive alternative
to other brands. The Company emphasizes cost reduction and has historically
passed substantially all of its savings on to retailers and consumers.

Brand and Corporate Identification

         The Company seeks to develop strong brand and corporate name
recognition among retailers and strong brand recognition and brand loyalty
among consumers. The Company believes that colorful and graphic packaging
combined with recognizable product names and the Company's commitment to
quality and low price, contribute to strong brand awareness and purchaser
confidence at the consumer level, and generate increased product sales. The
Company further believes that development of corporate and brand name
recognition of the Company and its products among retailers enables the Company
to introduce new products more effectively.

Further Market Penetration

         The Company focuses its sales efforts on supermarkets, mass
merchandisers, variety and dollar stores, drug stores and small grocery stores,
particularly those whose retailing philosophy closely corresponds to the
Company's high value, low cost marketing philosophy. The Company intends to
continue increasing its market penetration by distributing its products through
additional supermarkets, as well as other retail outlets. For 1996, Information
Resources, Inc. Retail Review data indicates that the Company's XTRA(Registered
Trademark) liquid laundry detergent and Nice'n FLUFFY(Registered Trademark)
liquid fabric softener were sold to retailers representing 63.6% and 64.0%,
respectively, of all commodity volume ("ACV") distribution within the food,
drug and mass merchants sector, up from 46.0% and 44.6%, respectively, in 1995.
ACV distribution for a product represents the percentage of food,

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drug and mass merchant retail outlets (as measured by aggregate retail sales)
which sold that product during a specified time period in the United States.
The Company intends to use the access to retailers it has gained through the
success of its XTRA(Registered Trademark) and Nice'n FLUFFY(Registered
Trademark) brands to increase the penetration of its other products through
these existing retail outlets.

Controlled Expansion of Product Line

         The Company introduced 15 new products in 1995 and 38 new products in
1996, including re-formulations and alternate sizes. Net sales of products
introduced in 1996 were $37 million or 21% of net sales for the year ended
December 31, 1996.

PRODUCTS

         The Company currently sells its products primarily in eight Household
Product categories under twelve distinct brand names. The Company's products
include the following:

         PRODUCT CATEGORY                   PRIMARY COMPANY BRANDS
         ----------------                   ----------------------

         Liquid Laundry Detergent           XTRA(Registered Trademark)

         Powder Laundry Detergent           XTRA(Registered Trademark)

         Liquid Fabric Softener             Nice'n FLUFFY(Registered Trademark)

         Fabric Softener Sheets             Nice'n FLUFFY(Registered Trademark)

         Household Cleaners                 Captain Shine(Registered Trademark),
                                            Touch of Glass(Registered
                                            Trademark), Swiss Pine(Registered
                                            Trademark), Tile Action(Trademark),
                                            Fabulous(Trademark), Plumber's
                                            Aid(Trademark)

         Dish Detergent                     XTRA(Registered Trademark) Plus, 
                                            Crystal Shine(Registered Trademark)

         Personal Soap Products             Fine Care(Registered Trademark)

         Air Fresheners                     Country Air(Trademark)

         Automotive Products                Speedway(Registered Trademark)

         The Company's laundry detergents and fabric softeners accounted for an
aggregate of approximately 81% and 85% of the Company's net sales in 1995 and
1996, respectively, with XTRA(Registered Trademark) liquid laundry detergent
accounting for 52% and 47% of net sales in these periods, respectively. The
Company's financial results and condition are substantially dependent on the
continued success and growth of sales of these products. A number of factors
could limit sales by the Company of these products, or the pr.ofitability of
such sales, including competitive efforts by other manufacturers of similar
products, shifts in consumer preferences or introduction and acceptance of
alternative product offerings.

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PRODUCT DESIGN AND DEVELOPMENT

         The Company consistently seeks to enhance the value of its products by
either improving their performance and packaging or lowering their cost and has
historically passed substantially all cost savings on to the retailer. The
Company places considerable emphasis on package quality and uses premium
quality materials and appealing, colorful graphic designs with the objective of
providing its products with the same or better shelf appeal than premium and
mid-priced brands.

         Most of the important product enhancements in the Household Products
industry during the past several years have been developed by the research and
development departments of the premium-priced brand companies and the chemical
companies that supply the Household Products industry. Rather than maintain a
large research and development department, the Company works closely with its
suppliers, distributors and other industry participants to identify, and in
some cases anticipate, technological and design innovations which may be
incorporated into the Company's products. Generally, the Company adopts product
and packaging features after they have gained general market acceptance and
believes that it has typically been one of the first value brand suppliers to
incorporate features comparable to the successful innovations of these larger
competitors. The Company only incorporates features which it believes are
valued by its consumer base. The Company believes that its approach to product
design and development minimizes costs associated with significant research and
development, limits the introduction of unproven innovations and features, and
reduces the need to spend heavily to advertise new product developments or to
educate consumers.

MARKETING AND DISTRIBUTION

         The Company sells its products to large and small retailers throughout
the United States. The Company's various branded products historically have
been sold primarily to supermarkets, mass merchandisers, variety and dollar
stores, drug stores and small grocery stores. Significant customers of the
Company include Wal-Mart, Consolidated Stores, K-Mart, Walgreens, Super Value
and Fleming Corp. The following table sets forth the Company's net sales for
fiscal 1994, 1995 and 1996 by retail distribution channel:

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                                                PERCENTAGE OF NET SALES
                                                -----------------------
         DISTRIBUTION CHANNEL                 1994        1995        1996
         --------------------                 ----        ----        ----
         Supermarkets                         25.4%       32.1%       40.6%
         Mass Merchandisers                   20.8        29.0        27.5
         Variety and Dollar Stores            34.2        24.5        16.8
         Drug Stores                          10.5         8.8         9.8
         Small Grocery and Other               9.1         5.6         5.3
                                             ------      ------      ------ 
           Total                             100.0%      100.0%      100.0%
                                             ======      ======      ======

         The Company's largest customer, Wal-Mart, accounted for approximately
17% of net sales in 1995 and 1996. No other customer of the Company accounted
for more than 5% of the Company's net sales during 1995 or 1996. As is
customary in the Household Products industry, the Company does not have
long-term contracts with its customers. A significant reduction of purchases by
any of the Company's largest customers could have a material adverse effect on
the Company's business and results of operations.

         As of December 31, 1996, the Company sold its products through its own
62 person national sales department, which included seven regional offices,
supported by a network of 104 independent brokers and sales representatives. In
fiscal 1996, approximately 55% of the Company's net sales were generated by its
internal sales force with independent broker assistance, with the remaining 45%
of net sales generated without broker assistance. Each salesperson is
compensated by salary and commissions.

         The Company seeks to provide retailers with high levels of sales and
merchandising support and delivery services. The Company's sales and
merchandising support and delivery services are designed to assist retailers in
increasing sales of the Company's products through development of improved
packaging, product mix, shelving and pricing strategies, and effective
promotional programs. To provide better delivery service to its customers, the
Company is flexible as to the amounts and combinations of products it will
deliver and generally strives to deliver products within one to seven business
days of receiving an order. With certain retailers, the Company uses electronic
data interchange ("EDI") systems that interface directly with the customer's
product ordering process. EDI, combined with the Company's internal
computerized management information and control system, improves inventory and
cost management and facilitates rapid delivery to retailers.

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         Substantially all product distribution is centralized at the Company's
facilities in New Jersey and in Missouri, with the exception of subcontracted
products which are usually distributed directly to retailers from the
subcontractors by freight companies selected by the Company. Products generally
are delivered to a retailer's distribution center, although the Company
distributes products representing a limited amount of net sales directly to
retail outlets. Substantially all of the Company's products are delivered by
independent trucking companies.

         Beginning in the latter part of the third quarter of 1996, the Company
experienced distribution difficulties and late customer deliveries primarily
attributable to the Company's continuing rapid growth in sales and the
assimilation of three new manufacturing and distribution facilities. The effect
of these factors was to increase the costs associated with plant integration,
distribution and customer returns and allowances, thus having a material
adverse effect on the results of the Company's operations for 1996. While the
Company is working with its customers to establish and assure efficient
distribution, there can be no assurance that such efforts will be successful or
that similar or new problems with distribution will not occur in the future.

MANUFACTURING AND SUPPLY

         During 1996, the Company manufactured substantially all of its liquid
products at its facility in North Brunswick, New Jersey. The manufacturing
process at the Company's facility consists of blending liquid chemicals and
fragrance, which the Company purchases from independent suppliers, and
packaging such blends to create finished products. Blending is done according
to or by modifying formulas provided by the Company's chemical suppliers. The
Company conducts quality control tests on raw materials on a regular basis and
also conducts stringent quality control tests on its products during and after
the manufacturing process. Any extended interruption of operations at the
Company's manufacturing facilities could have a material adverse effect on the
Company's business and results of operations.

         For the year ended December 31, 1996, the Company purchased
approximately 52% of its liquid chemicals from two suppliers, Stepan Company
and Henkel Corporation, and purchased 27% of its powder detergent from Cap City
Products Company, Inc. The balance of the Company's powder detergent was
produced at a now-owned facility in Chicago. Previously, the Company had
entered into a management agreement with the prior owner of the facility
pursuant to which the Company maintained manufacturing control, and a supply
agreement pursuant to which the Company purchased all of the supplier's output.
See Note 5 to "Notes to Consolidated Financial Statements."

         Substantially all of the bottles used by the Company during 1996 at
its manufacturing facility were purchased from Owens-Illinois Closure Inc.
("Owens-Illinois"). The Owens-Illinois plant used in connection with the
manufacture of such bottles is located near the Company's manufacturing
facility and the majority of the Owens-Illinois plant's production is dedicated
to the Company. The Company has entered into a supply

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agreement expiring January 31, 2001 with Owens-Illinois pursuant to which the
Company has agreed to purchase substantially all of its plastic bottle
packaging requirements from Owens-Illinois in return for Owens-Illinois'
agreement to dedicate certain of its machinery to meet the Company's packaging
requirements and provide additional machinery if necessary. Owens-Illinois also
has agreed to use its best efforts to expand its capacity to meet the Company's
continued growth in exchange for the Company's continuing commitment to
purchase bottles from Owens-Illinois. Certain molds used to manufacture the
Company's packaging are not owned by the Company.

         In January 1996, the Company entered into a lease for a facility
located adjacent to Owens-Illinois' facility in Edison, New Jersey. Until
recently, this facility was used for the manufacture of its scented candle air
freshener products and additional warehouse and distribution capacity. In May
1997, the Company, as part of its cost reduction strategy, decided to close its
Edison, New Jersey facility and move its candle manufacturing operation to the
Company's North Brunswick, New Jersey facility. In addition, in 1997 the
Company purchased a new facility adjacent to its existing North Brunswick, New
Jersey facility to consolidate its East Coast warehousing operations. See Item
2. "Properties" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Restructuring Costs."

         The Company also has certain products manufactured to the Company's
specifications by independent contractors and intends to expand its capacity to
produce non-liquid products by continuing to outsource manufacturing. The
Company subcontracts the manufacture of products based on cost-effectiveness,
manufacturing capacity and a desire to avoid large capital commitments
associated with manufacturing before the Company can determine the long-term
success of such products. The Company remains actively involved with each of
its principal subcontractors and seeks to promote efficiencies and cost-savings
at the subcontractor level by offering continuing technical, manufacturing and
managerial advice. The Company's purchases from subcontractors are generally
made pursuant to purchase orders.

         The Company's reliance on a sole supplier or limited group of
suppliers and subcontractors involves several risks, including increased risk
of inability to obtain adequate supplies, and reduced control over pricing and
timely delivery. Although the timeliness, quality and pricing of deliveries
from the Company's suppliers have been acceptable to date and the Company
believes that additional sources of supply are generally available, there can
be no assurance that supplies will be available on an acceptable basis or that
delays in obtaining new suppliers, particularly of plastic bottles, will not
have an adverse effect on the Company. The Company's inability to obtain
adequate supplies of chemicals, packaging materials, manufacturing equipment or
finished products at acceptable prices could have a material adverse effect on
the Company's business.

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INVENTORY PRACTICE AND ORDER BACKLOG

         The Household Products industry is generally characterized by prompt
delivery of products by suppliers. The Company strives to maintain the time
between the Company's receipt of a customer's order and shipment to the
customer at one to seven business days. The Company generally maintains between
two and ten days of finished product inventory. As a result of the short lead
time between the order and delivery of its products, the Company does not
maintain a significant backlog. In 1997, the Company experienced distribution
difficulties attributable to the Company's continuing rapid growth in sales.
See "-- Marketing and Distribution."

INTELLECTUAL PROPERTY

         Brand identification is an important element in marketing the
Company's products and the Company recognizes the importance of its trademarks
to the success of its business. The Company obtains trademarks for certain of
its brands and has registered or has applications pending to register certain
trademarks with the United States Patent and Trademark Office. In addition, the
Company has registered or applied for registration of certain of its trademarks
in a number of foreign countries. Due to the importance of package design,
labels, trademarks and trade dress to its business, the Company has taken, and
expects to continue to take, vigorous action to protect against infringement of
its trademarks and copyrights.

         Although the Company considers certain of its packaging, labels,
trademarks and designs to be proprietary, certain of such packaging, labels,
trademarks and designs are not protected by copyright or trademark
registration. In addition, the Company from time to time has received, and may
receive in the future, communications from third parties asserting and
challenging intellectual property rights relating to the Company's products,
labels, trademarks and packaging. There can be no assurance that third parties
will not successfully assert claims against the Company with respect to
existing or future products or packaging. Should the Company be found to
infringe upon the intellectual property rights of others, the Company could be
required to cease use of certain products, trademarks, labels or packaging or
pay damages to the affected parties, either of which could have a material
adverse effect on the business and operations of the Company.

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Substantial costs also may be incurred by the Company in redesigning its labels
or packaging, in selecting and clearing a new trademark or in defending any
legal action taken against it. Packaging, labels, trademarks and designs are
generally reviewed by the Company's intellectual property counsel prior to
their general adoption and usage.

         Manufacturers normally seek United States and foreign patent
protection for the chemical formulations that they develop and numerous third
party patents that relate to laundry and household cleaning products are on
file with the United States Patent and Trademark Office. Formulations of the
products produced by the Company are generally provided by the Company's third
party chemical suppliers who are responsible for the intellectual property, if
any, in such formulations. The Company believes it has been able to introduce
products comparable to those introduced by most of its competitors by using
manufacturing methods or materials that are not protected by patents or by
acquiring patented formulations.

COMPETITION

         The Company experiences substantial competition from a number of
suppliers of laundry and household cleaning products, including larger
premium-priced, mid-priced and private label suppliers. Many of these suppliers
have substantially greater financial, technical, marketing, distribution and
other resources than the Company. In addition, there are several value brand
suppliers which compete directly with the Company. The Company believes its
products compete primarily on the basis of price and customer service and the
Company does not intend to compete on the basis of premium-priced brand product
features.

         The Company estimates, based on Information Resources, Inc. Retail
Review data for the year ended December 31, 1996, that the two largest
suppliers in the laundry and household cleaning products industry held
approximately 54%, in the aggregate, of the domestic market for such products
in 1996. These two suppliers, Procter & Gamble Co. and Unilever N.V., accounted
for an aggregate of approximately 72% and 85% of 1996 domestic retail sales of
liquid laundry detergents and liquid fabric softeners, respectively. These two
product categories accounted for 47% and 21%, respectively, of the Company's
net sales in 1996.

         The laundry and household cleaning products industry is characterized
by substantial price competition which is effected through changes in price,
product size and promotions. The Company believes it typically is not affected
by price changes initiated by larger premium-priced or mid-priced suppliers
whose pricing is substantially higher than the Company's pricing. Some
suppliers of value brands or store brands compete directly with the Company as
low price suppliers. Competitors may attempt to gain market share by offering
products at prices at or below those typically offered by the Company. Such
competitive pricing has in certain cases necessitated and may continue to
necessitate price reductions by the Company and has and may continue to result
in lost orders. There can be no assurance that future price or product changes
by the Company's competitors will not have a material adverse effect on the
Company or that

                                      12
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the Company will be able to react with price or product changes of its own to
maintain its current market position.

EMPLOYEES

         As of December 31, 1996, the Company had 562 full-time employees, of
whom 40 worked in executive, administrative or clerical capacities, 352 worked
in design and manufacturing, 108 worked in warehouse facilities and 62 worked
in sales. The Company believes that its relations with its employees are good.
The Company has never experienced any interruption of any of its operations due
to a labor disagreement with its employees.

ENVIRONMENTAL REGULATION

         The Company is subject to various federal, state and local
environmental laws and regulations, including those relating to wastewater
discharge, air quality and the storage, handling and disposal of a variety of
substances. Some of the chemicals used by the Company and stored at its
manufacturing facility are materials regulated by federal or state
environmental protection agencies. While the Company has not had to make
significant capital expenditures for environmental compliance, the Company
cannot predict with any certainty its future capital expenditure requirements
for environmental compliance because of continually changing compliance
standards and technology. Consequently, unforeseen expenditures required to
comply with such laws and regulations, including unforeseen environmental
liabilities, could have a material adverse effect on the Company's business.
The Company maintains $6.0 million of insurance coverage for environmental
liabilities. See Item 2. "Properties."

EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information with respect to the
executive officers and significant employees of the Company as of March 3,
1998:

NAME                  AGE     POSITION
----                  ---     --------
Uri Evan              61      Chairman of the Board; Chief Executive Officer,
                              Interim President
Richard D. Coslow     55      Vice President of Finance; Chief Financial
                              Officer; Treasurer
Frank Corella         52      Vice President of Sales and Marketing
Daniel Bergman        39      Vice President; Director of New York Metro Sales;
                              Secretary; Director

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         URI EVAN has been Chairman of the Board of the Company since 1989 and
Chief Executive Officer since 1993. Since 1993, Mr. Evan has been Vice Chairman
and Chief Executive Officer of American Value Brands Inc., a food marketing
company of which he was a co-founder. From 1991 to 1992, he served as Chairman
and Chief Executive Officer of I. Rokeach & Sons Inc., a kosher food
manufacturing and marketing company. From 1988 to 1990, Mr. Evan was Chairman
and Chief Executive Officer of Newrock Development Inc., a real estate
development company. From 1969 to 1986, Mr. Evan was President and Chief
Executive Officer of Engineering Services Group, a Tel Aviv-based international
engineering, printing and publishing conglomerate of which he was a co-founder.
From 1970 to 1982, he served as Chairman of Organization and Management
Sciences Consultants Ltd., an Israeli management and computer sciences firm of
which he was a co-founder.

         RICHARD D. COSLOW has been Senior Vice President and Chief Financial
Officer of the Company since April 1997. From 1984 to 1997, he was Vice
President and Controller for Toshiba America Consumer Products, Inc., an
international diversified consumer products company. From 1982 to 1984, he was
Vice President of Finance for Endless Energy, Inc. and Jocelyn Management, Inc.
From 1980 to 1982 he served as Vice President and Controller for Mego
International, Inc. From 1967 to 1980 he held various positions with Deloitte
and Touche including Senior Audit Manager. Mr. Coslow is a Certified Public
Accountant.

         FRANK CORELLA has been Vice President of Sales and Marketing of the
Company since 1991. From 1990 to 1991, he was President and Principal of
Paperoni, Inc., a party supply company. From 1988 to 1990, he served as
President of US1 Auto Parts. From 1984 to 1988, Mr. Corella served as President
of American Discount Auto Parts, a division of Rite Aid. From 1962 to 1984, he
held various positions at SupeRx Drugs, a division of Kroger Foods, including
Vice President of Marketing.

         DANIEL BERGMAN was a founder of the Company, has been a Vice President
of the Company since June 1995 and has been Director of New York Metro Sales,
Secretary and a director of the Company since 1988. Between 1987 and 1991, Mr.
Bergman was President of Carnegie International Inc., a retail and export
electronics company, and between 1984 and 1987, Mr. Bergman was a Vice
President of Nikora International Inc., a retail and export electronics
company.

                                      14
<PAGE>

ITEM 2.  PROPERTIES

         The Company currently conducts its operations principally from a
360,000 square foot facility located in North Brunswick, New Jersey. The
Company's executive offices and its manufacturing, office support, and
receiving and shipping departments are all located in that facility. The lease
relating to such facility expires in 2004, subject to two five-year extensions.
For the fiscal year ended December 31, 1996, the Company recorded rent expense
of approximately $1.3 million.

         In January 1996, the Company entered into a lease for a 175,000 square
foot facility located in Edison, New Jersey. This facility originally was used
by the Company or the manufacture of the Company's scented candle air freshener
products and for additional warehouse and distribution capacity. The lease
relating to such facility expires in 2001, subject to one five-year extension,
and provides for an annual rental of $568,750. In May 1997, the Company, as
part of its cost reduction strategy, decided to close its Edison, New Jersey
facility and move its candle manufacturing operation to the Company's North
Brunswick, New Jersey facility. In August 1996, the Company purchased a 360,000
square foot facility located near Kansas City, Missouri for the production of
additional liquid laundry products and distribution. The Company also leases
seven additional sales offices throughout the United States. In addition, in
1997, the Company purchased a 650,000 square foot facility in North Brunswick,
New Jersey, adjacent to the Company's existing facility. This facility is
utilized as part of the Company's consolidation of its entire East Coast
warehousing and distribution operation. This property is currently the subject
of an Administrative Consent Order issued by the New Jersey Department of
Environmental Protection (the "NJDEP"), relating to the remediation of certain
hazardous wastes which were discharged onto the property by the seller. The
seller has undertaken substantial remediation efforts to date to clear the
property of these hazardous wastes and has posted a bond with the NJDEP to
secure the costs to continue such clean-up activities. In addition, the seller
has provided the Company with an undertaking to complete the clean-up of the
property to the standards required by the NJDEP, and a complete indemnity
against any claims or obligations to clean up the property which may be
asserted against the Company and which arise from any hazardous wastes that
existed on the property on the date the Company acquired the property. While
the Company believes it has taken adequate steps to protect its interests,
there can be no assurance that the Company will not incur costs in connection
with environmental matters concerning the property.

         During June 1997, the Company exercised its purchase option, by the
cancellation of a $2,250,000 promissory note, to acquire a powder plant
facility located in Chicago. This facility provides the Company with its entire
powder production requirements. As part of the transaction, the Company assumed
a land lease upon which the Company's Chicago operations are located. The
lease, which expires in 2080, provides for rent to be paid annually in the
amount of $1,000 plus a variable amount adjusted for inflation. The total rent
paid for the year ended December 31, 1997 was approximately $9,000.

                                      15
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         The description of the Company's Legal Proceedings has changed
substantially since the end of the period to which this Report on Form 10-K/A
relates and, consequently, a discussion of such items as of December 31, 1996
is not deemed to be relevant to an evaluation of the Company. The following is
a description of "Item 3 - Legal Proceedings" as of December 31, 1997:

         On May 5, 1997, a securities class action lawsuit entitled Feldbaum v.
USA Detergents, Inc. et al., No. 97-CV-3227, was filed in the U.S. District
Court for the Eastern District of Pennsylvania against the Company and certain
of its current and former officers and directors; the Feldbaum case
subsequently was transferred to the U.S. District Court for the District of New
Jersey. On May 15, 1997, a second securities class action lawsuit entitled
Einhorn v. USA Detergents, Inc. et al., No. 97-2459, was filed against the
Company and certain of its current and former officers and directors in the
U.S. District Court for the District of New Jersey. Since the Einhorn lawsuit
was filed, twelve additional securities class action lawsuits have been filed
in the U.S. District Court for the District of New Jersey against the Company
and certain of its current and former officers and directors. The class actions
purport to be brought on behalf of all persons who purchased the Company's
common stock between June 5, 1996, at the earliest, and May 8, 1997, at the
latest (the "putative class period"). The class actions generally allege that,
during the putative class period, the defendants made false or misleading
public statements and engaged in improper accounting practices, which caused
the price of the Company's common stock to be artificially inflated. The class
actions assert that the defendants' conduct violated Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated
thereunder, as well as state common law. The class actions do not specify an
amount of damages. In June and July 1997, the U.S. District Court for the
District of New Jersey entered orders consolidating all of the pending class
actions with the Einhorn case. In August 1997, the court entered an order
establishing a master docket for the consolidated class actions, In re USA
Detergents, Inc. Securities Litigation, Master File No. 97-CV-2459 (MTB), and
appointed lead plaintiffs and lead plaintiffs' co-lead counsel. Lead plaintiffs
are expected to file a consolidated amended class action complaint within
thirty days after the Company issues its restated financial statements, (which
issuance will occur upon the filing of this Report on Form 10-K/A). The Company
intends to defend this action vigorously. An unfavorable outcome in the
litigation could have a material adverse effect on the Company's financial
condition and results of operations.

         On September 12, 1997, the Company became aware of a claim by the
North Brunswick Water Company ("NBWC") covering, among other things, unpaid
water and sewer charges aggregating approximately $5,000,000. On October 20,
1997, the Company commenced an action in the Superior Court of New Jersey,
Chancery Division, Middlesex County, challenging NBWC's claim and requesting
injunctive relief

                                      16
<PAGE>

to prevent NBWC from taking any steps to discontinue service pending the
resolution of the claim. Pursuant to a Consent Order dated October 21, 1997,
the Company paid $532,118 to NBWC, subject to refund, pending the resolution of
the matter. Based on a preliminary assessment made by independent counsel for
the Company of the underlying basis for NBWC's claim, management believes that
the Company's obligation, if any, to NBWC will not have a significant impact on
the Company's results of operations or financial position beyond amounts
already paid.



                                      17
<PAGE>

                                    PART II

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
         (IN THOUSANDS EXCEPT PER SHARE DATA)

         The following selected financial data are derived from the audited
consolidated financial statements of the Company. The consolidated financial
statements for the years ended December 31, 1994, 1995 and 1996 (As Restated)
have been audited by Deloitte & Touche LLP, and their report dated October 30,
1997 (January 5, 1998 as to Note 5, February 25, 1998 and March 2, 1998 as to
Note 4) appears elsewhere herein. The selected financial data for the years
ended December 31, 1992 and 1993 was derived from financial statements audited
by Goldstein Golub Kessler & Company, P.C. and the balance sheet data for the
year ended December 31, 1994 were derived from financial statements audited by
Deloitte & Touche LLP. The report of Goldstein Golub Kessler & Company for 1993
and 1992 does not appear in this Annual Report. No cash dividends, other than S
corporation distributions, were paid for any years presented.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                          -----------------------
                                                          1992         1993        1994         1995            1996
                                                          ----         ----        ----         ----            ----
                                                                                                           (AS RESTATED(3))
<S>                                                      <C>         <C>          <C>         <C>             <C>     
INCOME STATEMENT DATA:
Net sales                                                $21,860     $46,939      $68,663     $104,878        $172,424
Cost of goods sold                                        16,941      36,896       51,588       72,921         121,498
                                                        --------    --------      -------      -------        --------
Gross profit                                               4,919      10,043       17,075       31,957          50,926
Selling, general and administrative expenses               3,893       8,445       12,182       22,232          43,878
Non-recurring expenses(1)                                    398         893           --           --              --
                                                        --------    --------      -------      -------        --------
Income from operations                                       628         705        4,893        9,725           7,048
Interest expense-net                                         192         383          543          544             868
                                                        --------    --------      -------      -------        --------
Earnings before income tax                                   436         322        4,350        9,181           6,180
Income tax provision                                          --          22           83        2,156           2,473
                                                        --------    --------      -------      -------        --------
Net income                                              $    436    $    300      $ 4,267      $ 7,025        $  3,707
                                                        ========    ========      =======      =======        ========
Net income per share                                                                                         $     .27
                                                                                                             =========
Weighted average number of shares outstanding                                                                   13,589
                                                                                                             =========

PRO FORMA INCOME STATEMENT DATA(2):

Earnings before income tax as reported                                            $ 4,350      $ 9,181
Pro forma income tax provision                                                      1,689        3,756
                                                                                  -------      -------
Pro forma net income                                                              $ 2,661      $ 5,425
                                                                                  =======      =======
Pro forma net income per share                                                    $   .22      $   .43
                                                                                  =======      =======
Weighted average number of shares outstanding                                      11,915       12,494
                                                                                  =======      =======
</TABLE>

                                                                 18
<PAGE>

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                         ------------
                                  1992        1993         1994         1995            1996
                                  ----        ----         ----         ----            ----
                                                                                 (AS RESTATED(3))
<S>                             <C>         <C>         <C>          <C>             <C>    
Working capital (deficit)       $1,192      $ (30)      $ 5,154      $11,132         $35,321
Total assets                     9,308      19,718       24,449       40,590          98,476
Short-term debt                  1,893       4,425        3,860        7,320           5,819
Long-term debt                   2,142       4,563        6,180        1,830          29,311
Stockholders' equity             1,050       1,850        5,880       20,292          36,099
</TABLE>

-------------------
(1)   Consists of loss on theft of inventory of $398,000 in 1992, and plant
      relocation expense of $474,000 and loss on theft of inventory of $419,000
      in 1993.
(2)   Pro forma net income represents net income less a provision for income
      taxes that would have been required had the Company been taxed as a C
      corporation during the entire period presented. The Company elected to be
      treated as a Subchapter S corporation until August 10, 1995 (one day
      prior to the closing of the Company's initial public offering (the "1995
      IPO")), and, as a result, was not subject to federal and certain state
      income taxes prior to that time. No pro forma adjustments have been made
      for additional compensation expense paid to the existing stockholders of
      the Company who are officers of the Company associated with the
      termination of the Company's S corporation status in connection with the
      1995 IPO or for a reduction in interest expense relating to the assumed
      pay down of borrowings under the Company's then existing working capital
      line of credit with the net proceeds of the 1995 IPO, because the net
      effect of such adjustments is not material. See Note 1 of "Notes to
      Consolidated Financial Statements" for the years ended December 31, 1994,
      1995, and 1996. (3) See Note 11 of "Notes to Consolidated Financial
      Statements" for the years ended December 31, 1994, 1995 and 1996.

                                      19
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated certain
income statement data expressed as a percentage of net sales. Certain column
totals set forth may not add due to rounding.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                                   
                                                     1995             1994             1996
                                                     ----             ----             ----
                                                                                   (AS RESTATED)
<S>                                                 <C>              <C>               <C>   
Net sales                                           100.0%           100.0%            100.0%
Cost of goods sold                                   75.1             69.5              70.5
                                                   -------          ------             ------
Gross profit                                         24.9             30.5              29.5
Selling, general and administrative expenses         17.7             21.2              25.4
Non-recurring expenses                                 --               --                --
                                                   -------          ------             ------
Income from operations                                7.1              9.3               4.1
Interest expense-net                                  0.8              0.5               0.5
                                                   -------          ------             ------
Earnings before income taxes                          6.3              8.8               3.6
Income tax provision                                  0.1              2.1               1.4
                                                   -------          ------             ------
Net income                                            6.2%            6.7%               2.2%
                                                   =======          ======             ======
</TABLE>

Year Ended December 31, 1996 (Restated) Compared to Year Ended December 31,
1995

         Net sales in the year ended December 31, 1996 increased 64.4% to
$172.4 million from $104.9 million in the year ended December 31, 1995. The
increase was primarily the result of an increase in unit sales of laundry
products and, to a lesser extent, the introduction of new products and
additional product sizes.

         Gross profit increased 59.4% to $50.9 million in the year ended
December 31, 1996 from $32.0 million in the prior year. Gross profit decreased
as a percentage of net sales to 29.5% in 1996 from 30.5% in the prior year,
primarily as a result of higher costs associated with integrating the Company's
Chicago, Kansas City and Edison, New Jersey facilities, partially offset by
improvement in labor efficiencies and purchasing improvements, and an increase
as a percentage of net sales in unit sales of higher margin laundry products.

                                      20
<PAGE>

         Selling, general and administrative expenses increased 97.4% to $43.9
million in the year ended December 31, 1996 from $22.2 million in the prior
year. As a percentage of net sales, selling, general and administrative
expenses increased to 25.4% in 1996 from 21.2% in the prior year. The increase
as a percentage of net sales was due primarily to a 1.6% increase in freight
costs arising out of distribution inefficiencies, an increase of 2.7% in
marketing funds, co-op advertising, promotional allowance and slotting
amortization, and an increase of .4% in bad debts and .2% in commissions,
partially offset by a decrease of .7% in salaries.

         Income from operations decreased 27.5% to $7.0 million in the year
ended December 31, 1996 from $9.7 million in the prior year. As a percentage of
net sales, income from operations decreased to 4.1% in 1996 from 9.3% in the
prior year as a result of higher selling, general and administrative expenses.

         Interest expense-net increased to $868,000 in the year ended December
31, 1996 from $544,000 in the prior year due to increased borrowings to fund
higher levels of inventories and accounts receivable resulting from increased
sales. As a percentage of sales, interest expense-net was unchanged at 0.5%.

         Earnings before income taxes decreased to $6.2 million in the year
ended December 31, 1996 from $9.2 million in the prior year. As a percentage of
net sales, earnings before income taxes decreased to 3.6% in 1996 from 8.8% in
the prior year.

                                      21
<PAGE>

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

         Net sales in the year ended December 31, 1995 increased 52.7% to
$104.9 million from $68.7 million in the year ended December 31, 1994. The
increase was primarily the result of an increase in unit sales of laundry
products, reflecting the addition of new customers and sales of additional
products to existing customers. The increase in net sales was facilitated by an
increase in the number of salespersons who joined the Company in the fourth
quarter of 1994.

         Gross profit increased 87.2% to $32.2 million in the year ended
December 31, 1995 from $17.1 million in the prior year. Gross profit increased
as a percentage of net sales to 30.5% in the year ended December 31, 1995 from
24.9% in the prior year. The increase as a percentage of net sales was
primarily attributable to the installation, in January 1995, of improved
manufacturing equipment, which had a positive impact on labor efficiency and
reduced product over-fills, and an increase as a percentage of net sales in
unit sales of higher margin laundry products.

         Selling, general and administrative expenses increased 82.5% to $22.2
million in the year ended December 31, 1995 from $12.2 million in the prior
year. As a percentage of net sales, these expenses increased to 21.2% in the
year ended December 31, 1995 from 17.7% in the prior year. The increase as a
percentage of net sales was primarily due to increases as a percentage of net
sales of 2.2% in merchandising allowances and co-op advertising, 0.4% in
selling commissions, 0.2% in slotting fees resulting from increased penetration
into supermarkets and 0.2% in bad debt expenses.

         Income from operations increased 98.8% to $9.7 million in the year
ended December 31, 1995 from $4.9 million in the prior year. As a percentage of
net sales, income from operations increased to 9.3% in the year ended December
31, 1995 from 7.1% in the prior year.

         Interest expense-net increased to $544,000 in the year ended December
31, 1995 from $543,000 in the prior year.

         Earnings before income taxes increased 111.1% to $9.2 million in the
year ended December 31, 1995 from $4.4 million in the prior year. As a
percentage of net sales, earnings before income taxes increased to 8.8% in the
year ended December 31, 1995 from 6.3% in the prior year.

                                      22
<PAGE>

Seasonality

         The Company has experienced, and may experience in the future,
quarter-to-quarter fluctuations in its operating results. The Company's
financial performance has been somewhat weaker in the fourth quarter than in
other fiscal quarters, primarily as a result of promotion-oriented retailers
providing reduced or less desirable display space for the Company's products
during the holiday shopping season. The Company expects that this trend will be
somewhat mitigated as anticipated sales from supermarkets, which are less
promotion- oriented during the holiday shopping season, increase as a
percentage of total net sales. The timing and introduction of new products and
other factors may also cause quarterly fluctuations in the Company's results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1996, the Company's working capital increased to $35.3
million from $11.1 million at December 31, 1995. The primary reasons for the
increase include higher levels of inventory and accounts receivable. At
December 31, 1996, net accounts receivable was $27.3 million, an increase of
$12.0 million from December 31, 1995 primarily attributable to increased sales
volume in 1996. At December 31, 1996, inventory was $28.8 million, an increase
of $20.4 from December 31, 1995, primarily attributable to increased sales
volume and inventory imbalances caused by problems in distribution. These
changes were partially offset by an increase in accounts payable and accrued
expenses of $16.5 million to $25.2 million at December 31, 1996.

         Net cash used in operating activities in 1996 and 1995 was ($16.9)
million and ($412,000), respectively. Decreases in cash provided by operating
activities in 1996 relate primarily to the increase in inventory and accounts
receivable. The decrease in cash provided by operating activities in 1995 was
primarily due to an increase in accounts receivable.

         The Company's 1995 IPO provided net proceeds to the Company of
approximately $12.7 million. Approximately $8.3 million was used by the Company
to repay amounts outstanding under its then existing line of credit. The
Company consummated a sale of 300,000 shares of Common Stock in June 1996,
providing net proceeds to the Company of $11.7 million. The net proceeds from
the June 1996 offering were used to pay down the Company's then existing line
of credit. Historically, the Company has financed its operations from capital
provided by existing stockholders, funds generated by operations, bank lines of
credit, the proceeds of the Company's loan from the New Jersey Economic
Development Authority (the "EDA Loan") and capitalized lease obligations. The
Company has used cash provided by operating activities to fund capital
expenditures, operations and S corporation distributions.

         Net cash used in investing activities in 1996 and 1995 was $18.9
million and $6.1 million, respectively. Cash used in investing activities in
1996 relates to purchases of property and equipment. Cash used in investing
activities in 1995 relates primarily to

                                      23
<PAGE>

purchases of production equipment and a loan of approximately $2.2 million to
an unaffiliated third party supplier of powder laundry detergent.

         Net cash provided by financing activities in 1996 and 1995 was $38.1
million and $6.5 million, respectively. Cash provided by financing activities
in 1996 was primarily proceeds from sales of Common Stock and a bank line of
credit. Cash provided by financing activities in 1995 was primarily proceeds
from sales of Common Stock, the bank lines of credit and the EDA Loan, offset
primarily by S corporation distributions to stockholders. At December 31, 1996,
the Company had short-term debt of $5.8 million and long-term debt of $29.3 as
compared to short-term debt of $7.3 million and long-term debt of $1.8 million
at December 31, 1995. The increase in overall debt was primarily attributable
to increases in inventory and accounts receivable levels.

         The description of the Company's credit facilities changed
substantially since the end of the period to which this Report on Form 10-K/A
relates and, consequently, a discussion of such items as of December 31, 1996
is not deemed to be relevant to an evaluation of the Company. The following is
a current description of these items:

PNC Bank Debt

         In December 1996, the Company entered into a credit facility with PNC
Bank, National Association ("PNC") consisting of a $20,000,000 capital
expenditure facility for the purchase of capital assets and/or leasehold
improvements and a $10,000,000 traditional revolving facility (the "December
1996 PNC Facility"). Borrowings under the December 1996 PNC Facility bore
interest, at the Company's option, at LIBOR plus .50% to 1.5% (6.08% as of
December 31, 1996) or one percent below the prime rate of PNC. All amounts
outstanding under the December 1996 PNC Facility, as of December 31, 1996 were
subject to the 6.08% LIBOR-based interest rate. Unused portions of the
revolving facility were subject to a commitment fee of .25% on such unused
amounts. On December 31, 1996, the Company also obtained a 60-day $4,000,000
bridge loan (the "Bridge Loan I"), bearing interest at one percent below the
lender's prime rate (7.25%). As of December 31, 1996, approximately $33,300,000
was outstanding under the credit facility and the Bridge Loan I facility. On
March 3, 1997, the Company repaid the Bridge Loan I facility with funds
generated from working capital.

         On March 24, 1997, the Company obtained a commitment from PNC and a
second lender (the "March PNC Commitment") to replace the December 1996 PNC
Facility with a $55 million credit facility. In conjunction with this
commitment, PNC extended to the Company a $10 million bridge loan (the "Bridge
Loan II") to acquire a distribution center in North Brunswick bearing interest
at LIBOR + 1.5% to be repaid from the anticipated proceeds of the replacement
facility. The December 1996 PNC Facility and Bridge Loan II were secured by a
substantial portion of the Company's assets.

         The December 1996 PNC Facility, among other things, required the
Company to

                                      24
<PAGE>

maintain specified debt to equity ratios, current ratios, minimum consolidated
tangible net worth and debt service ratio levels. Based on the restated
financial statements (Note 11), the Company was not in compliance with various
covenants and other material provisions contained in the December 1996 PNC
Facility including all of the required financial covenants. In addition, based
in part on the Company's performance in the first quarter of 1997, the $55
million March PNC Commitment was withdrawn.

         On June 30, 1997, the Company obtained a forbearance agreement from
PNC which provided that PNC would forbear exercising the rights and remedies
available to it under the December 1996 PNC Facility and Bridge Loan II until
July 7, 1997. Although the forbearance agreement expired, PNC continued to
cooperate with the Company during its discussions with other third party
lenders to amend and/or replace the December 1996 PNC Facility and Bridge Loan
II.

         On February 25, 1998, the Company and PNC entered into an amended and
restated Loan and Security Agreement (the "February 1998 PNC Facility"), which
waives all defaults under the December 1996 PNC Facility and Bridge Loan II.
Under the amended agreement, the Company made a principal payment of $5 million
and granted PNC a security interest in substantially all of the assets of the
company. The balance of the principal indebtedness, approximately $35 million,
has been extended to January 4, 1999 and bears interest at rates which range
from prime plus .25% to prime plus 2%. The actual rate depends on the timing of
the repayment of the indebtedness. Of the $5 million paid to PNC, $4 million
was loaned to the Company by an entity owned by certain of the Company's
principal stockholders at a rate of 9.5% per annum, and is due in July 1999.
These stockholders also personally guaranteed the repayment of up to an
additional $5 million of the indebtedness owed to PNC.

         In connection with the transaction, PNC received a warrant to purchase
between approximatley 140,000 and 700,000 shares of the Company's common stock,
depending on the repayment date of the remaining indebtedness (140,000 shares
if paid in full by September 30, 1998). In conjunction with the issuance of
this warrant, the Company will recognize, in the first quarter of 1998, a
deferred charge estimated to be approximately $400,000. This charge will be
amortized over the period ending January 4, 1999. The shareholders who funded
$4 million of the $5 million payment described above and guaranteed the
repayment of an additional $5 million are also expected to receive warrants or
other consideration in connection with the transaction.

         The February 1998 PNC Facility requires the Company to, among other
things, maintain a ratio of current assets to current liabilities (as defined)
in excess of 1.1, and restricts the payment of dividends and the incurrence of
new debt.

         In November 1997, the Company executed a commitment letter with GE
Capital for a credit facility totaling up to $52 million. The commitment
provided for a three year revolving credit facility of up to $45 million,
subject to availability based on eligible accounts receivable and inventory; a
three year term loan of $4 million with quarterly

                                      25
<PAGE>

amortization payments; and a three year term loan of $3 million with quarterly
amortization payments. The credit facility would be secured by substantially
all the assets of the Company.

         The commitment by GE Capital to extend the credit facility is subject
to various conditions including, among other things, the satisfactory
completion by GE Capital of its due diligence examination, evidence that the
Company will have excess availability (as defined) of not less than $5 million
at the time of the loan closing and the execution of definitive loan and
security documents. The commitment by GE Capital expired on March 2, 1998.
Management currently is negotiating with GE Capital to extend the commitment.
The Company must conclude the GE Capital Credit Facility or obtain other
sources of financing in order to meet its anticipated near term commitments.
There can be no assurance that the Company will be successful in concluding the
GE Capital Credit Facility or obtaining alternate financing.

EDA Loan

         The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of December 31,
1996, the Company used approximately $2.5 million of the EDA Loan for purchases
of machinery and equipment and improvements to the Company's North Brunswick
manufacturing facility. The remaining funds are restricted for the duration of
the EDA Loan. The EDA Loan is payable in monthly installments of approximately
$26,000 through November 1, 2002. Interest on the EDA Loan is payable at a
variable rate (4.2% at December 31, 1996). As a result of several factors,
including those relating to the Company's restated historical financial
statements, amounts owed under the EDA Loan, at the option of the issuing
lender thereunder, may be declared immediately due and payable. The Company has
requested a waiver from the New Jersey Economic Development Authority with
respect to existing violations under the EDA Loan. There can be no assurances
that the Company will be successful in obtaining the waiver. To date, the
Company is current with respect to scheduled principal and interest payments.
The entire obligation has been classified as current in the December 31, 1996
balance sheet.

New Facility

         In January 1997, the Company purchased a 650,000 square foot
distribution facility in North Brunswick, New Jersey, adjacent to the Company's
existing facility for a purchase price of $7,200,000. The Company expects to
consolidate its entire East Coast warehousing and distribution operation at
this new facility. The purchase of this distribution facility was funded by the
$10 million Bridge Loan II from PNC.

                                      26
<PAGE>

Note Receivable

         In December 1995, the Company loaned approximately $2.3 million to an
unaffiliated third party in connection with such third party's acquisition of a
powder detergent manufacturing facility. Amounts outstanding under such loan
bore interest at 10.0% per annum and were payable on demand. In June 1997, the
Company exercised its option to purchase the unaffiliated third party (and,
consequently, the powder detergent manufacturing facility) by the cancellation
of the $2.3 million promissory note.

Exercise of Stock Options

         During the year ended December 31, 1997, the Company obtained proceeds
approximating $366,000 from the exercise of 53,709 stock options.

Restructuring Costs

         In May 1997, the Company, as part of its cost-reduction strategy,
decided to close its Edison, New Jersey facility and move its candle
manufacturing operations to the Company's North Brunswick, New Jersey facility
at an estimated cost of $2.4 million. These restructuring costs include the
cost of moving the candle line and inventory, write-off of related leasehold
improvements and a portion of the future lease commitment and associated lease
expenses. The Company expects the property to be re-leased within the next year
thereby eliminating or substantially reducing the then remaining lease
obligation.

Environmental Regulation

         The Company is subject to various federal, state and local
environmental laws and regulations, including those relating to wastewater
discharge, air quality and the storage, handling and disposal of a variety of
substances. Some of the chemicals used by the Company and stored at its
manufacturing facility are materials regulated by federal or state
environmental protection agencies. The Company maintains $6,000,000 of
insurance coverage for environmental liabilities.

                                      27
<PAGE>

Management's Plans

         During the fourth quarter of 1996 and the nine months ended September
30, 1997, the Company incurred losses of $2,119,000 and $21,219,000,
respectively, attributable primarily to increased material costs relating to:
incremental freight costs incurred during the integration of the Company's
Chicago, Harrisonville and Edison facilities; manufacturing inefficiencies
caused by a high level of production line change-overs to meet increased
customer demands and short production runs during the start-up and validation
of new production line capacity; the write-down of raw materials and finished
goods inventory associated with discontinued product and sales of close-out
products; and increased levels of unabsorbed material waste variances related
to these plant integration issues. There were significant additional costs for
underabsorbed overhead and increased levels of warehousing and distribution
associated with plant assimilation. Further, the Company significantly
increased co-op advertising and other customer marketing expenses as it
increased sales to grocery wholesalers and supermarket chains. As a result of
the losses incurred through September 30, 1997, the Company has experienced
difficulty in meeting its liquidity needs. The Company requires the
availability of sufficient cash flow and borrowing capacity to finance its
operations, meet its debt service obligations and fund future capital
expenditure requirements. The Company's operating plan for the balance of 1997
and 1998 contemplates continuing its cost reduction programs. Such programs
include: the shut-down of the Company's Edison candle manufacturing facility
and consolidation of candle manufacturing operations in North Brunswick which
was completed in the second quarter of 1997; reduction in temporary labor;
automation of manufacturing facilities related to spray products; production
rationalization; increased use of high speed fillers and cartoners; and
improved production planning and control.

                                      28
<PAGE>

INFLATION

         The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States have had a
significant effect on net sales or profitability.

NEW ACCOUNTING PRINCIPLE

         The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 128, "Earnings Per Share." This pronouncement
must be implemented for annual and interim periods ending after December 15,
1997. SFAS No. 128 does not permit early application. When implemented, SFAS
No. 128 requires restatement of all prior period earnings per share data. SFAS
No. 128 calls for the calculation of basic earnings per share, which is
calculated using only weighted average shares outstanding during the period and
does not consider the assumed exercise of shares utilizing the treasury stock
method. In addition, SFAS No. 128 requires the disclosure of diluted earnings
per share. The historical effect of stock options has not been included in the
computation of earnings/(loss) per share as the impact was not material or
anti-dilutive. The Company believes that the adoption of SFAS No. 128 will not
have an impact on basic earnings per share as compared with previously reported
restated earnings per share amounts or have a material effect on previously
reported restated primary earnings per share as compared with diluted earnings
per share.

ITEM 8.  FINANCIAL STATEMENTS

         See financial statements and supplementary data required pursuant to
         this Item beginning on page F-1 of this Report on Form 10-K/A.

                                      29
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors, their respective ages, the year in which each first
became a director of the Company and their principal occupations or employment
during the past five years is set forth below. See "Business-Executive Officers
of the Registrant" in Item 1 of this Report on Form 10-K/A for information
regarding the Company's executive officers.


<TABLE>
<CAPTION>
DIRECTOR                        AGE        YEAR           PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
                                          FIRST
                                          BECAME
                                         DIRECTOR

<S>                             <C>        <C>       <C>
Uri Evan                        61         1989      Chairman of the Board of the Company since 1989, Chief
                                                     Executive Officer since 1993 and President since 1997.
                                                     Since 1993, Mr. Evan has been Vice Chairman and Chief
                                                     Executive Officer of American Value Brands Inc., a food
                                                     marketing company of which he was a co-founder.  From
                                                     1991 to 1992, he served as Chairman and Chief Executive
                                                     Officer of I. Rokeach & Sons Inc., a kosher food
                                                     manufacturing and marketing company.  From 1988 to 1990,
                                                     Mr. Evan was Chairman and Chief Executive Officer of
                                                     Newrock Development Inc., a real estate development
                                                     company.

Daniel Bergman                  39         1988      Co-founder of the Company and a Vice President of the
                                                     Company since June 1995.  Mr. Bergman also has been
                                                     Director of New York Metro Sales, Secretary and a
                                                     director of the Company since 1988.  Between 1987 and
                                                     1991, Mr. Bergman was President of Carnegie International
                                                     Inc., a retail and export electronics company.

Frederick R. Adler              71         1993      Director of the Company since 1993.  Mr. Adler is
                                                     Managing Director of Adler & Company, a venture capital
                                                     management firm he organized in 1968, and a general
                                                     partner of its related investment funds.  Since January
                                                     1, 1996, Mr. Adler has been of counsel to the law firm of
                                                     Fulbright & Jaworski L.L.P. and, for more than five years
                                                     prior thereto, was a senior partner in the firm.  Mr.
                                                     Adler is also Chairman of the Executive Committee and a
                                                     director of Data General Corporation, a computer company,
                                                     Chairman and a director of Shells Seafood Restaurants,
                                                     Inc., a restaurant chain, and a director of Global
                                                     Pharmaceutical Corp., a manufacturer of generic
                                                     pharmaceuticals, of Prime Cellular, Inc., a software
                                                     company, and of various private companies.

                                      30
<PAGE>

DIRECTOR                        AGE        YEAR           PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
                                          FIRST
                                          BECAME
                                         DIRECTOR

Dr. Shlomo Kalish               45         1995      Director of the Company since August 1995.  Dr. Kalish
                                                     has served since September 1990 as the director of the
                                                     Recanati Wharton Insead York International Marketing
                                                     Program at the Leon Recanati Graduate School of
                                                     Management Administration, Tel Aviv University.  Dr.
                                                     Kalish has also served since June 1995 as the managing
                                                     director of Jerusalem Global Consultants, an Israeli
                                                     investment banking boutique and strategic consulting
                                                     firm.  Between September 1981 and August 1987, Dr. Kalish
                                                     was a professor at the Simon School of Business,
                                                     University of Rochester.

Richard A. Mandell              54         1995      Director of the Company since August 1995.  Mr. Mandell
                                                     has served as a Managing Director at Bluestone Capital
                                                     Partners, L.P. ,  an investment banking firm.  From
                                                     January 1996 to February 1998, he was a Vice
                                                     President--Private Investments at Clariden Asset
                                                     Management (New York) Inc., a subsidiary of Clariden
                                                     Bank, a private Swiss bank.  From 1982 to June 1995, he
                                                     was a Managing Director of Investment Banking for
                                                     Prudential Securities Incorporated.  Mr. Mandell is also
                                                     a director of Sbarro, Inc., a food service company, and
                                                     Trend-Lines, Inc., a specialty retailer of woodworking
                                                     tools and accessories and golf equipment and supplies.
</TABLE>


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         To the Company's knowledge, the Company's directors, executive
officers and beneficial owners of more than ten percent of the Company's Common
Stock are in compliance with the reporting requirements of Section 16(a) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is aware that during 1996, Mr. Kalish and Mr. Frederick J. Horowitz, a
former officer and director of the Company, failed to timely report one
transaction on Form 4. Both of these transactions were subsequently reported.

                                      31
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

         The following table sets forth information concerning all cash and
non-cash compensation awarded to, earned by or paid to the Company's chief
executive officer and each of the four most highly compensated executive
officers of the Company during the fiscal year ended December 31, 1996 for
services in all capacities to the Company and its subsidiaries.

<TABLE>
<CAPTION>
                                                                                                                Long-Term
                                                                       Annual Compensation                     Compensation
                                                        -----------------------------------------------        ------------
        Name and Principal Position           Year        Salary          Bonus           Other Annual          Securities
                                                                                          Compensation          Underlying
                                                                                                                  Stock
                                                                                                                Options(1)

<S>                                           <C>        <C>            <C>                  <C>                <C>
Uri Evan(2)                                   1996       $200,000       $      --            $22,020                  --
Chairman of the Board and Chief Executive     1995        118,308              --             21,491                  --
  Officer                                     1994         70,000              --                 --                  --

Frederick J. Horowitz(2)(3)                   1996        125,000          42,367              5,600                  --
Chief Administrative Officer and Executive    1995         88,538          30,144              5,456                  --
  Vice President                              1994             --              --                 --                  --

Frank Corella                                 1996        175,000      150,000(4)             12,933              15,000
Vice President of Sales and Marketing         1995        150,000      273,750(4)             20,000                  --
                                              1994        150,000      190,388(4)             20,000                  --

Harold J. Macsata(3)                          1996        125,000          71,867                 --              13,125
Vice President of Finance and Treasurer       1995        121,961          30,144                 --              22,500
                                              1994        118,000              --                 --                  --

Daniel Bergman(2)                             1996        125,000          42,367              5,600                  --
Vice President                                1995         88,538          30,144              7,877                  --
                                              1994         65,000              --                 --                  --
</TABLE>

(1) Amounts reflected have been adjusted for the three-for-two stock split of
    the Company's Common Stock in the form of a stock dividend paid on February
    9, 1996 (the "Stock Split").

(2) Dollar amounts reflected do not include S corporation distributions made by
    the Company in each of 1994 and 1995, prior to the Company's initial public
    offering of stock in August 1995 (the "1995 IPO").

(3) Ceased to be employed by the Company during 1997.

(4) Represents sales commissions and bonuses. See "--Employment Agreements."

                                      32
<PAGE>

         The following table sets forth information on option grants in the
fiscal year ended December 31, 1996 to the persons named in the Summary
Compensation Table. All amounts have been adjusted to reflect the Stock Split.

                                          OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                           POTENTIAL REALIZABLE
                                                                                             VALUE AT ASSUMED
                                                                                               ANNUAL RATES
                                                                                              OF STOCK PRICE
                                                                                             APPRECIATION FOR
                                                                                               OPTION TERM (2)
                                                                                          ----------------------
                                                                                            5%            10%
NAME                        NUMBER OF          % OF            EXERCISE OR  EXPIRATION
                           SECURITIES      TOTAL OPTIONS       BASE PRICE      DATE
                           UNDERLYING       GRANTED TO          PER SHARE
                             OPTIONS       EMPLOYEES IN
                             GRANTED     1996 FISCAL YEAR(1)
<S>                            <C>               <C>              <C>          <C>           <C>           <C>     
Uri Evan                       --                --               --           --            --            --
Frederick J. Horowitz (3)      --                --               --           --            --            --
Frank Corella                 15,000            13.18            $15.75       1/2/06      $130,251      $320,815
Harold J. Macsata (3)         13,125            11.54            $15.75       1/2/06      $113,970      $280,713
Daniel Bergman                 --                --               --           --            --            --
</TABLE>

(1) Options vest over three years in installments of 25%, 25% and 50%.

(2) Amounts reflected in these columns represent hypothetical values that may
    be realized upon exercise of the options immediately prior to the
    expiration of their term, assuming the specified annually compounded rates
    of appreciation of the Company's Common Stock over the term of the options.
    These numbers are calculated based on rules promulgated by the Securities
    and Exchange Commission. Actual gains, if any, on stock option exercises
    and Common Stock holdings are dependent on the timing of such exercise and
    the future performance of the Company's Common Stock.

(3) Ceased to be employed by the Company during 1997.


         The following table sets forth information with respect to (i)
exercises of stock options during fiscal 1996 and (ii) unexercised stock
options held at December 31, 1996 by the persons named in the Summary
Compensation Table.

                                      33
<PAGE>

<TABLE>
<CAPTION>
                                    AGGREGATED 1996 FISCAL YEAR-END OPTION VALUES

                                 OPTION EXERCISES                   NUMBER OF                VALUE OF UNEXERCISED
                                                               UNEXERCISED OPTIONS          IN-THE-MONEY OPTIONS AT
                                                           HELD AT 1996 FISCAL YEAR END   1996 FISCAL YEAR END($)(2)

NAME                        SHARES ACQUIRED      VALUE     EXERCISABLE    UNEXERCISABLE   EXERCISABLE  UNEXERCISABLE
                              ON EXERCISE     REALIZED(1)
<S>                              <C>             <C>          <C>             <C>           <C>            <C>       
Uri Evan                         --              --           --              --            --             --
Frederick J. Horowitz(3)         --              --           --              --            --             --
Frank Corella                   29,786       $1,183,994      29,786         74,573       $1,180,270    $2,748,705
Harold J. Macsata(3)             --              --          5,625          30,000        179,747        878,850
Daniel Bergman                   --              --           --              --
</TABLE>

(1)      The "value realized" represents the difference between the exercise
         price of the option and the closing price of the Common Stock on The
         Nasdaq National Market on the date of exercise.

(2)      The value for an "in-the-money" option represents the difference
         between the exercise price of the option and the closing price of the
         Common Stock on The Nasdaq National Market on December 31, 1996 of
         $41.625.

(3)      Ceased to be employed by the Company during 1997.


EMPLOYMENT AGREEMENTS

         In January 1996, the Company entered into an amended employment
agreement with Mr. Evan which provides for an annual base salary of $200,000,
as well as such bonuses as may be authorized from time to time by the Board of
Directors. The agreement expires in June 1999, with automatic extensions of one
year unless terminated, and a covenant not to compete for a period of up to
twenty-four months following the termination of employment. Mr. Evan has agreed
to devote approximately 80% of his working time to the business and affairs of
the Company. If the Company terminates the agreement other than for cause, Mr.
Evan will be entitled to continue to receive his base salary through the end of
the term. The agreement also provides that in the event of a Change of Control
(as defined in the agreement) during the term of the agreement or during the
twenty-four months thereafter, Mr. Evan shall receive a payment equal to 2.5%
of the increase in the Market Capitalization of the Company (as defined in the
agreement) between the Company's 1995 initial public offering and such Change
of Control.

         Mr. Bergman has entered into an employment agreement with the Company
that provides for an annual base salary of $125,000, the right to receive 8% of
the OGM Pool (as defined below) and such other bonuses as may be authorized
from time to time by the Board of Directors. See "--Profit Sharing Plan." The
agreement has a term of three years expiring in 1998, with automatic extensions
of one year unless terminated, and a covenant not to compete for a period of up
to twenty-four months following the termination of employment. The agreement
requires Mr. Bergman to devote his full time, attention and efforts to the
business and affairs of the Company. If the Company

                                      34
<PAGE>

terminates the agreement other than for cause, Mr. Bergman will be entitled to
continue to receive his base salary through the end of the term.

         Mr. Corella has entered into an employment agreement with the Company
that provides for an annual base salary of $175,000. Mr. Corella also is
expected to be able to earn sales commissions and, pursuant to the terms of his
employment agreement, is entitled to receive an additional $125,000 in bonuses
in the event the Company's net sales exceed $100,000,000 for the year. If the
Company terminates the agreement other than for cause, Mr.
Corella will be entitled to receive his base salary through the end of the
term.

         In March 1997, the Company entered into an employment agreement with
Richard D. Coslow to serve as the Company's Chief Financial Officer beginning
April 14, 1997. The agreement provides for an annual base salary of $156,000
plus such bonuses as may be authorized from time to time by the Board of
Directors, the right to receive 8% of the OGM Pool and the right to receive an
option to purchase 15,000 shares of Common Stock pursuant to the Company's 1995
Stock Option Plan. The agreement has an initial three year term, with automatic
extensions of one year unless terminated. If the Company terminates the
agreement other than for cause, or the permanent disability or death of Mr.
Coslow, he will be entitled to continue to receive his base salary for a period
of six months from the date of such termination (or one year in the event such
termination occurs within the first year of his employment).

         In July 1997, the Company entered into an employment agreement with
Giulio Perillo to serve as the Company's President and Chief Operating Officer
beginning August 4, 1997. Mr. Perillo resigned from his position as President
and Chief Operating Officer effective February 25, 1998. The agreement provided
for an annual base salary of $190,000 plus such bonuses as authorized from time
to time by the Board of Directors.

         Each of Messrs. Horowitz and Mascata entered into consulting
arrangements during 1997 which provided for, among other things, each of them
to continue to provide services to the Company until November 5, 1997 in the
case of Mr. Macsata and December 31, 1997 in the case of Mr. Horowitz. Under
his agreement, Mr. Macsata is entitled, among other things, to continued
vesting of his stock options through March 1, 1999 and a severance payment of
$62,500 if, and only to the extent, he performs satisfactorily under his
agreement, as determined in the sole reasonable discretion of the Company.

                                      35
<PAGE>

PROFIT SHARING PLAN

         The Company has a profit sharing plan (the "OGM Plan") based on the
amount by which the Company's OGM exceeds 10% in a given year. OGM is equal to
the percentage of gross sales represented by the Company's income from
operations plus general and administrative expenses. If the Company's OGM
exceeds 10%, a percentage of that excess is placed in a bonus pool (the "OGM
Pool"). The percentage added to the OGM Pool varies between 5% and 22% of OGM
in excess of 10%, except that the total amount available for distribution does
not include amounts calculated based on annual net sales in excess of $200
million. Of the OGM Pool, 16% currently is allocated for distribution to senior
executives with Messrs. Bergman and Coslow each to receive 8%. Of the remainder
of the OGM Pool, no participant currently can receive a distribution greater
than 50% of his or her base salary. Amounts not allocated for distribution
under the OGM Pool will not be distributed. For 1995 and 1996, the Company made
payments aggregating approximately $231,000 and $410,000, respectively, under
the OGM Plan. No distributions were made under the OGM Plan for periods prior
to 1995.

COMPENSATION OF DIRECTORS

         Each non-employee director of the Company receives (i) an annual fee
of $15,000 and (ii) $1,500 per day for each Board of Directors or committee
meeting attended but not more than $1,500 for any single day, regardless of the
number of meetings of the Board of Directors or any committee thereof attended
during that day. In addition, directors who are not employees of the Company
are compensated through stock options. See "--Non-Employee Directors' Plan."

1995 STOCK OPTION PLAN

         Effective in August 1995, the Company adopted the USA Detergents, Inc.
1995 Stock Option Plan (the "Plan") pursuant to which options to purchase an
aggregate of 388,935 shares of Common Stock may be granted to key employees and
consultants of the Company and any of its subsidiaries. In July 1997, the
maximum number of shares of Common Stock authorized to be granted under the
Plan was increased to 1,000,000, subject to approval of the Company's
stockholders. The Plan was adopted for the purpose of securing for the Company
and its stockholders the benefits of common stock ownership of the Company by
key personnel of the Company and its subsidiaries. The Board of Directors
believes that the granting of options under the Plan will foster the Company's
ability to attract, retain and motivate those individuals who will be largely
responsible for the profitability and long-term future growth of the Company.

         The Plan authorizes the Board to issue incentive stock options
("ISO's"), as

                                      36
<PAGE>

defined in Section 422(b) of the Internal Revenue Code (the "Code"), and stock
options that do not conform to the requirements of that Code section
("Non-ISO's"). The exercise price of each ISO may not be less than 100% of the
fair market value of the Common Stock at the time of grant, except that in the
case of a grant to an employee who owns (within the meaning of Code Section
422(b)(6)) 10% or more of the outstanding stock of the Company or any
subsidiary (a "10% Stockholder"), the exercise price may not be less than 110%
of such fair market value. The exercise price of each Non-ISO may not be less
than the par value of the Common Stock. Generally, options will vest over a
three to five year period, subject to acceleration in the event of a Change in
Control (as hereinafter defined), and may not be exercised after the tenth
anniversary (fifth anniversary in the case of an ISO granted to a 10%
Stockholder) of their grant. Options may not be transferred during the lifetime
of an optionholder. No stock options may be granted under the Plan after August
2005.

         The Plan is administered by the Stock Option Committee (the
"Committee") of the Board of Directors. Subject to the provisions of the Plan,
the Committee has the authority to, among other things, determine the
individuals to whom the stock options are to be granted, the number of shares
to be covered by each option, the option price, the type of option, the option
period, the restrictions, if any, on the exercise of the option and the terms
for the payment of the option price, interpret the provisions of the Plan, fix
and interpret the provisions of option agreements made under the Plan,
supervise the administration of the Plan, and take such other action as may be
necessary or desirable in order to carry out the provisions of the Plan. Each
grant of options is to be evidenced by a stock option agreement executed by the
Company and the optionee at the time of grant in accordance with the terms and
conditions of the Plan. As of December 31, 1996, Messrs. Adler, Kalish and
Mandell comprised the stock option committee

                                      37
<PAGE>

         No option will become exercisable unless the person to whom the option
is granted remains in the continuous employ or service of the Company or one of
its subsidiaries for at least six months (or for such longer period as the
Committee may designate) from the date the option is granted. Unless extended
by the Committee, if an optionee ceases to be employed by or to perform
services for the Company or one of its subsidiaries for any reason other than
death or disability, then each outstanding option granted to him or her under
the Plan will terminate on the date three months after the date of such
termination of employment or service, or, if earlier, the date specified in the
option agreement. If an optionee's employment or service is terminated by
reason of the optionee's death or disability (or if the optionee's employment
or service is terminated by reason of his or her disability and the optionee
dies within one year after such termination of employment or service), then,
unless extended by the Committee, each outstanding option granted to the
optionee under the Plan will terminate on the date one year after the date of
such termination of employment or service (or one year after the later death of
a disabled optionee) or, if earlier, the date specified in the option
agreement.

         If any event constituting a "Change in Control of the Company" shall
occur, all options granted under the Plan which are outstanding at the time a
Change in Control of the Company occurs will immediately become exercisable. A
"Change in Control of the Company" will be deemed to occur if (i) there is
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (ii) the stockholders of
the Company approve any plan or proposal for liquidation or dissolution of the
Company, or (iii) any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act, becomes the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act) of 40% or more of the Company's
outstanding Common Stock other than pursuant to a plan or arrangement entered
into by such person and the Company, or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.

         The Board of Directors may amend or terminate the Plan. Except as
otherwise provided in the Plan with respect to equity changes, any amendment
which would increase the aggregate number of shares of Common Stock as to which
options may be

                                      38
<PAGE>

granted under the Plan, materially increase the benefits under the Plan, or
modify the class of persons eligible to receive options under the Plan is
subject to the approval of the Company's stockholders. No amendment or
termination may affect adversely any outstanding option without the written
consent of the optionee.

FEDERAL INCOME TAX CONSEQUENCES

         An optionee will not realize taxable income upon the grant of an
option. In general, the holder of a Non-ISO will realize ordinary income when
the option is exercised equal to the excess of the value of the stock over the
exercise price (i.e., the option spread), and the Company receives a
corresponding deduction in the same amount, subject to the deduction limits of
Section 162(m) of the Code. (If an optionee is subject to the six month
restrictions on sale of Common Stock under Section 16(b) of the Exchange Act,
ordinary income recognition generally will be postponed until the date the
restrictions lapse, unless an early income recognition election is made.) Upon
a later sale of the stock, an optionee will realize capital gain or loss equal
to the difference between the selling price and the value of the stock at the
time the option was exercised (or, if later, the time the ordinary income is
recognized with respect to the shares received upon exercise).

         The holder of an ISO will not realize taxable income upon the exercise
of the option (although the option spread is an adjustment to taxable income
that may result in alternative minimum tax (the adjustment, if any, is also
added to the basis of the shares for purposes of determining adjusted gain or
loss under the alternative minimum tax when the shares are sold)). If the stock
acquired upon exercise of the ISO is sold or otherwise disposed of within two
years from the option grant date or within one year from the exercise date,
then, in general, gain realized on the sale is treated as ordinary income to
the extent of the option spread at the exercise date, and the Company receives
a corresponding deduction in the same amount, subject to the limitations of
Section 162(m) of the Code. Any remaining gain is treated as short-term or
long-term capital gain depending on the holding period. If the stock is held
for at least two years from the grant date and one year from the exercise date,
then gain or loss realized upon the sale will be capital gain or loss and the
Company will not be entitled to a deduction.

NON-EMPLOYEE DIRECTORS' PLAN

         Effective in August 1995, the Company adopted a Stock Option Plan for
Non-Employee Directors (the "Directors' Plan"), pursuant to which options to
acquire an aggregate of 75,000 shares of Common Stock may be granted to
non-employee directors. In July 1997, the maximum number of shares of Common
Stock authorized to be granted under the Directors' Plan was increased to
125,000 subject to stockholder approval. The Directors' Plan provides for the
automatic grant to each of the Company's

                                      39
<PAGE>

non-employee directors of (1) an option to purchase 4,500 shares of Common
Stock on the later of the date of such director's initial election or
appointment to the Board of Directors or the date of adoption of the Directors'
Plan, and (2) an option to purchase 4,500 shares of Common Stock on each annual
anniversary of such election or appointment, provided that such individual is
on that anniversary date a non-employee director. The options will have an
exercise price of 100% of the fair market value of the Common Stock on the date
of grant, have a ten-year term and become exercisable in four equal quarterly
installments commencing on the date which is three months after the date of the
grant thereof, subject to acceleration in the event of a change of control (as
defined in the Directors' Plan). The options may be exercised by payment in
cash, check or shares of Common Stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Uri Evan, Chief Executive Officer, Chairman of the Board and a
principal stockholder of the Company, is also a director, officer and
stockholder of American Value Brands Inc. and a director and officer of Net
Grocer Inc. and Frederick R. Adler, a director and principal stockholder of the
Company, is also a director and stockholder of American Value Brands Inc. and a
director of Net Grocer Inc.

                                      40
<PAGE>

                     USA DETERGENTS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE


                                                                         PAGE

Independent Auditors' Reports                                            F-2

Consolidated Balance Sheets at December 31, 1995                         F-3
and 1996 (As Restated)

Consolidated Statements of Operations for the years                      F-4
ended December 31, 1994, 1995 and 1996 (As Restated)

Consolidated Statements of Cash Flows for the                            F-5
years ended December 31, 1994, 1995 and 1996 (As Restated)

Consolidated Statements of Stockholders' Equity                          F-6
for the years ended December 31, 1994, 1995 and 1996 (As Restated)

Notes to Consolidated Financial Statements for the                       F-7
years ended December 31, 1994, 1995 and 1996 (As Restated)



                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
USA Detergents, Inc.:

         We have audited the accompanying consolidated balance sheets of USA
Detergents, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, retained earnings and cash flows
for the three years ended December 31, 1994, 1995 and 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of USA Detergents, Inc. and
subsidiaries at December 31, 1995 and 1996, and the results of its operations
and its cash flows for the three years ended December 31, 1994, 1995 and 1996
in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

         As discussed in Note 11, the accompanying financial statements have
been restated.


New York, New York
October 30, 1997 (January 5, 1998, as to Note 5 and February 25, 1998 and March
2, 1998 as to Note 4)

                                      F-2
<PAGE>

                     USA DETERGENTS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                    ASSETS

                                                                  1995          1996
                                                                  ----          ----
                                                                            (AS RESTATED
                                                                            SEE NOTE 11)
<S>                                                             <C>           <C>    
Current assets:
Cash                                                            $    61       $ 2,373
Accounts receivable, net of allowance for doubtful               15,278        27,323
accounts of $276 and $1,349, respectively                                   
Inventories                                                       8,448        28,830
Prepaid expenses and other current assets                         2,989         3,053
Refundable Income taxes                                            --           4,255
Deferred income tax assets - net                                    630           534
                                                                -------       -------
         Total current assets                                    27,406        66,368
Property and equipment--net                                      10,404        26,783
Restricted funds                                                    275           275
Other assets                                                        255         2,800
Note receivable                                                   2,250         2,250
                                                                -------       -------
         Total assets                                           $40,590       $98,476
                                                                =======       =======
                                                                            
                  LIABILITIES AND STOCKHOLDERS' EQUITY         
                                                                            
Current liabilities:                                                        
Current portion of long-term debt                               $ 7,320       $ 5,819
Accounts payable                                                  4,830        13,725
Accrued expenses                                                  3,942        11,503
 Income taxes payable                                               182          --
                                                                -------       -------
   Total current liabilities                                     16,274        31,047
Long-term debt--net of current portion                            1,830        29,311
Deferred rent payable                                             1,204         1,284
Deferred income tax liabilities-net                                 990           735
                                                                -------       -------
         Total liabilities                                       20,298        62,377
                                                                            
Commitments and Contingencies                                               
                                                                            
Stockholders' equity:                                                       
Preferred Stock--no par value; authorized 1,000,000 shares,        --            --
none issued                                                                 
Common stock--$.01 par value; authorized 30,000,000 shares,         134           138
issued and  outstanding 13,392,390 and 13,752,570 shares,                   
respectively                                                                
Additional paid-in capital                                       15,499        27,595
Retained earnings                                                 4,659         8,366
                                                                -------       -------
         Total stockholders' equity                              20,292        36,099
                                                                -------       -------
         Total liabilities and stockholders' equity             $40,590       $98,476
                                                                =======       =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>

                     USA DETERGENTS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
 
<TABLE>
<CAPTION>
                                                    1994                    1995                     1996
                                                    ----                    ----                     ----
                                                                                                 (As Restated
                                                                                                 See Note 11)

<S>                                               <C>                     <C>                      <C>     
Net sales.........................                $68,663                 $104,878                 $172,424
Cost of goods sold................                 51,588                   72,921                  121,498
                                                   ------                   ------                  -------

Gross profit......................                 17,075                   31,957                   50,926

Selling, general and administrative                12,182                   22,232                   43,878
                                                   ------                   ------                   ------

Income from operations............                  4,893                    9,725                    7,048
Interest expense - net............                    543                      544                      868
                                                      ---                      ---                      ---
Income before income                                4,350                    9,181                    6,180
tax provision.....................
Income tax provision..............                     83                    2,156                    2,473
                                                       --                    -----                    -----

Net income........................                $ 4,267                   $7,025                  $ 3,707
                                                  =======                   ======                  =======
Net income per share..............                                                                     $.27
                                                                                                       ====
Weighted average number of
 common shares outstanding........                                                                   13,589
                                                                                                     ======

Pro Forma Income Statement Data:
Earnings before income tax
provision, as reported............                 $4,350                   $9,181
Pro forma income tax provision....
                                                    1,689                    3,756
                                                    -----                    -----

 Pro forma net income.............                 $2,661                   $5,425
                                                   ======                   ======
 Pro forma net income per
 share............................                   $.22                     $.43
                                                     ====                     ====
Weighted average number of
common shares outstanding
used in the pro forma per
share calculation.......
                                                   11,915                   12,494
                                                   ======                   ======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>

                     USA DETERGENTS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         1994        1995        1996
                                                                         ----        ----        ----
                                                                                             (AS RESTATED
                                                                                             SEE NOTE 11)
<S>                                                                    <C>         <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                             $  4,267    $  7,025    $  3,707
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization                                               762       1,006       2,467
Change in the provision for bad debts and sales allowances                  157         192       1,073
Increase/(decrease) in deferred rent                                        416          (3)         80
Changes in operating assets and liabilities:
   (Increase) in accounts receivable                                       (384)     (8,806)    (13,118)
   (Increase) in inventories                                             (2,346)       (549)    (20,382)
   (Increase) in prepaid expenses and other current assets               (1,250)     (1,293)        (64)
   (Increase)/decrease in other assets                                      (34)         22      (2,545)
   Decrease/(increase) in accounts payable                               (2,962)        966       8,895
   Increase in accrued expenses                                           2,158         543       7,561
   Decrease in restricted funds                                             141        --          --
   (Increase) in income taxes receivable                                   --          --        (4,255)
   (Increase)/decrease in deferred income tax assets-net                   --          (630)         96
   Increase/(decrease) in deferred income tax liabilities-net              --           990        (255)
   Increase/(decrease) in income taxes payable                               38         125        (182)
                                                                       --------    --------    --------
   Net cash provided by (used in) operating activities:                     963        (412)    (16,922)
                                                                       --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                      (1,651)     (3,851)    (18,846)
 Increase in note receivable                                               --        (2,250)       --
                                                                       --------    --------    --------
 Net cash used in investing activities:                                  (1,651)     (6,101)    (18,846)
                                                                       --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Stockholder distributions                                               (1,612)     (5,331)       --
 Repayment of stockholders loans                                            (82)       --          --
 Proceeds from common stock subscription                                  1,375        --          --
 Repayment of EDA debt                                                     (334)       (305)       (305)
 Net proceeds from initial public offering                                 --        12,718        --
 Net proceeds from sale of common stock                                    --          --        11,736
 Net proceeds from exercise of options                                     --          --           364
 Increase in Bridge Loan                                                   --          --         4,000
 Increase/(decrease) in revolving credit line-net                         1,394        (517)     22,322
 Capitalized lease repayments                                               (22)        (68)        (37)
                                                                       --------    --------    --------
 Net cash provided by financing activities                                  719       6,497      38,080
                                                                       --------    --------    --------
 Net increase/(decrease) in cash                                             31         (16)      2,312
 Cash, January 1,                                                            46          77          61
                                                                       --------    --------    --------
 Cash, December 31,                                                    $     77    $     61    $  2,373
                                                                       ========    ========    ========

 SUPPLEMENTAL DISCLOSURE OF CASH
 FLOW INFORMATION:
  Cash paid during the year for:
   Interest                                                            $    520    $    539    $    834
                                                                       ========    ========    ========
   Income taxes                                                        $     45    $  1,671    $  7,059
                                                                       ========    ========    ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>

                     USA DETERGENTS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                 PREFERRED STOCK    COMMON STOCK        ADDITIONAL  RETAINED               STOCK         TOTAL
                                 ---------------    ------------         PAID-IN    EARNINGS           SUBSCRIPTIONS  STOCKHOLDERS'
                                                                         CAPITAL    --------             RECEIVABLE      EQUITY
                                 SHARES    AMOUNT   SHARES      AMOUNT   -------                TOTAL    ----------      ------
                                 ------    ------   ------      ------                          -----
<S>                                <C>     <C>     <C>           <C>     <C>         <C>       <C>         <C>           <C>    
BALANCE, December 31, 1993....     --      $  --   7,943,000     $ 79    $ 2,836     $  310    $ 3,225     $(1,375)      $ 1,850
 Net income...................                                                        4,267      4,267                     4,267
 Stockholder distributions....                                                       (1,612)    (1,612)                   (1,612)
 Collection of common stock                                                                                  1,375         1,375
                                ------    ------- ----------    ------  ---------   --------  ---------   ---------     ---------
  subscription receivable.....                                                                
BALANCE, December 31, 1994....     --         --   7,943,000       79      2,836      2,965      5,880          --         5,880
 Net income...................                                                        7,025      7,025                     7,025
 Stockholder distributions....                                                       (5,331)    (5,331)                   (5,331)
 Net proceeds from initial                           985,260       10     12,708                12,718                    12,718
  public offering.............                                                                
Three-for-two stock split.....     --         --   4,464,112       45        (45)        --         --          --            --
                                ------    ------- ----------    ------  ---------   --------  ---------   ---------     ---------
BALANCE, December 31, 1995....     --         --  13,392,372      134     15,499      4,659     20,292          --        20,292
 Net income...................                                                        3,707      3,707                     3,707
 Stock options exercised......                        60,198        1        363                   364                       364
 Net proceeds from sale of                                                                    
 common stock.................     --         --     300,000        3     11,733                11,736                    11,736
                                ------    ------- ----------    ------  ---------   --------  ---------   ---------     ---------
                                                                                              
BALANCE, December 31, 1996                                                                    
(As Restated See Note 11)          --      $  --  13,752,570     $138    $27,595     $8,366    $36,099     $    --       $36,099
                                ======    ======= ==========    ======  =========   ========  =========   =========     =========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>

                     USA Detergents, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1994, 1995 and 1996
                          (As Restated - See Note 11)

1.       Principal Business Activity and Summary of Significant Accounting
         Policies

         USA Detergents, Inc. (the "Company") manufactures and markets
nationally distributed value brand laundry and household cleaning products.

         Basis of Presentation--The accompanying Financial Statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

         Inventories -- Inventories are stated at the lower of cost, determined
by using the first-in, first-out and average methods, or market. The Company
periodically reviews inventory for slow moving or obsolete items. Such items
are written down to net realizable value and have not been material for any
period presented.

         Slotting fees -- The Company incurs certain costs in connection with
placing its products. These costs are known in the trade as "slotting fees."
The Company is amortizing these fees over a one year period from the date
incurred. Deferred slotting fees are included in prepaid expenses and other
current assets.

         Long-Lived Assets -- In March 1995, the Financial Accounting Standards
Board issued Statement Number 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement is
effective for fiscal years beginning after December 15, 1995. The Company has
adopted this statement and the impact has not been significant.

         Depreciation and Amortization -- Depreciation of property and
equipment is provided for by using the straight-line method over the estimated
useful lives of the respective assets. Amortization of leasehold improvements
is provided for by the straight-line method over the lease term.

         Trademark and Deferred Loan Costs -- Other assets include trademark
costs, which are being amortized using the straight-line method over a period
of 10 years, and loan closing costs, which are being amortized over the life of
the loan.

         Income Taxes -- Prior to August 10, 1995 (one day prior to the
completion of the Company's initial public offering), the Company elected to be
treated as an S corporation ("S corporation") under the applicable sections of
the Internal Revenue Code. Accordingly, during the "S Corporation Period" there
was no provision for federal income taxes as such earnings of the Company
flowed through directly to the stockholders. The Company was subject to state

                                      F-7
<PAGE>

and local taxes in certain states during the S Corporation Period.

         Deferred taxes on income are provided to reflect the tax effect of
temporary differences between financial statement income and taxable income.
The principal items giving rise to deferred taxes are the use of accelerated
depreciation methods for tax purposes, straight-lining of step rental increases
and differences in the timing of the deductibility of certain expenses between
income tax and financial reporting.

         Fair Value of Financial Instruments -- The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments". The estimated fair
values of financial instruments have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.

         The carrying amounts and estimated fair values of financial
instruments at the end of the respective years are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                      December 31, 1995          December 31, 1996
                                      -----------------          -----------------
                                   Carrying    Estimated       Carrying    Estimated
                                    Amount     Fair Value       Amount     Fair Value
                                    ------     ----------       ------     ----------
<S>                                    <C>          <C>         <C>          <C>   
Assets:
Cash...........................        $61          $61         $2,373       $2,373
Trade accounts receivable           15,554       15,554         28,672       28,672
Note receivable.................     2,250        2,250          2,250        2,250
Liabilities:
    Accounts payable,
    accrued expenses
    and taxes.....................   8,954        8,954         25,247       25,247

Revolving line of
    credit and Bridge Loan I.        6,983        6,983         33,305       33,305
Capitalized lease
    obligations..................       56           56             19           19
Economic Development
    Authority loan..............     2,111        1,946          1,806        1,712
</TABLE>

The following methods and assumptions were used to estimate the fair value of
the financial instruments presented above:

Cash -- The carrying amount is a reasonable approximation of fair value.

                                      F-8
<PAGE>

Trade accounts receivable, note receivable, accounts payable, accrued expenses
and taxes. The fair value of receivables and payables are assumed to equal
their carrying value because of their short maturities.

Revolving Credit Line and Bridge Loan I -- Fair value is estimated by
discounting the future stream of payments using the incremental borrowing rate
of the Company, which represents its primary source of recourse financing.

Economic Development Authority Loan -- Interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for debt issues for which no market
quotes are available.

         Use of estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

         Revenue Recognition -- Revenue is recognized at the time the
merchandise is shipped.

         Stock-Based Compensation -- Stock-based compensation is recognized
using the intrinsic value method. For disclosure purposes, pro forma net income
and pro forma net income per share are provided as if the fair value method was
applied.

         Pro forma Earnings Per Share and Pro forma Information -- Pro forma
net income per share is computed by dividing pro forma net income by the
weighted average number of shares outstanding. The dilutive effect of stock
options have not been included as the impact is not material. Shares
outstanding have been retroactively adjusted for the recapitalization.

         Pro forma net income has been adjusted to reflect a tax provision
which reflects the actual taxes that would have been paid had the Company been
a C corporation for all of 1995 and 1994.

         Reclassifications -- Certain reclassifications have been made to prior
year amounts to conform with the presentation for the current year.

                                      F-9
<PAGE>

         New Accounting Standards -- In October, 1996, the Accounting Standards
Executive Committee issued Statement of Position 96-1, "Environmental
Remediation Liabilities." The statement provides guidance on accounting for
environmental remediation liabilities and is effective for fiscal years
beginning after December 15, 1996. Adoption of this statement is not expected
to have any significant impact on the Company.

         The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share." This pronouncement
must be implemented for annual and interim periods ending after December 15,
1997. SFAS No. 128 does not permit early application. When implemented, SFAS
No. 128 requires restatement of all prior period earnings per share data. SFAS
No. 128 calls for the calculation of basic earnings per share, which is
calculated using only weighted average shares outstanding during the period and
does not consider the assumed exercise of shares utilizing the treasury stock
method. In addition, SFAS No. 128 requires the disclosure of diluted earnings
per share. The historical effect of stock options has not been included in the
computation of earnings/(loss) per share as the impact was not material or
antidilutive. The Company believes that the adoption of SFAS No. 128 will not
have an impact on basic earnings per share as compared with previously reported
restated earnings per share amounts or have a material effect on previously
reported restated primary earnings per share as compared with diluted earnings
per share.

2. INVENTORIES

         Inventories consist of the following:

                                                         DECEMBER 31,
                                                     1995          1996
                                                     ----          ----
                                                       (in thousands)

Raw material......................................   $3,816       $ 9,972
Finished goods....................................    4,632        18,858
                                                     ------       -------
                                                     $8,448       $28,830
                                                     ======       =======

                                     F-10
<PAGE>

3. PROPERTY AND EQUIPMENT

         Property and equipment, at cost, consists of the following:


<TABLE>
<CAPTION>
                                                          DECEMBER 31,         
                                                          ------------          ESTIMATED
                                                     1995           1996       USEFUL LIFE
                                                     ----           ----       -----------
                                                         (in thousands)

<S>                                                  <C>           <C>        <C>
Machinery and equipment...........................   $7,672        $20,332    6 to 10 years
Furniture and fixtures............................    1,382          2,608    5 to 7 years
Leasehold improvements............................    2,563          3,381    Term of lease
Construction in progress..........................    1,423          2,179
Land..............................................       --          1,376
Building..........................................       --          1,652      25 years
                                                    -------        -------
                                                     13,040         31,528

Less accumulated depreciation and
amortization......................................    2,636          4,745
                                                    -------        -------
                                                    $10,404        $26,783
                                                    =======        =======
</TABLE>

Depreciation and amortization expense amounted to $762, $1,006 and $2,467 for
the years ended December 31, 1994, 1995 and 1996, respectively.

                                     F-11
<PAGE>

4. DEBT

                                                          DECEMBER 31,
                                                          ------------
                                                       1995          1996
                                                       ----          ----

Bridge Loan I (i)                                   $    --       $ 4,000
Capital Expenditure Facility (i)                         --        20,000
Revolving credit facility (i)                         6,983         9,305
New Jersey EDA loan (ii)                              2,111         1,806
Capitalized lease obligations                            56            19
                                                    -------       -------
                                                      9,150        35,130
Less amount due in one year                           7,320         5,819
                                                    -------       -------
                                                    $ 1,830       $29,311
                                                    =======       =======


Original annual maturities of bank and other long-term debt, are as follows:

                                                     1997         $ 5,819
                                                     1998               6
                                                     1999               0
                                                     2000          10,000
                                                     2001               5
                                                  Thereafter       19,300
                                                                  -------
                                                                  $35,130
                                                                  =======

                                     F-12
<PAGE>

(i)      PNC Bank Debt

         In December 1996, the Company entered into a credit facility with PNC
Bank, National Association ("PNC") consisting of a $20,000,000 capital
expenditure facility for the purchase of capital assets and/or leasehold
improvements and a $10,000,000 traditional revolving facility (the "Decem.ber
1996 PNC Facility"). Borrowings under the December 1996 PNC Facility bore
interest, at the Company's option, at LIBOR plus .50% to 1.5% (6.08% as of
December 31, 1996) or one percent below the prime rate of PNC. All amounts
outstanding under the December 1996 PNC Facility, as of December 31, 1996 were
subject to the 6.08% LIBOR-based interest rate. Unused portions of the
revolving facility were subject to a commitment fee of .25% on such unused
amounts. On December 31, 1996, the Company also obtained a 60-day $4,000,000
bridge loan (the "Bridge Loan I"), bearing interest at one percent below the
lender's prime rate (7.25%). As of December 31, 1996, approximately $33,300,000
was outstanding under the credit facility and the Bridge Loan I facility. On
March 3, 1997, the Company repaid the Bridge Loan I facility with funds
generated from working capital.

         On March 24, 1997, the Company obtained a commitment from PNC and a
second lender (the "March PNC Commitment") to replace the December 1996 PNC
Facility with a $55 million credit facility. In conjunction with this
commitment, PNC extended to the Company a $10 million bridge loan (the "Bridge
Loan II") to acquire a distribution center in North Brunswick bearing interest
at LIBOR + 1.5% to be repaid from the anticipated proceeds of the replacement
facility. The December 1996 PNC Facility and Bridge Loan II were secured by a
substantial portion of the Company's assets.

         The December 1996 PNC Facility, among other things, required the
Company to maintain specified debt to equity ratios, current ratios, minimum
consolidated tangible net worth and debt service ratio levels. Based on the
restated financial statements (Note 11), the Company was not in compliance with
various covenants and other material provisions contained in the December 1996
PNC Facility including all of the required financial covenants. In addition,
based in part on the Company's performance in the first quarter of 1997, the
$55 million March PNC Commitment was withdrawn.

         On June 30, 1997, the Company obtained a forbearance agreement from
PNC which provided that PNC would forbear exercising the rights and remedies
available to it under the December 1996 PNC Facility and Bridge Loan II until
July 7, 1997. Although the forbearance agreement expired, PNC continued to
cooperate with the Company during its discussions with other third party
lenders to amend and/or replace the December 1996 PNC Facility and Bridge Loan
II.

         On February 25, 1998, the Company and PNC entered into an amended and
restated Loan and Security Agreement (the "February 1998 PNC Facility"), which
waives all defaults under the December 1996 PNC Facility and Bridge Loan II.
Under the amended agreement, the Company made a prinicipal payment of $5
million and granted PNC a security interest in substantially all of the assets
of the company. The balance of the principal indebtedness,

                                     F-13
<PAGE>

approximately $35 million, has been extended to January 4, 1999 and bears
interest at rates which range from prime plus .25% to prime plus 2%. The actual
rate depends on the timing of the repayment of the indebtedness. Of the $5
million paid to PNC, $4 million was loaned to the Company by an entity owned by
certain of the Company's principal stockholders at a rate of 9.5% per annum,
and is due in July 1999. These stockholders also personally guaranteed the
repayment of up to an additional $5 million of the indebtedness owed to PNC.

         In connection with the transaction, PNC received a warrant to purchase
between approximately 140,000 and 700,000 shares of the Company's common stock,
depending on the repayment date of the remaining indebtedness (140,000 shares
if paid in full by September 30, 1998). In conjunction with the issuance of
this warrant, the Company will recognize, in the first quarter of 1998, a
deferred charge estimated to be approximately $400,000. This charge will be
amortized over the period ending January 4, 1999, The shareholders who funded
$4 million of the $5 million payment and guaranteed the repayment of an
additional $5 million may also receive warrants or other consideration in
connection with the transaction.

         The February 1998 PNC Facility requires the Company to, among other
things, maintain a ratio of current assets to current liabilities (as defined)
in excess of 1.1, and restricts the payment of dividends and the incurrence of
new debt.

         In November 1997, the Company executed a commitment letter with GE
Capital for a credit facility totaling up to $52 million. The commitment
provided for a three year revolving credit facility of up to $45 million,
subject to availability based on eligible accounts receivable and inventory; a
three year term loan of $4 million with quarterly amortization payments; and a
three year term loan of $3 million with quarterly amortization payments. The
credit facility would be secured by substantially all the assets of the
Company.

         The commitment by GE Capital to extend the credit facility is subject
to various conditions including, among other things, the satisfactory
completion by GE Capital of its due diligence examination, evidence that the
Company will have excess availability (as defined) of not less than $5 million
at the time of the loan closing and the execution of definitive loan and
security documents. The commitment by GE Capital expired on March 2, 1998.
Management currently is negotiating with GE Capital to extend the commitment.
The Company must conclude the GE Capital Credit Facility or obtain other
sources of financing in order to meet its anticipated near term commitments.
There can be no assurance that the Company will be successful in concluding the
GE Capital Credit Facility or obtaining alternate financing.

(ii) EDA Loan

         The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of December 31,
1996, the Company used approximately $2.5 million of the EDA Loan for purchases
of machinery and equipment and improvements to the Company's North Brunswick
manufacturing facility. The remaining funds

                                     F-14
<PAGE>

are restricted for the duration of the EDA Loan. The EDA Loan is payable in
monthly installments of approximately $26,000 through November 1, 2002.
Interest on the EDA Loan is payable at a variable rate (4.2% at December 31,
1996). As a result of several factors, including those relating to the
Company's restated financial statements, amounts owed under the EDA Loan, at
the option of the issuing lender thereunder, may be declared immediately due
and payable. The Company has requested a waiver from the New Jersey Economic
Development Authority with respect to existing violations under the EDA Loan.
There can be no assurances that the Company will be successful in obtaining the
waiver. To date, the Company is current with respect to scheduled principal and
interest payments. The entire obligation has been classified as current in the
December 31, 1996 balance sheet.

5. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

         On May 5, 1997, a securities class action lawsuit entitled Feldbaum v.
USA Detergents, Inc. et al., No. 97-CV-3227, was filed in the U.S. District
Court for the Eastern District of Pennsylvania against the Company and certain
of its current and former officers and directors; the Feldbaum case
subsequently was transferred to the U.S. District Court for the District of New
Jersey. On May 15, 1997, a second securities class action lawsuit entitled
Einhorn v. USA Detergents, Inc. et al., No. 97-2459, was filed against the
Company and certain of its current and former officers and directors in the
U.S. District Court for the District of New Jersey. Since the Einhorn lawsuit
was filed, twelve additional securities class action lawsuits have been filed
in the U.S. District Court for the District of New Jersey against the Company
and certain of its current and former officers and directors. The class actions
purport to be brought on behalf of all persons who purchased the Company's
common stock between June 5, 1996, at the earliest, and May 8, 1997, at the
latest (the "putative class period"). The class actions generally allege that,
during the putative class period, the defendants made false or misleading
public statements and engaged in improper accounting practices, which caused
the price of the Company's common stock to be artificially inflated. The class
actions assert that the defendants' conduct violated Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated
thereunder, as well as state common law. The class actions do not specify an
amount of damages. In June and July 1997, the U.S. District Court for the
District of New Jersey entered orders consolidating all of the pending class
actions with the Einhorn case. In August 1997, the court entered an order
establishing a master docket for the consolidated class actions, In re USA
Detergents, Inc. Securities Litigation, Master File No. 97-CV-2459 (MTB), and
appointed lead plaintiffs and lead plaintiffs' co-lead counsel. Lead plaintiffs
are expected to file a consolidated amended class action complaint within
thirty days after the Company issues its restated financial statements, which
issuance will occur upon the filing of this Report on Form 10-K/A. The Company
intends to defend this action vigorously. An unfavorable outcome in the
litigation could have a material adverse effect on the Company's financial
condition and results of operations.

                                     F-15
<PAGE>

         On September 12, 1997, the Company became aware of a claim by the
North Brunswick Water Company ("NBWC") covering, among other things, unpaid
water and sewer charges aggregating approximately $5,000,000. On October 20,
1997, the Company commenced an action in the Superior Court of New Jersey,
Chancery Division, Middlesex County, challenging NBWC's claim and requesting
injunctive relief to prevent NBWC from taking any steps to discontinue service
pending the resolution of the claim. Pursuant to a Consent Order dated October
21, 1997, the Company paid $532,118 to NBWC, subject to refund, pending the
resolution of the matter. Based on a preliminary assessment made by independent
counsel for the Company of the underlying basis for NBWC's claim, management
believes that the Company's obligation, if any, to NBWC will not have a
significant impact on the Company's results of operations or financial position
beyond amounts already paid.

Note Receivable

         In December 1995, the Company loaned approximately $2.3 million to an
unaffiliated third party in connection with such third party's acquisition of a
powder detergent manufacturing facility. Amounts outstanding under such loan
bore interest at 10.0% per annum and were payable on demand. The loan was
secured exclusively by the stock and assets of the borrower. The Company had an
option to purchase the manufacturing facility for the amount of the loan.

         During June 1997, the Company exercised its purchase option, by the
cancellation of a $2,250,000 promissory note, to acquire a powder plant
facility located in Chicago. This facility provides the Company with its entire
powder production requirements. As part of the transaction, the Company assumed
a land lease upon which the Company's Chicago operations are located. The
lease, which expires in 2080, provides for rent to be paid annually in the
amount of $1,000 plus a variable amount adjusted for inflation. The total rent
paid for the year ended December 31, 1997 was approximately $9,000.

                                     F-16
<PAGE>

Leases
         The Company is committed under various operating leases which expire
at varying dates through the year 2004. Aggregate minimum future lease
payments, exclusive of payments for real estate taxes and operating costs, are
as follows (in thousands):

         YEAR ENDING
         DECEMBER 31,
         ------------

         1997.....................................  $  2,527
         1998.....................................     2,477
         1999.....................................     2,059
         2000.....................................     1,745
         2001.....................................     1,269
         Thereafter...............................     2,250
                                                    --------
                                                     $12,327
                                                    ========

         Rent expense charged to operations amounted to $1,099,000, $1,043,000
and $1,702,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, including real estate taxes and operating escalations.

         Rent expense recognized annually differs from actual rent paid as a
result of free rent periods and escalations in base rent provided in the
leases. Accordingly, the Company has recorded deferred rent of $1,284,000 at
December 31, 1996. This amount is being amortized by the straight-line method
over the life of the lease.

Servicing Agreement

         The Company entered into an exclusive use agreement with a vendor
whereby the vendor has committed the use of certain machines for the production
of packaging materials for the Company. The monthly payment is $965,666,
subject to maximum annual increases of 2%, through January 31, 2001, which will
be applied against the purchase price of the packaging materials.

                                     F-17
<PAGE>

Profit Sharing Plan

         The Company has a profit sharing plan based on the amount by which the
Company's operating gross margin (the "OGM"), as defined, exceeds ten percent.
If the Company's OGM exceeds ten percent, a percentage of that excess is placed
in a bonus pool based on a predetermined formula provided that the total amount
available for distribution is only based on annual gross sales up to $200
million. For the year ended December 31, 1996, fifty-two percent of the bonus
pool was allocated for distribution to senior executives. Of the remainder of
the bonus pool, no participant can currently receive a distribution greater
than 50% of his or her base salary. Amounts not allocated for distribution
under the bonus pool will not be distributed. The Company did not make payments
under the plan through December 31, 1994, as amounts would have been immaterial
and were waived. For the years ended December 31, 1995 and 1996, approximately
$231,000 and $410,000, respectively, was distributed under the plan.

Employment Agreements

         The Company is obligated under various employment agreements expiring
in 2000. As of December 31, 1996 and unaudited October 30, 1997, the minimum
future annual amounts payable under these agreements are as follows (in
thousands):


                       October 30, 1997          December 31, 1996
                       ----------------          -----------------
1997                    $         141             $       1,000
1998                              696                     1,000
1999                              546                       200
2000                              150                        --
                        -------------             -------------
                        $       1,533             $       2,200
                        =============             =============


Restructuring Costs

         In May 1997, the Company, as part of its cost-reduction strategy,
decided to close its Edison, New Jersey facility and move its candle
manufacturing operations to the Company's North Brunswick, New Jersey facility
at an estimated cost of $2.4 million. These restructuring costs include the
cost of moving the candle line and inventory, write-off of related leasehold
improvements and a portion of the future lease commitment and associated lease
expenses. The Company expects the property to be re-leased during 1998 thereby
eliminating or substantially reducing the then remaining lease obligation.

Environmental Regulation

         The Company is subject to various federal, state and local
environmental laws and regulations, including those relating to wastewater
discharge, air quality and the storage, handling and disposal of a variety of
substances. Some of the chemicals used by the Company

                                     F-18
<PAGE>

and stored at its manufacturing facility are materials regulated by federal or
state environmental protection agencies. The Company maintains $6,000,000 of
insurance coverage for environmental liabilities.

New Facility

         On January 22, 1997, the Company entered into a contract to purchase a
650,000 square foot distribution facility in North Brunswick, New Jersey,
adjacent to the Company's existing facility for a purchase price of $7,200,000.
Subsequent thereto, the Company consolidated its entire East Coast warehousing
and distribution operation at this new facility. The purchase of this
distribution facility was funded by the $10 million Bridge Loan II from PNC.

6.       INCOME TAXES

         Components of income taxes are as follows:

                                          YEAR ENDED DECEMBER 31,
                                          -----------------------
                                   1994            1995              1996
                                   ----            ----              ----
         Current:                             (IN THOUSANDS)
           Federal...............   $--           $1,403            $2,319
           State and local.......    83              393               313
           Deferred..............    --              360              (159)
                                    ---           ------            ------
                                    $83           $2,156            $2,473
                                    ===           ======            ======

                                     F-19
<PAGE>

         Temporary differences which give rise to net deferred tax liabilities
at December 31, 1995 and 1996 are as follows:

                                                                DECEMBER 31,
                                                                ------------
                                                             1995         1996
                                                             ----         ----
                                                              (IN THOUSANDS)
         Deferred tax liabilities
            Depreciation..........................           $990       $1,237
                                                             ----       ------
         Deferred tax assets
            Straight-lining of step rental increases          466          502
            Allowance for bad debts...............            107          527
            Inventory capitalization..............             37           15
            Miscellaneous.........................             20           (8)
                                                             ----        -----
                                                              630        1,036
                                                             ----        -----

         Net deferred tax liabilities.............           $360         $201
                                                             ====         ====

         A reconciliation of income taxes at the Federal statutory rate to
amounts provided is as follows:

                                                                DECEMBER 31,
                                                                ------------
                                                              1995       1996
                                                              ----       ----
                                                               (IN THOUSANDS)

         Tax provision computed at statutory rate.           $3,122     $2,101
         State and local income taxes..................         264        206
         Non taxable earnings during period prior to
            conversion to C corporation status.........      (1,522)        --
         Recognition of deferred taxes upon conversion
            to C corporation status....................         227         --
         Other--net....................................          65        166
                                                             ------     ------
                                                             $2,156     $2,473
                                                             ======     ======

         Prior to August 10, 1995, the Company was taxed as an S corporation.
Accordingly, no reconciliation for 1994 has been provided as taxes on earnings
of the Company were the responsibility of the stockholders.

7. SIGNIFICANT CUSTOMERS AND SUPPLIERS

         The Company's largest customer, Wal-Mart, accounted for 10.0%, 17.2%
and 16.8% of sales, respectively, in 1994, 1995 and 1996. No other customer of
the Company accounted for more than 10.0% of the Company's net sales. As is
customary in the industry, the Company does not have long-term contracts with
its customers.

         Certain chemical plastic bottles, packaging materials and
manufacturing equipment used in connection with the manufacture of the
Company's products as well as certain finished products sold by the Company are
obtained from a sole or a limited group of suppliers and 

                                     F-20
<PAGE>

subcontractors. The Company's reliance on a sole supplier or limited groups of
suppliers and subcontractors involves several risks, including increased risk
of inability to obtain adequate supplies, and reduced control over pricing and
timely delivery. Although the timeliness, quality and pricing of deliveries
from the Company's suppliers have been acceptable to date and the Company
believes that additional sources of supply are generally available, there can
be no assurance that supplies will be available on an acceptable basis or that
delays in obtaining new suppliers, particularly of plastic bottles, will not
have an adverse effect on the Company.

8. STOCKHOLDERS' EQUITY

         Organization, Recapitalization and Sale of Common Stock -- The Company
was organized in New Jersey and commenced operations effective October 25,
1988. On August 2, 1995, the Company was reincorporated in Delaware. In
connection with the reincorporation, the Company became authorized to issue up
to 30,000,000 shares of Common Stock, $.01 par value per share, and up to
1,000,000 shares of Preferred Stock, no par value. As part of the
reincorporation each share of the predecessor corporation's common stock was
converted into 88,167 shares of Common Stock of the Company. All applicable
share data have been retroactively adjusted to reflect the reincorporation and
share conversion.

         In August 1995, the Company completed an initial public offering of
3,622,500 shares of Common Stock, including 1,477,890 shares of Common Stock
sold by the Company (the remainder being sold by certain stockholders of the
Company) which provided net proceeds to the Company of approximately
$12,718,000.

         On January 18, 1996, the Company declared a three-for-two stock split
effected in the form of a 50% stock dividend to holders of record of the
Company's Common Stock at the close of business on January 30, 1996 and paid
February 9, 1996. Shares outstanding and per share amounts have been
retroactively adjusted to reflect the three-for-two stock split.

         In June 1996, the Company completed an additional public offering of
300,000 shares of Common Stock which provided net proceeds to the Company of
approximately $11,736,000.

         1995 Stock Option Plan. -- Effective in August 1995, the Company
adopted the USA Detergents, Inc. 1995 Stock Option Plan (the "1995 Plan"),
pursuant to which options to acquire an aggregate of 388,935 shares of Common
Stock may be granted to key employees and consultants of the Company or any of
its subsidiaries. In July 1997, the maximum number of shares of Common Stock
authorized to be granted under the 1995 Plan was increased to 1,000,000,
subject to approval of the Company's stockholders. The 1995 Plan authorizes the
Board to issue incentive stock options ("ISO's"), as defined in Section 422A(b)
of the Internal Revenue Code (the "Code"), and stock options that do not
conform to the requirements of that Code section ("Non-ISO's"). The exercise
price of each ISO may not be less than 100% of the fair market value of the
Common Stock at the time of grant, except that in the case of a grant to an
employee who owns 10% or more of the outstanding stock of the Company or any
subsidiary ("10% Stockholder"), the exercise price shall not be less than 110%
of such fair market value. The exercise price of each Non-ISO may not be less
than the par value of the Common Stock.

                                     F-21
<PAGE>

Generally, options will vest over a three to five year period and may not be
exercised after the tenth anniversary (fifth anniversary in the case of an ISO
granted to a 10% Shareholder) of their grant. Options may not be transferred
during the lifetime of an optionholder. No stock options may be granted under
the 1995 Plan after 2005.

         Non-Employee Directors' Plan. -- Effective in August 1995, the Company
adopted a Stock Option Plan for Non-Employee Directors (the "Directors' Plan"),
pursuant to which options to acquire an aggregate of 75,000 shares of Common
Stock may be granted to non-employee directors. In July 1997, the maximum
number of shares of Common Stock authorized to be granted under the Directors'
Plan was increased to 125,000. The Directors' Plan provides for the automatic
grant to each of the Company's non-employee directors of (1) an option to
purchase 4,500 shares of Common Stock on the later of the date of such
director's initial election or appointment to the Board of Directors or the
date of adoption of the Directors' Plan, and (2) an option to purchase 4,500
shares of Common Stock on each annual anniversary of such election or
appointment, provided that such individual is on that anniversary date a
non-employee director. The options will have an exercise price of 100% of the
fair market value of the Common Stock on the date of grant, have a ten-year
term and become exercisable in four equal quarterly installments commencing on
the date which is three months after the date of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Plan). The options may be exercised by payment in cash, check or shares of
Common Stock.

         In December 1993, the Company granted an option to an executive
covering 119,145 shares of common stock exercisable in four annual installments
beginning December 31, 1995. This option is exercisable at $2.00 per share.
Through December 31, 1996, 29,786 shares have been purchased pursuant to the
exercise of this option.

         Activity in the 1995 Plan and the Directors' Plan since inception is
as follows:


                                             NUMBER OF     EXERCISE PRICE
                                              OPTIONS          RANGE
                                              -------          -----
Granted in 1995............................   154,650     $9.67     $12.67
Canceled ..................................    (7,500)     9.67      12.67
                                              -------
Options outstanding, December 31, 1995.....   147,150      9.67      12.67
Granted in 1996............................   139,500     15.75      37.00
Canceled ..................................    (1,125)     9.67       9.67
Exercised..................................   (30,412)     9.67      12.67
                                              -------
Options outstanding, December 31, 1996.....   255,113      9.67      37.00
                                              =======

                                     F-22
<PAGE>

         As of December 31, 1996, total options outstanding and options
exercisable consist of the following:

<TABLE>
<CAPTION>
                      NUMBER OF OPTIONS       EXERCISE      NUMBER OF OPTIONS
GRANT DATE               OUTSTANDING           PRICE           EXERCISABLE
----------               -----------           -----           -----------
<S>                          <C>               <C>                <C>   
Dec-93                       89,350            $  2.00            29,786
Aug-95                      106,613               9.67             7,500
Aug-95                        4,500              11.92             4,500
Aug-95                        4,500              12.67             4,500
Jan-96                      101,100              15.75                --
Aug-96                       13,500              31.50                --
Oct-96                        8,000              37.00                --
Oct-96                       16,900              33.00                --
                            -------                               ------
                            344,463                               46,286
                            =======                               ======
</TABLE>

         As of December 31, 1996, there were 178,410 options available for
future grant under the Plans and 46,286 outstanding options were exercisable.

         During the year ended December 31, 1996, the Company obtained proceeds
approximating $364,000 from the exercise of 60,198 stock options.

         The Company applies the provisions of APB Opinion 25 and related
interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized for the foregoing options. The excess, if
any, of the fair market value of shares on the measurement date over the
exercise price is charged to operations each year as the options become
exercisable. Had compensation cost for these options been determined using the
Black-Scholes option-pricing model described in FASB Statement 123, the Company
would have recorded aggregate compensation expense of approximately $1,840,839
which would be expensed over the option's vesting period. The assumptions used
in the option-pricing model include a risk-free interest rate of 5.2%-6.2%,
expected life of 3 years and expected volatility of 48.85%-73.07%. Dividends
are assumed to be zero. The pro forma impact of following the provisions of
FASB Statement No. 123 on the Company's net income and income per share would
be as follows:

                                     F-23
<PAGE>

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                             -----------------------
                                                                                1995        1996
                                                                              (in thousands, except
                                                                                  per share data)

<S>                                                                             <C>        <C>   
Net income (1995 reflects pro forma
net income)                             -   as reported                         $5,425     $3,707
                                                                                ======     ======

                                        -   pro forma                           $5,351     $3,281
                                                                                ======     ======

Net income per common share (1995
reflects pro forma net income per
common share)                           -   as reported                         $  .43     $  .27
                                                                                ======     ======

                                        -   pro forma                           $  .43     $  .24
                                                                                ======     ======
</TABLE>

         Net income per share has been calculated using the weighted average
shares outstanding during the periods.

9.       SELECTED QUARTERLY DATA (UNAUDITED)

         The following table sets forth selected quarterly financial
         information for the years ended December 31, 1996 and 1995 (in
         thousands of dollars, except per share amounts):

                                     F-24
<PAGE>

<TABLE>
<CAPTION>
                                    Three months ended                 Three months ended
                                     December 31, 1996                 December 31, 1996
                                 (As previously reported)                (As restated)
                                 ------------------------                -------------
<S>                                 <C>                                <C>                
Net sales                           $            48,944                $            48,204
Gross Profit                                     16,200                             11,138
Net income(loss)                                    924                             (2,119)
Net income (loss) per share         $               .07                $              (.15)
</TABLE>

<TABLE>
<CAPTION>
                                    Three months ended                 Three months ended
                                    September 30, 1996                 September 30, 1996
                                 (As previously reported)                (As restated)
                                 ------------------------                -------------
<S>                                 <C>                                <C>              
Net sales                           $          48,105                  $          47,447
Gross Profit                                   16,387                             15,079
Net income                                      3,152                              1,701
Net income per share                $             .23                  $             .12
</TABLE>

<TABLE>
<CAPTION>
                                    Three months ended                 Three months ended
                                       June 30, 1996                     June 30, 1996
                                 (As previously reported)                (As restated)
                                 ------------------------                -------------
<S>                                 <C>                                <C>              
Net sales                           $          42,915                  $          43,328
Gross Profit                                   14,564                             14,350
Net income                                      2,703                              2,658
Net income per share                $             .20                  $             .20
</TABLE>

<TABLE>
<CAPTION>
                                    Three months ended                 Three months ended
                                      March 31, 1996                     March 31, 1996
                                 (As previously reported)                (As restated)
                                 ------------------------                -------------
<S>                                 <C>                                <C>              
Net sales                           $          34,067                  $          33,445
Gross Profit                                   11,542                             10,359
Net income                                      2,088                              1,467
Net income per share                $             .16                  $             .11
</TABLE>

<TABLE>
<CAPTION>
                                                       Pro-forma Net Income
       Quarter Ended      Net Sales    Gross Profit     Amount    Per Share
       -------------      ---------    ------------     ------    ---------
<S>                        <C>             <C>            <C>        <C> 
          3/31/95          $23,255         $6,426         $968       $.08
          6/30/95           25,652          7,277        1,192        .10
          9/30/95           27,120          8,770        1,616        .13
         12/31/95           28,851          9,484        1,649        .12
                          --------        -------       ------       ----
             Year         $104,878        $31,957       $5,425       $.43
                          ========        =======       ======       ====
</TABLE>

                                     F-25
<PAGE>

10.      MANAGEMENT'S PLANS

         During the fourth quarter of 1996 and the nine months ended September
30, 1997, the Company incurred losses of $2,119,000 and $21,219,000,
respectively, attributable primarily to increased material costs relating to:
incremental freight costs incurred during the integration of the Company's
Chicago, Harrisonville and Edison facilities; manufacturing inefficiencies
caused by a high level of production line change-overs to meet increased
customer demands and short production runs during the start-up and validation
of new production line capacity; the write-down of raw materials and finished
goods inventory associated with discontinued product and sales of close-out
products; and increased levels of unabsorbed material waste variances related
to these plant integration issues. There were significant additional costs for
underabsorbed overhead and increased levels of warehousing and distribution
associated with plant assimilation. Further, the Company significantly
increased co-op advertising and other customer marketing expenses as it
increased sales to grocery wholesalers and supermarket chains. As a result of
the losses incurred through September 30, 1997, the Company has experienced
difficulty in meeting its liquidity needs. The Company requires the
availability of sufficient cash flow and borrowing capacity to finance its
operations, meet its debt service obligations and fund future capital
expenditure requirements. The Company's operating plan for the balance of 1997
and 1998 contemplates continuing its cost reduction programs. Such programs
include: the shut-down of the Company's Edison candle manufacturing facility
and consolidation of candle manufacturing operations in North Brunswick which
was completed in the second quarter of 1997,reduction in temporary labor;
automation of manufacturing facilities related to spray products; production
rationalization; increased use of high speed fillers and cartoners; and
improved production planning and control.

11.      RESTATEMENT

         The Company has restated its financial statements for the year ended
December 31, 1996 as a result of errors and irregularities discovered
subsequent to the issuance of such financial statements. The financial
statements for the year ended December 31, 1996 require restatement principally
with respect to (1) unrecorded vendor invoices and vendor rebates resulting in
an understatement of cost of goods sold; (2) shipping cut-offs resulting in an
over statement of sales and slotting costs; and (3) inappropriately capitalized
labor resulting in an understatement of selling, general and administrative
expenses.

         The effect of the restatements on the Company's balance sheet at
December 31, 1996 and statement of operations for the year ended December 31,
1996, are summarized as follows:

                                     F-26
<PAGE>

<TABLE>
<CAPTION>
                                                           Year Ended               Year Ended
                                                        December 31, 1996        December 31, 1996
                                                    (As Previously Reported)       (As Restated)
                                                         (in thousands, except per share data)

Statement of Operations
-----------------------
<S>                                                        <C>                       <C>     
Net sales                                                  $174,031                  $172,424
Gross profit                                                 58,693                    50,926
Selling, general and                                         43,046                    43,878
   administrative
Income from Operations                                       15,647                     7,048
Net income                                                    8,867                     3,707
Net income per share                                            .65                       .27
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1996
                                                 -----------------------------------------------
                                                  (As Previously Reported)        (As Restated)
                                                                        (in thousands)
Balance Sheet
-------------
<S>                                                        <C>                       <C>     
Total current assets                                       $ 64,976                  $ 66,368
Total assets                                                 98,904                    98,476
Total current liabilities                                    24,414                    31,047
Total liabilities                                            57,645                    62,377
Total stockholders' equity                                   41,259                    36,099
</TABLE>

                                   F-27                                     

<PAGE>


                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
its Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                            USA DETERGENTS, INC.

Dated:  March 17, 1998                      By: /s/ Uri Evan
                                               -------------------------------
                                               Name:  Uri Evan
                                               Title: Chief Executive Officer


                  Pursuant to the requirements of the Securities Exchange Act
of 1934, this Amendment No. 2 to its Report on Form 10-K has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated.

Signature                  Title                                Date
---------                  -----                                ----

/s/ Uri Evan               Chief Executive Officer and          March 17, 1998
----------------------     Chairman of the Board of 
    Uri Evan               Directors and President

/s/ Richard D. Coslow      Chief Financial Officer (Principal   March 17, 1998
----------------------     Financial Officer and Principal
     Richard D. Coslow     Accounting Officer)
                      
/s/ Daniel Bergman         Director                             March 17, 1998
----------------------
    Daniel Bergman

/s/ Frederick R. Adler     Director                             March 17, 1998
----------------------
    Frederick R. Adler

/s/ Richard A. Mandell     Director                             March 17, 1998
----------------------
    Richard A. Mandell

/s/ Dr. Shlomo Kalish      Director                             March 17, 1998
----------------------
    Dr. Shlomo Kalish



<PAGE>


                     USA DETERGENTS, INC. AND SUBSIDIARIES

            SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (000'S)


<TABLE>
<CAPTION>
            DESCRIPTION             BALANCE AT    ADDITIONS    DEDUCTIONS    BALANCE AT
            -----------              BEGINNING      CHARGED    ----------   END OF PERIOD
                                     OF PERIOD    TO PROFIT                 -------------
                                     ---------    AND LOSS         (A)
                                                  --------         ---
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

<S>                                      <C>         <C>           <C>            <C>
Year ended December 31, 1994             $84         $130          $130           $84

Year ended December 31, 1995             $84         $421          $229          $276

Year ended December 31, 1996            $276       $1,421          $348        $1,349
</TABLE>

(A)      Represents write-offs of uncollectible accounts receivable.