Blyth Industries: 10-K for Year to 1/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended January 31, 1998 Commission File No. 1-13026 BLYTH INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 36-2984916 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Field Point Road Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 661-1926 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Common Stock, $0.02 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 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 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. X --- As of April 13, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,187,039,777, based on the closing price of the registrant's Common Stock on the New York Stock Exchange on such date and based on the assumption, for purposes of this computation only, that all of the registrant's directors and executive officers are affiliates. As of April 13, 1998, there were outstanding 49,120,027 shares of Common Stock, $0.02 par value. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to shareholders for the year ended January 31, 1998 (Incorporated into Part II) (2) Portions of the registrant's definitive proxy statement issued in connection with the annual meeting of shareholders to be held on June 9, 1998 (Incorporated into Part III) TABLE OF CONTENTS PART I Item 1. Business.............................................................................................. 1 Item 2. Properties............................................................................................ 13 Item 3. Legal Proceedings..................................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders................................................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 14 Item 6. Selected Financial Data............................................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................................... 14 Item 8. Financial Statements and Supplementary Data........................................................... 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................................................... 15 PART III Item 10. Directors and Executive Officers of the Registrant.................................................... 15 Item 11. Executive Compensation................................................................................ 15 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 15 Item 13. Certain Relationships and Related Transactions........................................................ 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 16 PART I Item 1. Business Blyth Industries, Inc. ("Blyth" or the "Company") designs, manufactures, markets and distributes an extensive line of candles and home fragrance products, including scented candles, outdoor citronella candles, potpourri and environmental fragrance products, and markets a broad range of related candle accessories and decorative gift bags and tags. These products are sold under various brand names, including the names Colonial Candle of Cape Cod-Registered Trademark-, PartyLite Gifts-Registered Trademark-, Carolina Designs-TM-, Ambria-TM-, Canterbury-TM-, Florasense-Registered Trademark-, Jeanmarie-Registered Trademark- and FilterMate-TM-. The Company is also a leading producer of portable heating fuel products sold under the Sterno-Registered Trademark- and Handy Fuel-Registered Trademark- brand names. The Company markets its products through a wide variety of distribution channels, including a network of sales representatives and home party plan independent sales consultants serving the consumer market, and independent sales representatives and distributors serving the institutional market. Consumable products, which include candles, scented candles, outdoor citronella candles, potpourri, other fragrance products, portable heating fuels and decorative gift bags and tags, account for approximately 60% of the Company's net sales and candle accessories account for the balance of net sales. The Company believes that it is a leading supplier in the natural home fragrance industry based on net sales and the breadth of distribution channels served. The Company's net sales have grown substantially in the last five years, with internal growth and acquisitions contributing approximately 85% and 15%, respectively, to such growth. Internal growth has been generated by increased sales to the consumer market (including increased sales of acquired product lines), the introduction of new products and product line extensions and geographic expansion. The Company has successfully integrated numerous acquisitions and investments into its operations since its formation in 1977. In May 1997, the Company acquired Endar Corp., a manufacturer of potpourri, scented candles and other fragrance products. The Company issued 1,900,786 shares of its Common Stock in the transaction. In late December 1997, the Company acquired the Sterno-Registered Trademark- and Handy Fuel-Registered Trademark- portable heating fuels product lines, including related manufacturing and distribution facilities, for $65.0 million. The business strategy of the Company has evolved into a strategy focusing on the broad category of home fragrance and candle products. This strategy flows from the Company's belief that customers "wardrobe" their homes through the use of candles, potpourri and other fragrance products in different fragrances, colors and forms. As a result, the Company believes that candles and potpourri are replacing scented air-freshener products. The Company's strategy is to sell high-quality fragrance and candle products, with a primary focus on the global consumer markets, which provide greater opportunities for growth and product differentiation and higher profit margins than does the institutional market. The Company believes that increased expenditures on the home and garden, increased emphasis on home entertaining and home fragrance and the gain in popularity of traditional, natural and now scented, products have resulted in growth in demand for candles and related products and, recently, scented products. The Company's operating strategy has been, and will continue to be (1) to focus on the consumer market, (2) to grow through new product development and geographic expansion, (3) to market its products through all major domestic distribution channels with product offerings tailored to the requirements of each channel, (4) to emphasize customer service, (5) to realize efficiencies and cost improvements in manufacturing and distribution and (6) to grow through international expansion and acquisitions. The Company has been successful in identifying new product opportunities to balance its sales and operating results throughout the fiscal year. The Company has identified international expansion as a key opportunity for future growth, and has recently completed construction of a manufacturing facility in Cumbria, England. The Company also recently commenced distribution from a leased facility in the Netherlands, and has commenced construction of an owned European distribution facility in the Netherlands. Strategy Consumer Market Focus The Company focuses on the consumer market, which provides greater opportunities for growth and product differentiation and higher profit margins than do other markets for the Company's products. Sales to the consumer market represented over 90% of the Company's net sales for fiscal 1998. The Company expects that, as in recent years, its future growth will be generated primarily by sales of products sold into the faster growing consumer market in North America and Europe, rather than the domestic institutional market which has grown more slowly and which the Company expects will continue to do so. Growth Through New Product Development The Company continuously introduces new products to satisfy changing consumer tastes. The Company introduces new product offerings each year, which new products have typically accounted for at least 15% of the Company's net sales in the first full year following introduction. Examples of new products introduced by the Company in 1997 include the introduction of aromatherapy candles under good, better and best brand names, the introduction of self-adhesive gift tags by Jeanmarie-Registered Trademark-, the expansion of the Canterbury-TM- brand to an expanding base of food, drug and mass merchants and the Company's new brand, Fragrance Originals-TM-, a coordinated line of high-end candles, aromatherapy candles and potpourri. Marketing Presence in All Major Domestic Distribution Channels The Company markets its products in the consumer market through sales to department and gift stores, specialty chains and mass merchandisers and direct sales to consumers through its home party plan. The Company also markets its products to distributors and retailers serving the institutional market. The Company tailors its products, designs, packaging and price to satisfy the varying demands of its customers within each distribution channel. The Company believes that its presence in all major distribution channels provides a competitive advantage with respect to the successful introduction of new products that appeal to customers in more than one distribution channel. The Company plans to increase penetration of distribution channels in those geographic areas in North America where it believes opportunities exist. For example, the Company's strategic partnering arrangement with Hallmark Cards, Incorporated has allowed the Company to market several of the Company's key brands through many of the various stores that carry Hallmark products. Emphasis on Customer Service The Company has developed systems to insure that the desired finished products are available for timely shipment to its wide variety of customers with different product needs and purchasing patterns. The Company seeks to maintain its inventory at levels sufficient to fill completely all customer orders. For its department and gift store and specialty chain customers, the Company has developed a pick 2 and pack system that allows it to ship small shipments containing a variety of products to a large number of customers. For its mass merchant and institutional customers, the Company offers just-in-time delivery through an interactive electronic data interchange program, and has developed programs and standards to improve and measure customer service. For home party plan customers, the Company has focused on timely and complete shipments of individual customer orders. This is achieved, in part, through the use of a pick and pack system. Daily and monthly measures of turnaround time, percent on-time delivery and percent of product back ordered are monitored in order to continuously improve customer service. Efficiencies and Cost Improvements in Manufacturing and Distribution The Company is continuously engaged in efforts to reduce its costs through more efficient production and distribution methods and technological advancements. The Company has consolidated and rationalized acquired equipment and facilities and invested in new, more advanced equipment in order to lower manufacturing costs, improve product quality and significantly increase manufacturing capacity to meet sales growth. To this end, the Company has more than doubled its manufacturing and distribution capacity in recent years. Acquired manufacturing operations have historically been integrated into the Company's existing operations based on manufacturing process. In fiscal 1998, the Company completed construction of a 100,000 square foot owned manufacturing facility in Cumbria, England, and a 400,000 square foot owned distribution facility in Elkin, North Carolina, and opened a 350,000 square foot leased distribution facility in Carol Stream, Illinois. As part of the acquisition of Endar, Endar's various leased manufacturing and distribution facilities, aggregating over 500,000 square feet, became available to the Company. Also, the Company acquired the 120,000 square foot Sterno-Registered Trademark- and Handy Fuel-Registered Trademark-manufacturing and distribution facility in December 1997. Finally, the Company has purchased land and commenced construction of a European distribution facility of approximately 300,000 square feet in the Netherlands which is expected to be operational in mid-1999. Growth Through International Expansion Since 1990, the Company's international business has grown at a faster rate than sales in the United States, and international net sales (excluding sales by Colony Gifts, which is not a consolidated subsidiary) now represent over 15% of the Company's net sales. The international operations of the Company include (1) exports of branded products sold through Company sales managers and independent sales agents, competing in the candle markets of Canada, Europe, Latin America and the Pacific Rim, to distributors, department and gift stores, mass merchandisers and food service distributors, (2) sales by PartyLite independent sales consultants of branded products directly to consumers in Canada and certain European countries, and (3) sales by Colony Gifts, Fragrant Memories and Eclipse Candles throughout Europe and elsewhere. The Company currently plans to continue to expand internationally through the establishment of foreign-based marketing and distribution operations and through continued expansion of its home party plan activities. In particular, the Company's home party plan activities have been successful in gaining entry in selected countries. As noted above, in order to further support its international sales, the Company has recently completed a 100,000 square foot manufacturing facility in England and has commenced construction of a European distribution facility of approximately 300,000 square feet in the Netherlands. 3 Growth Through Acquisitions The Company regularly evaluates acquisition opportunities in light of the anticipated impact on current new products, the Company's planned growth rate and the complementary nature of the prospective acquired business. There can be no assurance that the Company will be able to continue to identify suitable acquisition candidates, to consummate acquisitions on terms favorable to the Company, to finance acquisitions or successfully to integrate acquired operations. In May 1997, the Company acquired Endar Corp., a manufacturer of potpourri, scented candles and other fragrance products. In December 1997, the Company acquired the Sterno-Registered Trademark- and Handy Fuel-Registered Trademark- portable heating fuels product lines, including related manufacturing and distribution facilities, from Colgate-Palmolive Company. 4 Products Below is a summary of the Company's principal products and the brand names under which they are sold: Key to Brands A - Colonial Candle of Cape Cod-Registered Trademark- G - Canterbury-TM- N - Eternalux-Registered Trademark- B - PartyLite Gifts-Registered Trademark- H - Florasense-Registered Trademark- O - FilterMate-TM- C - Fragrance Originals-TM- I - Old Harbor-Registered Trademark- P - FanMate-Registered Trademark- D - Original Recipe-TM- J - Colony-Registered Trademark-(UK)* Q - New Ideas-TM- E - Carolina Designs-TM- K - Eclipse-TM-(UK)* R - Sterno-Registered Trademark- F - Ambria-TM- L - Jeanmarie-Registered Trademark- S - Handy Fuel-Registered M - Candle Corporation of America-TM- Trademark- B R A N D S - ------------------------------------------------------------------------------------------------------------------ PRODUCTS A B C D E F G H I J K L M N O P Q R S - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Candles X X X X X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Candle Accessories X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Aromatherapy Candles X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Potpourri Products X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Citronella Products X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Air Fresheners & Sprays X X X X X X X X - ------------------------------------------------------------------------------------------------------------------ Lamps, Food Warmers & Portable X X X X X X Heating Fuel - ------------------------------------------------------------------------------------------------------------------ Decorative Gift Bags and Tags X - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ - ---------- * The Colony-Registered Trademark- and Eclipse Candles-TM- trademarks are registered in the United Kingdom and other countries outside of the United States. Blyth's products under the Colony-Registered Trademark- and Eclipse Candles-TM- marks are offered and sold only outside of the United States, and are not available in the United States. Colony-Registered Trademark- and Eclipse Candles-TM- brand products sold in the United States are in no way associated with Blyth, and are made and sold by another company. 5 Sales Method - Generally Sales in the consumer market are made to the retail customer through independent sales representatives, Company sales managers and distributors. The Company utilizes independent sales consultants in direct selling to the consumer. Sales in the institutional market are made through independent food service distributors, Company sales managers and independent sales representatives. The Company markets its products through a variety of distribution channels, and tailors its products, designs, packaging and prices to satisfy the varying demands of its customers within each distribution channel. The Company's consumer products consist of products for everyday use and products for seasonal use. Consumer Market Sales to the consumer market accounted for over 90% of the Company's net sales in fiscal 1998. The Company seeks to serve the needs of a broad range of consumers by marketing different products and different brand names at different price points to department stores, gift stores, specialty chains, direct sales customers and mass merchants. The Company believes that its success in selling to the broad consumer market is the result of a line of competitive and broad product offerings, the perceived value of its products and name brands, name recognition, product innovation and a reputation for dependable customer service. The Company also sells various candles, including votives and filled-glass containers for devotional use in the home, to the religious segment of the consumer market in the United States and Puerto Rico. Institutional Market The Company believes that it is a leading supplier of tapers, filled-glass candles, tealights, food warmers, portable heating fuels and liquid wax lamps and replacement cartridges for such lamps to the domestic institutional industry, which includes restaurants and other institutional customers. New Product Development The Company continuously develops and introduces new products to satisfy changing consumer tastes. The new product development process is managed on a Company-wide basis by a team comprised of brand managers, product managers, designers, foreign sourcing personnel, laboratory technicians, manufacturing engineers and sales managers. New product concepts are directed to the marketing departments from all areas within the Company and from the Company's independent sales representatives. The new product development process, including market research, comparative analysis, engineering specifications, feasibility studies, testing and evaluation, can require from 3 to 18 months to complete. 6 Sales and Marketing The Company maintains sales offices throughout North America and Europe utilizing full-time sales and sales training managers who call on customers, independent sales representative organizations and distributors. The Company also has marketing staffs located in various offices in North America and Europe engaged in developing strategies relating to new product development, pricing, distribution, advertising and sales promotion. The Company's marketing staff is organized around product brands. United States Consumer Market The Company markets its products to department and gift stores, specialty chains and mass merchandisers through a network of independent sales representatives and Company sales managers. The Company supports these independent sales representatives by providing them with comprehensive product catalogues and samples to market the Company's regular and seasonal product lines. The Company believes that its competitive position in these markets is enhanced by its ability to respond quickly to new orders and its ability to assist customers through inventory management and control and to satisfy delivery requirements through on-line ordering. The Company has effectively utilized just-in-time product delivery, through an interactive electronic data interchange ("EDI") program implemented with many customers. EDI allows the Company to track and respond to certain customers' direct orders on a continuous basis. In order to increase its sales to the consumer market, the Company develops comprehensive merchandising programs for department and gift stores and specialty chains and mass merchandisers. The Company develops merchandising programs targeted to specific chains, including in-store display fixtures, cooperative advertising programs and planograms for improving turnover of the Company's products. The Company also affixes tags, tickets, bar codes and other merchandising aids to products to certain customers' specifications. The Company sells its products through a network of over 20,000 active independent sales consultants (in the United States alone) through the home party plan method of selling. The PartyLite independent sales consultants identify hostesses for parties, who invite their friends to attend, and the hostess, in return, receives gifts of, and discounts on, Company merchandise. The independent sales consultants receive gross earnings based on sales of the Company's products at parties organized by them. No products are inventoried by independent sales consultants, other than samples that are not for resale. Since many of the Company's home party plan sales are seasonal or tied to promotional programs, the demand for these products varies by the strength of the season and the programs, with October, November and December typically being the highest selling months. The Company sells its products through distributors and retailers serving the consumer market for devotional candles for use in the home. These distributors, in turn, sell to a wide variety of retail establishments, including national and regional food store chains and independent local stores. The Eternalux-TM- brand name is supported with product catalogues and other promotional programs. Some of the Company's sales are made directly to retailers. 7 International Consumer Market The Company markets its products outside the U.S. to department and gift stores, specialty chains, and mass merchandisers through a network of independent sales representatives and sales managers, including representatives and managers of Colony Gift Corporation Limited and Eclipse Candles, Ltd. Similar to its practices in the U.S., the Company supports its marketing efforts with comprehensive product catalogues and training programs. The Company also sells its products through a network of independent sales consultants through the home party plan method of selling. Institutional Market A significant majority of the Company's sales to the domestic institutional market are made through a network of independent institutional dealers. The dealers, in turn, sell to a wide variety of institutional establishments, including national and regional hotel chains, national restaurant chains and individually-owned hotels and restaurants. The Company's dealer network sells the Company's products to institutions utilizing the Company's comprehensive product catalogue. Company sales managers assist in the training of dealers and work closely with the dealers to promote the Company's products and provide direct assistance to food service establishments in determining their wax, liquid wax and portable heating fuel product needs. Certain of the Company's institutional sales are made directly by Company salespersons to major users of candles, liquid wax lamps and portable heating fuel products, such as restaurant and hotel chains. Finally, the Company also markets to independent institutional dealers through independent sales representatives. Institutional customers require timely delivery of a broad range of items, and the Company believes that its leading position in the institutional distribution channel is the result, in part, of the breadth of its product offerings, its strategically located manufacturing facilities and related full-line distribution centers and its close working relationship with dealers. In order to encourage institutional dealers to carry a larger number of Company products, the Company utilizes program selling, which involves unit sales of set groups of products. The Company believes that its installed base of products at institutions provides the Company with a competitive advantage in this market. Customers The customers for the Company's products include department and gift stores and specialty chains, mass merchandisers, distributors serving the institutional market and individual consumers (through the home party plan network). No single customer accounts for 10% or more of the Company's sales. In each of the channels of distribution in which the Company does business, its five largest customers have been customers of the Company for at least five years. Manufacturing and Distribution The Company manufactures virtually all of its candle and fragrance products. The Company is continuously engaged in efforts to reduce its manufacturing costs and to improve quality through more efficient production methods and technological advancements. The Company employs industrial engineers whose responsibilities include improving and upgrading the Company's manufacturing facilities, equipment and processes, as well as engineering new products and implementing the large 8 number of changes continuously being made to the Company's product designs, sizes and shapes. The manufacture of the Company's products involves the use of various highly automated processes and technologies, as well as certain hand crafting and finishing. During recent years, the Company has invested in new automated machinery that the Company believes has resulted, and will continue to result, in significant cost savings and capacity expansion. The Company sources candle accessories and its decorative gift bags and tags from independent third parties in the Pacific Rim, Europe and Mexico, as well as in the United States, and maintains purchasing offices in Hong Kong and Taiwan for Pacific Rim sourcing. To maximize distribution efficiencies, the Company operates stand-alone distribution facilities in addition to distribution facilities in its manufacturing plants. The Company has expanded its manufacturing and distribution capabilities in order to support its anticipated growth. The Company anticipates adding additional distribution facilities and production equipment in fiscal 1999 to meet current and anticipated volume level. All of the raw materials used by the Company, principally petroleum-based wax, have historically been available in adequate supply from multiple sources. However, for certain raw materials, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays. Such shortages have not previously had, and are not expected to have, a material adverse effect on the Company's operations. Competition The Company's business is highly competitive, with the principal competitive factors being product quality, delivery time, customer service and price. The candle and fragrance products industry is highly fragmented, with numerous suppliers serving one or more of the distribution channels served by the Company. The Company believes that it is the only supplier of candles serving the breadth of distribution channels that it serves. Candle Lite (a unit of Lancaster Colony Corporation), S.C. Johnson & Co., Inc., Dial Corporation, The Yankee Candle Company, Inc., Lamplight Farms, Aromatique, Tsumura International, Inc. and Seasons, Inc. are the significant suppliers of candles and home fragrance products to the consumer retail market. The Company's competitors in the institutional market are comprised mostly of smaller manufacturers of a special or narrow range of products. Because there are relatively low barriers to entry to the candle and fragrance product industry, the Company may face future competition from other companies, which may have substantially greater financial and marketing resources than those available to the Company. From time to time during the year-end holiday season, the Company experiences competition from candles manufactured in foreign countries, particularly China. In addition, certain of the Company's competitors focus on a particular geographic or single-product market and attempt to gain or maintain market share solely on the basis of price. Employees As of March 31, 1998, the Company had approximately 3,000 full-time employees. Of those, approximately 200 are non-salaried, hourly workers in the Company's Chicago, Illinois and Brooklyn, New York facilities represented by Local 777 of the Teamsters and Local 422-S of the AFL-CIO, respectively, under contracts that will expire in June 2000 and June 1999, respectively. The remaining 9 employees are salaried and non-salaried non-unionized employees. The Company believes that its employee relations are good. Since its formation in 1977, the Company has never experienced a work stoppage. Trademarks The Company owns numerous United States trademark registrations and has numerous United States trademark applications pending in the United States Patent and Trademark Office with respect to certain of its products. In addition, the Company from time to time registers certain of its trademarks in certain foreign countries. All of the Company's United States trademark registrations can be maintained and renewed provided that the trademarks are still in use for the goods and services covered by such registrations. The Company regards its trademarks as valuable assets. Although the Company owns certain patents which it considers valuable, its business is not dependent upon any single patent or group of patents. Year 2000 Matters The Company continues to assess the impact of the Year 2000 on its information systems, including the Year 2000 readiness of those it conducts business with, and is developing and implementing a Year 2000 compliance strategy. The Company expects increased spending to bring its systems into Year 2000 compliance, but Year 2000 related expenses are not expected to be material to the Company's results of operations and financial position and are being expensed as incurred. However, if modifications and conversions by the Company and those it conducts business with are not completed in a timely manner, the Year 2000 issue may have a material adverse affect on the Company's business, results of operations and financial position. Other Information The Company is including the following cautionary statement in this Report to make applicable, and to take advantage of, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company and its representatives may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by the following cautionary statements. Forward-looking statements involve risks and uncertainties which would cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such forward-looking statements are expected to be based on various assumptions, many of which are based, in turn, upon further assumptions. There can be no assurance that management's expectations, beliefs or projections will occur or be achieved or accomplished. In addition to other factors and matters discussed elsewhere in this Report and the Company's other public filings and statements, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the Company's forward-looking statements. The 10 Company disclaims any obligation to update any forward-looking statements, or the following factors, to reflect events or circumstances after the date of this Report. Risk of Inability to Maintain Growth Rate The Company has grown substantially in recent years. The Company expects that its future growth will continue to be generated primarily by sales to the faster growing consumer market, rather than the institutional market, which has grown more slowly than the consumer market and which the Company expects will continue to do so. The Company believes that its ability to continue to grow will depend on continuing market acceptance of its existing products, the successful development and introduction of new products, the increase in production and distribution capacity to meet demand and the continued successful implementation of its strategy. The candle industry is driven by consumer tastes. Accordingly, there can be no assurance that the Company's existing or future products will maintain or achieve market acceptance. Although the Company's strategy has been successful to date, the Company expects that, as the Company grows, its rate of growth will be less than its historic growth rate. In addition, the Company has grown in part through acquisitions and there can be no assurance that the Company will be able to continue to identify suitable acquisition candidates, to consummate acquisitions on terms favorable to the Company, to finance acquisitions or successfully to integrate acquired operations. Ability to Respond to Increased Product Demand The Company's continuing and significant internal growth has necessitated increases in personnel, expansion of its production and distribution facilities and enhancement of its management information systems. The Company's ability to meet future demand for its products in a timely and efficient manner will be dependent upon its success in (1) training, motivating and managing new employees, including a number of new senior managers, (2) bringing new production and distribution facilities on line in a timely manner, (3) improving management information systems in order to continue to be able to respond promptly to customer orders and (4) improving its ability to forecast anticipated product demand in order to continue to fill customer orders promptly. If the Company were unable to meet future demand for its products in a timely and efficient manner, its operating results could be materially adversely affected. Risks Associated with International Sales and Foreign-Sourced Products. The Company sources a portion of its candle accessories and decorative gift bags from independent manufacturers in the Pacific Rim, Europe and Mexico. In addition, since 1990, the Company's international business has grown at a faster rate than sales in the United States. The Company is subject to the following risks inherent in foreign sales and manufacturing: fluctuations in currency exchange rates; economic and political instability; transportation delays; difficulty in maintaining quality control; restrictive actions by foreign governments; nationalizations; the laws and policies of the United States affecting importation of goods (including duties, quotas and taxes); and trade and foreign tax laws. Dependence on Key Management Personnel The Company's success depends to a significant degree upon the continued contributions of its key management personnel, particularly its Chairman, Chief Executive Officer and President, Robert B. Goergen. The Company does not have employment contracts with any of its key management 11 personnel, nor does the Company maintain any key person life insurance policies. The loss of any of the Company's key management personnel could have a material adverse effect on the Company. Competition The Company's business is highly competitive, both in terms of price and new product introductions. The candle and fragrance products industry is highly fragmented, with numerous suppliers serving one or more of the distribution channels served by the Company. Because there are relatively low barriers to entry to the candle and fragrance products industry, the Company may face increased future competition from other companies, some of which may have substantially greater financial and marketing resources than those available to the Company. From time to time during the year-end holiday season, the Company experiences competition from candles manufactured in foreign countries, particularly China. In addition, certain of the Company's competitors focus on a particular geographic or single-product market and attempt to gain or maintain market share solely on the basis of price. 12 Item 2. Properties The following table sets forth the location and approximate square footage of the Company's major manufacturing and distribution facilities: Approximate Square Feet ----------------------- Location Use Owned Leased Batavia, Illinois............... Manufacturing 120,000 -- Brooklyn, New York.............. Distribution -- 30,000 Carol Stream, Illinois.......... Distribution -- 492,000 Carson, California.............. Manufacturing and -- 38,000 related distribution Chicago, Illinois............... Manufacturing and 167,900 -- related distribution Cumbria, England................ Manufacturing 100,000 -- Diessen, Netherlands............ Distribution -- 78,000 Elkin, North Carolina........... Manufacturing and 690,000 -- related distribution Heidelberg, Germany............. Distribution -- 37,000 Hialeah, Florida................ Manufacturing and 22,300 -- related distribution Hyannis, Massachusetts.......... Manufacturing 69,000 -- Monterrey, Mexico............... Manufacturing -- 85,000 Montgomery, Illinois............ Distribution -- 238,000 Plymouth, Massachusetts......... Distribution 58,700 -- Temecula, California............ Manufacturing and -- 316,000 related distribution Texarkana, Texas................ Manufacturing and 120,000 -- related distribution Thomasville, Georgia............ Manufacturing and 66,000 -- related distribution Tijuana, Mexico................. Manufacturing -- 120,000 Tulsa, Oklahoma................. Distribution 98,000 59,400 Weston-Super-Mare, England...... Manufacturing and -- 50,000 related distribution - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- The Company's executive offices, administrative offices and outlet stores are generally located in leased space (except for certain offices located in owned space aggregating approximately 100,000 square feet). All of the Company's properties are currently being utilized for their intended purpose. The Company has commenced construction of a European distribution facility of approximately 300,000 square feet in Tilburg, Netherlands, which is expected to be operational in mid-1999. Item 3. Legal Proceedings The Company is involved in litigation arising in the ordinary course of its business. In the opinion of the Company's management, existing litigation will not have a material adverse effect on the Company's financial position or results of operations. 13 Item 4. Submission of Matters to a Vote of Security Holders The Company's 1998 annual meeting of stockholders will be held on June 9, 1998. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year ended January 31, 1998. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this Item is incorporated herein by reference to page 1 of the Company's Annual Report to Shareholders for the fiscal year ended January 31, 1998. The referenced page of such annual report has been filed as part of Exhibit 13 to this report. Such information is incorporated herein by reference, pursuant to General Instruction G(2). During the fourth quarter of the fiscal year ended January 31, 1998, the Company issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): (1) During January, 1998, the Company issued an aggregate of 522 shares of Common Stock to 132 employees as part of a one-time stock bonus program. The issuance of Common Stock as part of the stock bonus was not registered on the basis that the award of stock as a one-time bonus to employees does not require registration because no "offer" or "sale" is deemed to occur. Item 6. Selected Financial Data The information required by this Item is incorporated herein by reference to page 10 of the Company's Annual Report to Shareholders for the fiscal year ended January 31, 1998. The referenced page of such annual report has been filed as part of Exhibit 13 to this report. Such information is incorporated herein by reference, pursuant to General Instruction G(2). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this Item is incorporated herein by reference to pages 11 through 17 of the Company's Annual Report to Shareholders for the fiscal year ended January 31, 1998. The referenced pages of such annual report have been filed as part of Exhibit 13 to this report. Such information is incorporated herein by reference, pursuant to General Instruction G(2). Item 8. Financial Statements and Supplementary Data The information required by this Item is incorporated herein by reference to pages 18 through 31 of the Company's Annual Report to Shareholders for the fiscal year ended January 31, 1998. The referenced pages of such annual report have been filed as part of Exhibit 13 to this report. Such information is incorporated herein by reference, pursuant to General Instruction G(2). 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On April 8, 1997, the Board of Directors of the Company, acting upon the recommendation of its Audit Committee, appointed Coopers & Lybrand L.L.P. as the independent accountants of the Company for the fiscal year ended January 31, 1998, and determined not to engage Grant Thornton LLP ("Grant Thornton") as the independent certified public accountants of the Company for the fiscal year ended January 31, 1998. Grant Thornton had been previously engaged to audit the Company's financial statements for seven years, including the fiscal year ended January 31, 1997. Grant Thornton's report on the financial statements of the Company for the fiscal years ended January 31, 1996 and January 31, 1997 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Grant Thornton's satisfaction, would have caused Grant Thornton to make reference to the subject matter of the disagreement(s) in connection with its reports on the Company's financial statements. Pursuant to a letter from Grant Thornton to the Securities and Exchange Commission (the "SEC"), dated May 2, 1997, a copy of which is attached as Exhibit 16 to Blyth's Current Report on Form 8-K/A filed on the same date with the SEC, Grant Thornton agrees with the above statements. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions The information required by Items 10 through 13 is included in the Company's definitive proxy statement dated April 29, 1998, on pages 3 through 11. Such information is incorporated herein by reference, pursuant to General Instruction G(3). 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1). Financial Statements The following consolidated financial statements are contained on the indicated pages of this report: Page No. -------- Report of Independent Accountants............................... * Report of Independent Certified Public Accountants.............. * Statements: Consolidated Balance Sheets................................ * Consolidated Statements of Earnings........................ * Consolidated Statements of Stockholders' Equity............ * Consolidated Statements of Cash Flows...................... * Notes to Consolidated Financial Statements................. * - ---------- * Incorporated herein by reference to the appropriate portions of the Company's Annual Report to Shareholders for the fiscal year ended January 31, 1998. (See Part II.) (a)(2). Financial Statement Schedules The following financial statement schedule is contained on the indicated pages of this report: Page No. -------- Report of Independent Accountants............................... S-1 Report of Independent Certified Public Accountants.............. S-2 Allowance for Doubtful Receivables.............................. S-3 All other schedules are omitted because they are inapplicable or the requested information is shown in the consolidated financial statements or related notes. (a)(3). Exhibits Exhibit No. Description of Exhibit ----------- ---------------------- 3.1* Restated Certificate of Incorporation of the Registrant 3.2* Restated By-laws of the Registrant 16 Exhibit No. Description of Exhibit ----------- ---------------------- 4.1+ Amended and Restated 1994 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1996) 4.1(a)+ Form of Proposed Amended and Restated 1994 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K/A filed April 20, 1998) 4.2+ Form of Nontransferable Incentive Stock Option Agreement under the Amended and Restated 1994 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1996) 4.3+ Form of Nontransferable Non-Qualified Stock Option Agreement under the Amended and Restated 1994 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1996) 4.4+ 1994 Stock Option Plan for Non-Employee Directors of the Registrant (incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1996) 4.5*+ Form of Stock Option Agreement under the 1994 Stock Option Plan for Non-Employee Directors of the Registrant 10.1 Credit Agreement, dated as of October 17, 1997, among the Registrant, the Banks listed therein, Morgan Guaranty Trust Company of New York, as documentation agent, and Bank of America National Trust and Savings Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.2 Note Purchase Agreement, dated July 7, 1995 (the "Note Purchase Agreements"), relating to the 7.54% Senior Notes due June 30, 2005, among Candle Corporation Worldwide, Inc., Candle Corporation of America, and PartyLite Gifts, Inc., as Issuers, the Registrant, as guarantor, and the Purchasers named therein (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1995) 10.2(a) Fourth Amendment, dated as of October 17, 1997, to Note Purchase Agreements (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.2(b) Assumption Agreement, dated as of October 17, 1997, of Note Purchase Agreements, among Candle Corporation Worldwide, Inc., Candle Corporation of America, and PartyLite Gifts, Inc., as assignors, and the Registrant, as assignee (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.2(c) Guaranty Agreement, dated as of October 17, 1997, by Candle Corporation Worldwide, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.2(d) Form of 7.54% Senior Notes due June 30, 2005 (incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.3 Master Equipment Lease Agreement between MetLife Capital, Limited Partnership, as lessor, and Candle Corporation of America, as lessee (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995) 17 Exhibit No. Description of Exhibit ----------- ---------------------- 10.4* Standard Form Industrial Lease dated April 22, 1993, between Carol Point Builders I General Partnership and PartyLite Gifts, Inc. 10.4(a) First Amendment, dated August 21, 1995, between ERI-CP, Inc., a Delaware corporation, as successor to Carol Point Builders I General Partnership, and PartyLite Gifts, Inc., to Standard Form Industrial Lease dated April 22, 1993, between Carol Point Builders II General Partnership and PartyLite Gifts, Inc. (incorporated by reference to Exhibit 10.4(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996) 10.5** Lease Agreement, dated June 25, 1997, between Carol Stream I Development Company, as landlord, PartyLite Gifts, Inc., as tenant, and the Registrant, as guarantor (schedules omitted - to be furnished to the Securities and Exchange Commission upon request) 10.6*+ Form of Indemnity Agreement between the Registrant and each of its directors 10.7*+ Amended and Restated Stock Appreciation Unit Agreement originally dated as of September 10, 1992, between the Registrant and Thomas K. Kreilick 10.8**+ Promissory Note, dated March 17, 1995, payable by Elwood L. La Forge, Jr. and Mary G. La Forge to the Registrant 10.9**+ Mortgage, dated March 17, 1995, between Elwood L. La Forge, Jr. and Mary G. La Forge, as mortgagor, to the Registrant, as mortgagee 13.** Annual Report to Shareholders for the fiscal year ended January 31, 1998 (Pages 1 and 9 through 31) 21.** List of Subsidiaries 23.1** Consent of Coopers & Lybrand L.L.P., independent accountants 23.2** Consent of Grant Thornton LLP, independent certified public accountants 24.1** Power of Attorney 24.2** Certified Resolutions of the Board of Directors of the Registrant 27.1** Financial Data Schedule (restated to reflect the adoption of FASB Statement No. 128, "Earnings per Share", the historical operations of Endar Corp. acquired in a pooling of interests transaction on May 20, 1997 and the June 1997 three-for-two stock split effected as a stock dividend). 27.2** Financial Data Schedule (restated to reflect the adoption of FASB Statement No. 128, "Earnings per Share", the historical operations of Endar Corp. acquired in a pooling of interests transaction on May 20, 1997 and the June 1997 three-for-two stock split effected as a stock dividend). 27.3** Financial Data Schedule (restated to reflect the adoption of FASB Statement No. 128, "Earnings per Share", the historical operations of Endar Corp. acquired in a pooling of interests transaction on May 20, 1997 and the June 1997 three-for-two stock split effected as a stock dividend). - ---------- * Included as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-77458) and incorporated herein by reference. ** Filed herewith. + Management contract or compensatory plan required to be filed by Item 14(c) of this report. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the fourth quarter of the fiscal year ended January 31, 1998: (i) Current Report on Form 8-K, dated December 2, 1997, attaching earnings press release. (ii) Current Report on Form 8-K dated December 31, 1997, reporting the consummation of the acquisition of the Sterno-Registered Trademark- and Handy Fuel-Registered Trademark- assets. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 29, 1998 BLYTH INDUSTRIES, INC. By:/s/ Robert B. Goergen ---------------------------------------------- Robert B. Goergen Chairman, Chief Executive Officer and President 19 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Robert B. Goergen Chairman, Chief Executive Officer and President; April 29, 1998 - ---------------------- Director (Principal Executive Officer) Robert B. Goergen /s/ Richard T. Browning Vice President and Chief Financial Officer April 29, 1998 - ----------------------- (Principal Financial and Accounting Officer) Richard T. Browning /s/ Howard E. Rose Vice Chairman and Director April 29, 1998 - ----------------------- Howard E. Rose /s/ Roger A. Anderson Director April 29, 1998 - ---------------------- Roger A. Anderson /s/ John W. Burkhart Director April 29, 1998 - ---------------------- John W. Burkhart /s/ Pamela M. Goergen Director April 29, 1998 - ---------------------- Pamela M. Goergen /s/ Neal I. Goldman Director April 29, 1998 - ---------------------- Neal I. Goldman /s/ Roger H. Morley Director April 29, 1998 - ---------------------- Roger H. Morley /s/ John E. Preschlack Director April 29, 1998 - ----------------------- John E. Preschlack /s/ Frederick H. Stephens, Jr. Director April 29, 1998 - ------------------------------ Frederick H. Stephens, Jr. 20 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders Blyth Industries, Inc. Our report on the consolidated financial statements of Blyth Industries, Inc. and Subsidiaries has been incorporated by reference in this form 10-K from page 30 of the 1998 Annual Report to Shareholders of Blyth Industries, Inc. In connection with our audit of such financial statements, we have also audited the related financial statement schedule listed in the index at Item 14(A)(2) of this Form 10-K. In our opinion, the financial statement referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, in all material respects, the information required to be included herein. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 25, 1998 S-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Blyth Industries, Inc. In connection with our audit of the consolidated financial statements of Blyth Industries, Inc. and Subsidiaries referred to in our report dated March 28, 1997, which is included in the Annual Report to the Shareholders and incorporated by reference in Part IV of this Form 10-K, we have also audited Schedule II for each of the two years in the period ended January 31, 1997. In our opinion, this schedule presents fairly, in all material respects the information required to be set forth therein. /s/ Grant Thornton LLP ----------------------- GRANT THORNTON LLP Chicago, Illinois March 28, 1997 S-2 Blyth Industries, Inc. SCHEDULE II - ALLOWANCE FOR DOUBTFUL RECEIVABLES For the years ended January 31, 1996, 1997 and 1998 (In thousands) Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period ----------- --------- -------- ---------- ---------- 1996................... $ 419 $ 768 $ 560 $ 627 1997................... 627 1,483 1,056 1,054 1998................... 1,054 3,514 3,215 1,353 S-3 Exhibit 10.5 CAROL STREAM I CAROL STREAM, ILLINOIS - -------------------------------------------------------------------------------- LEASE AGREEMENT Between CAROL STREAM I DEVELOPMENT COMPANY ("Landlord") and PARTYLITE GIFTS, INC. ("Tenant") with a Guaranty provided by: BLYTH INDUSTRIES INC. - -------------------------------------------------------------------------------- LEASE SUMMARY A. Date of Execution of Lease: June 25, 1997 Landlord: Carol Stream I Development Company C. Address of Landlord: Suite 1900 250 East Broad Street Columbus, Ohio 43215 Attn: Richard C. Daley D. Tenant: Partylite Gifts, Inc. E. Address of Tenant: 59 Armstrong Road P.O. Box 976 Plymouth Massachusetts 02360 F. Billing Address of Tenant: -------------------------------- -------------------------------- G. Land: The approximately 15.8 acre parcel of land located at Schmale and Tower Roads in Carol Stream, Illinois. H. Building: The 357,697 square foot building located on the Land and known as Building #1. I. Leased Premises: The entire Building containing 357,697 square feet of rentable space and the Land. J. Permitted Use: General office, warehouse and distribution use. K. Lease Term: Ten years commencing on the Commencement Date and terminating on the Termination Date. L. Commencement Date: July 1, 1997 (subject to deferral per Section 9 of the Lease). M. Termination Date: Tenth anniversary of Commencement Date. N. Base Rent: First 60 months of Lease Term: $107,309.10 per month ($3.60 prsf per year) Last 60 months of Lease Term: $121,619.98 per month ($4.08 prsf per year) Due: First months rent due on or before Tenant's possession of any portion of Leased Premises. Rent due on the first day of each calendar month. Late after ten days after due date; 5% charge for past due rent. O. Tenant's Proportionate Share of Operating Expenses: 100%. P. Initial Estimated Operating Expense Payment: $31,894.65 per month ($1.07 prsf per year) - subject to adjustment per Section 2 of the Lease. Q. Leasehold Improvements: $100,000 (see Exhibit D attached hereto). R. Renewals: Two (2) renewal term(s) of five (5) years not more than 18 and not less than 12 months prior to scheduled expiration of lease term (see Exhibit F). S. Guarantor: Blyth Industries, Inc. T. Guarantor's Address: 100 Field Point Road Greenwich, Connecticut 06830-6442 Attention: Bruce Kreiger, General Counsel The following exhibits are attached to and made a part of the Lease: Exhibit A - Description of Leased Premises Exhibit B - Examples of Operating Expenses Exhibit C - Rules and Regulations Exhibit D - Leasehold Improvements Exhibit E - Agency Disclosure Statement Exhibit F - Special Terms THE PROVISIONS OF THIS LEASE SUMMARY ARE INCORPORATED BY THIS REFERENCE INTO THE LEASE. LEASE AGREEMENT Landlord hereby leases the Leased Premises to Tenant for the duration of the Lease Term. The leasing of the Leased Premises to Tenant will be upon the terms and conditions set forth in this Lease. Section 1. Base Rent. For each month of the Lease Term, Tenant will pay Base Rent in an amount equal to the monthly installment set forth in the Lease Summary. Section 2. Operating Expense Payment. Tenant will pay its Proportionate Share of all Operating Expenses incurred by Landlord during the Lease Term in connection with the operation, management, maintenance and repair of the Land and the Building. Illustrative examples of those expenses which are included within the definition of "Operating Expenses" are set forth in Exhibit B. Tenant's Proportionate Share of such Operating Expenses will be paid by Tenant monthly in advance based upon Landlord's reasonable estimate of the actual Operating Expenses which will be incurred during each calendar year during the Lease Term. The Estimated Operating Expense Payment for the first such calendar year is set forth in the Lease Summary. The Estimated Operating Expense Payment for each calendar year thereafter will be adjusted based upon Landlord's reasonable estimate of its Operating Expenses for such calendar year. Landlord will endeavor to notify Tenant by December 1 of each year during the Lease Term of any adjustment in the monthly Estimated Operating Expense Payment for the upcoming calendar year. As soon as reasonably practicable after the end of each calendar year (but in no event later than April 30 of each such calendar year), Landlord will deliver to Tenant a written statement showing its actual Operating Expenses for such calendar year and Tenant's actual Proportionate Share thereof. If the sum of the Estimated Operating Expense Payments paid by Tenant during such calendar year exceeds Tenant's Proportionate Share of the actual Operating Expenses incurred during such year, then Landlord will apply the excess toward the next succeeding monthly Estimated Operating Expense Payment(s) due from Tenant. If the sum of the Estimated Operating Expense Payments paid by Tenant during such calendar year is less than Tenant's Proportionate Share of the actual Operating Expenses incurred during such year, then Tenant will pay the deficiency to Landlord within 20 days after Tenant's receipt of Landlord's written demand for the payment thereof. Section 3. Manner and Timing of Rent Payments. The first monthly installment of Base Rent and Estimated Operating Expense Payments will be paid by Tenant on or before the date on which Tenant first takes possession of any portion of the Leased Premises for the purposes of installing its racking or fixtures therein. Thereafter, monthly installments of Base Rent and Estimated Operating Expense Payments will be due and payable in advance on or before the first day of each calendar month during the Lease Term. Each such installment will be paid to Landlord at its address set forth in the Lease Summary (or such other address as Landlord may designate from time to time). If the Lease Term commences on a day other than the first day of the month or terminates on a day other than the last day of the month, then the installments of Base Rent and Estimated Operating Expense Payments for such month(s) will be adjusted accordingly. If any installment of Base Rent or any Estimated Operating Expense Payment is not received by Landlord within ten days after its due date, then a late payment charge of 5% of such past due amount will be immediately due and payable from Tenant. In addition, all past-due installments of Base Rent and Estimated Operating Expense Payments will bear interest from the date such payments were due until paid at the corporate rate of interest announced by American National Bank, plus two percent, not to exceed the highest amount permitted by law ("Delinquent Rate"). All installments of Base Rent and Estimated Operating Expense Payments will be paid by Tenant without demand and without any rights of reduction, counterclaim or offset, except as specifically provided herein. Tenant hereby agrees to pay as additional rent any sales, use or other tax (other than income tax, excess profits or revenue tax, excise or inheritance tax, gift tax, franchise tax, corporation tax, capital levy transfer, estate or succession tax) now or hereafter imposed by any governmental authority upon the rent and other sums payable by Tenant hereunder. Landlord's acceptance of any payment which constitutes less than all of the balance then owed to it by Tenant hereunder will be treated as its receipt of a payment "on account" and not as an accord and satisfaction and Landlord may accept any such payment (regardless of the existence of any endorsement or statement to the contrary 1 contained in a check or letter accompanying such payment) without prejudice to Landlord's right to recover the balance of the amount owed to it or pursue any other remedy provided for in this Lease. Section 4. Utilities. Landlord represents and warrants to Tenant that all utility services, including, without limitation, those listed below, are presently (or will be no later than the Commencement Date) connected to and available at the Building. Tenant will pay all costs associated with the provision of all utility services to the Leased Premises, including, without limitation, telephone, gas, electricity, water and sewer service. All utility services will be separately metered to the Leased Premises and placed in Tenant's name. Landlord will not be liable to Tenant, nor will Tenant be relieved of any obligation hereunder if any utility service to the Leased Premises is interrupted for any reason. Section 5. Maintenance and Repair. Tenant will at its sole expense maintain the Leased Premises in the same condition as existed as of the Commencement Date, reasonable wear and tear and damage by fire and casualty excepted. Tenant's maintenance obligation will extend to and include the repair (but not the replacement) of all structural and non-structural elements and mechanical systems located within the Leased Premises. Notwithstanding anything to the contrary contained herein, Landlord (and not Tenant), at Landlord's sole cost, will be responsible for repairing all structural and non-structural elements and mechanical systems located within the Leased Premises to the extent such repair is necessitated as a result of construction defects in materials or workmanship with respect to Landlord's initial construction of the Building or the Improvements. In addition, Landlord (and not Tenant), at Landlord's sole cost, will be responsible for the making of any repairs to the Leased Premises which are covered by enforceable construction warranties or guaranties. Landlord represents and warrants that the HVAC system in the Building was designed to be adequate to maintain a consistent ambient temperature within the Building of 68 degrees Fahrenheit. Tenant will provide and maintain, at Tenant's sole cost and expense, maintenance contracts on a quarterly basis for all air-conditioning, heating and ventilating systems serving the Leased Premises. Such HVAC maintenance will be provided by companies and pursuant to contracts and programs satisfactory to Landlord. Copies of all maintenance and service contracts will be delivered to Landlord on or before the Commencement Date. Any repairs made to the Leased Premises by Tenant pursuant to this Section 5 will be made in a workmanlike manner with materials at least equal in quality and grade to those originally contained within the Leased Premises. Tenant will also contract for its own janitorial and trash removal services and will promptly pay all costs associated with such services. Landlord will maintain the foundation, floor, roof and exterior walls of the Building and all common areas serving the Building in a first-class condition and order of repair and will be responsible for replacing (but not repairing) all structural elements and mechanical systems located within the Leased Premises; provided, however, that Tenant (and not Landlord) will be responsible for the payment of all costs associated with Landlord's maintenance and repair of the same if the need therefore arises due to the fault or negligence of Tenant or its agents, employees, licensees or invitees. Except as otherwise expressly provided above and in Exhibit C, all costs incurred by Landlord in connection with the maintenance and repair (but not the replacement) of such structural elements, mechanical systems, roof, exterior walls or common areas will be considered Operating Expenses and Tenant will pay its Proportionate Share thereof pursuant to Section 2. Except as otherwise expressly provided in this Section 5, Landlord will not at any time during the Lease Term be required to make any improvements, repairs, replacements or alterations to the Leased Premises. Section 6. Use of Premises. Tenant will use the Leased Premises solely for the Permitted Use. Tenant will not cause or permit any waste or damage to the Leased Premises, the Building or the Land and will not occupy or use the Leased Premises for any business or purpose which is unlawful, hazardous, unsanitary, noxious or offensive. If Tenant's use or occupancy of the Leased Premises changes after the Commencement Date and any such change causes an increase in Landlord's insurance premiums over and above those in effect as of the Commencement Date, then Tenant will pay the resulting increase within 20 days after its receipt of a statement from Landlord setting forth the amount thereof. Tenant will comply with the Rules and Regulations which are set forth in Exhibit C (and any reasonable modifications thereto which are consistent with the provisions of this Lease). Section 7. Governmental Requirements. On or before the Commencement Date, Landlord will deliver to Tenant a certificate from an AIA certified architect confirming that, as of the Commencement Date, the Leased Premises will be in compliance with all applicable laws, rules, regulations and ordinances, including, without limitation, the Americans 2 with Disabilities Act. During the Lease Term, Landlord, at Landlord's cost, will keep the Leased Premises in compliance with all applicable laws, rules regulations and ordinances which are now or hereinafter in effect, with the exception that Tenant will, at its sole expense, comply with all laws and other governmental requirements which are now or hereafter in force pertaining solely to Tenant's specific occupancy and use of the Leased Premises, including, without limitation, the Americans with Disabilities Act, the Comprehensive Environmental Response, Compensation and Liability Act the Clean Air Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act and the Water Pollution Control Act. Section 8. Signs. Tenant will not place any sign or other advertising material on the exterior or interior of the Leased Premises or the Building, without the prior written consent of Landlord, which consent will not be unreasonably withheld. Section 9. Leasehold Improvements. Attached to this Lease as Exhibit D are the preliminary specifications for the base building improvements and the improvements to be made to the office area of the Leased Premises ("Improvements"), as well as a tenant improvement allowance for the improvement to be made to the office area. Landlord, at Landlord's cost (but, with respect to the office area Improvements only, as a charge against any tenant improvement allowance being given to Tenant) will proceed with the preparation of the final architectural and engineering drawings, plans and specifications for the Improvements. Once those drawings, plans and specifications are completed, Landlord will deliver a full set thereof to Tenant for its review and approval. The approved final drawings, plans and specifications ("Final Plans") are incorporated herein by this reference. If the actual cost of constructing the office area Improvements in accordance with the approved Final Plans (as reasonably determined by Landlord's general contractor) exceeds the amount of the tenant improvement allowance set forth in Exhibit D, then, unless Landlord and Tenant otherwise agree to amortize any such excess costs through a mutually acceptable Base Rent increase, Tenant will pay any such excess costs within 20 days after Landlord's written demand for the payment thereof. If, following the approval of the Final Plans, Tenant expresses a desire to make any revisions thereto, Tenant will so notify Landlord and Landlord will then ask its general contractor to prepare a cost estimate for the making of such changes. Landlord will promptly notify Tenant of any increased costs or savings resulting from such changes and Tenant will have the right to require Landlord to cause such a change to be made to the Final Plans; provided, however, that such changes will not unreasonably affect the structural integrity or value of the Building. If the aggregate of all such changes results in a net increase in the cost of the construction of the Improvements, (net of any savings), then Tenant will pay such net increase to Landlord within 20 days after Landlord's written demand for the payment thereof. Landlord, at Landlord's cost, unless a tenant improvement allowance is designated above and Tenant exceeds such allowance, will cause the Improvements to be constructed in accordance with the Final Plans. Landlord will use its good faith diligent efforts to substantially complete construction of the Improvements on or before September 2, 1997, subject to delays caused by the occurrence of events beyond its reasonable control, including, without limitation, labor troubles, inability to procure materials, restrictive governmental laws and pronouncements, acts of God, unseasonable weather, Tenant's failure to timely respond to any matter submitted for its review, Tenant's requested change orders and Tenant's making of various installations in the Leased Premises pursuant to Paragraph 3 of Exhibit F to this Lease, if the making of any such installations unreasonably interferes with Landlord's construction of the Improvements("Delay Events"). Tenant agrees that it will review and either approve or specify its objections to any documents or drawings submitted to it for its review and approval hereunder within five days after its receipt of the same. The Commencement Date of this Lease shall be July 1, 1997 provided that on or before July 1, 1997 (i) there exists commercially reasonable ingress and egress to the Building for the purpose of permitting Tenant to install its racking in the Building (with Tenant hereby acknowledging that such commercially reasonable ingress and egress will exist if Center Road and Tower Road extending from Center Road to the front entryway to the Building, are paved and available for use by Tenant), (ii) the construction of the improvements are such that Tenant can install all of its racking in the Building, and (iii) Landlord has obtained the necessary governmental approvals, if any, to permit Tenant's 3 occupancy of the Building for the limited purpose of installing its racking. If the July 1, 1997 deadline is not met, the Commencement Date of this Lease shall be the actual date on which items (i), (ii) and (iii) are satisfied. In the event Landlord has met the July 1, 1997 deadline, but subsequent construction progress and approvals are not forthcoming such that Tenant cannot begin to bring its product into the Building on or before July 7, 1997, then, unless the failure to meet such July 7, 1997 deadline is attributable solely to those Tenant-caused delays referred to in the immediately succeeding paragraph, notwithstanding the commencement of the Lease Term, Base Rent and Estimated Operating Expense Payments shall abate until such time as Tenant can begin to bring its product into the Building and, if Tenant has prepaid Base Rent and Estimated Operating Expense Payments, Tenant shall be entitled to a pro rata credit against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments based upon the number of days from July 7, 1997 to the date Tenant can begin to bring its product into the Building. If construction of the improvements to the Leased Premises is not substantially complete on or before September 2, 1997 (except as otherwise provided with respect to those Tenant-caused delays referred to in the immediately succeeding sentence of this paragraph), then Base Rent and Estimated Operating Expense Payments shall abate as of September 2, 1997 until such time as the Leased Premises is substantially completed and, if Tenant has prepaid Base Rent and Estimated Operating Expense Payments, Tenant shall be entitled to a pro rata credit against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments based upon the number of days from September 2, 1997 to the date the Leased Premises is substantially completed. Notwithstanding anything to the contrary contained herein, if Landlord's inability to substantially complete the improvements on or before September 2, 1997 is attributable solely to Tenant-caused delays after the date hereof (including, without limitation, Tenant's failure to timely respond to any matter submitted for its review, delays caused by Tenant's requested change orders, as verified by Landlord's general contractor, and Tenant's making of installations in the Leased Premises pursuant to Exhibit F, Paragraph 3 thereof (provided the making of any such installations unreasonably interferes with Landlord's construction of the Improvements), then, notwithstanding the fact that the Improvements are not yet substantially completed, Tenant will continue to have an obligation to pay Base Rent and Estimated Operating Expense Payments and perform all of its other obligations and duties set forth in this Lease. For the purposes of this Lease, the Improvements will be deemed substantially completed on the date on which the following events have occurred: (a) Landlord's architect issues a certificate of substantial completion for the Building in accordance with the requirements of AIA Document A201, 1987 edition (expressly excluding, however, any requirement as to the subsequent completion of landscaping or external paving which is not necessary for Tenant's use and occupancy of the Leased Premises for its intended use); (b) a temporary approval (at least permitting Tenant to occupy, store and ship product) or permanent certificate of occupancy is issued by the appropriate governmental authority; and (c) Tenant has commercially reasonable ingress and egress to the Building for the purpose of permitting Tenant to ship its product from the Leased Premises and otherwise use and occupy the Leased Premises for its intended purpose. Notwithstanding anything to the contrary contained in the immediately preceding sentence, if Tenant's failure to complete the installation of its racking or its other installations, if any, (and not Landlord's construction of any improvements required to be constructed by it under the terms of this Lease) prevent the appropriate governmental authorities from issuing the required temporary approval or permanent certificate of occupancy for the Leased Premises, then, in such event, the requirement in the immediately preceding sentence that a temporary approval or permanent certificate of occupancy be issued for the Leased Premises will be eliminated from the test of when "substantial completion" has occurred. The floors of the Building will be deemed "complete" for the purposes of this Lease when they are fully cured, such that the installation of racks and equipment can commence immediately. Unless, as of the date of substantial completion of the Leased Premises, the construction of the Improvements is 100% complete and a permanent certificate of occupancy has been issued, then Landlord and Tenant agree that promptly after the date the Leased Premises is substantially completed, they will prepare a punchlist and Landlord will have an additional 30 days from the date the Leased Premises is substantially completed to complete the punchlist items and to obtain the permanent certificate of occupancy (or such longer period of time as may be required to complete any punchlist items which are weather sensitive - e.g., landscaping and exterior paving). If Landlord and Tenant cannot agree on the punchlist items, then Tenant will promptly select an architect and notify Landlord of the architect so selected. Tenant's architect and Landlord's architect will determine the punchlist items and will report in writing to Landlord and Tenant the punchlist items. If the two architects do not agree on the punchlist items, a third 4 architect (mutually acceptable to Landlord's architect and Tenant's architect) will be selected within the following five days. In such event, the third architect will determine the punchlist items within five days after his or her selection and will report in writing to Landlord and Tenant the punchlist items. All architects will be members in good standing with the American Institute of Architects and will have previous experience in making evaluations of industrial buildings in the metropolitan Chicago real estate market. Landlord and Tenant will each pay the charges of its own architect and one-half of the charges of the third architect. Notwithstanding anything contained herein to the contrary, if Landlord has not 100% completed the punchlist items and the improvements (including, without limitation, the landscaping and exterior paving) and obtained a permanent certificate of occupancy by October 1, 1997 for any reason other than the occurrence of a Tenant-caused delay, then Tenant may complete the punchlist items and the improvements and deduct the cost thereof reasonably incurred by Tenant from the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments; provided, however, that if Tenant's use and occupancy of the Leased Premises is interrupted by any governmental authority at any time thereafter, including, without limitation, during the course of Tenant completing the punchlist items and the improvements, due to the fact that a permanent certificate of occupancy has not been issued, then Base Rent and Estimated Operating Expense Payments shall abate until such time as Tenant's use and occupancy is restored by governmental authority. To the extent the Improvements shown in the approved Final Plans are more user-specific than customarily anticipated for warehouse space in the Building, Landlord will specifically identify those Improvements which are more user-specific in a notice sent by Landlord to Tenant at the time of Landlord's preparation of the Final Plans and, unless Tenant agrees to alter the Final Plans to eliminate such user-specific improvements), Tenant will thereafter be obligated, at its expense, to remove all such greater than customary improvements upon the expiration or sooner termination of the Lease Term. Section 10. Alterations. Except for "Minor Alterations" (as that term is hereafter defined). Tenant may not at any time prior to or during the Lease Term make any alterations, additions or improvements to the Leased Premises without the prior written consent of Landlord. Tenant may, with prior notice to Landlord, but without the prior consent of Landlord, make Minor Alterations to the Leased Premises during the Lease Term. For the purposes of this Section 10, "Minor Alterations" will mean any alteration, addition or improvement to the Leased Premises which costs less than $25,000, and which does not alter the exterior aesthetics of the Building or impact the structural components of the Building or any of the mechanical systems contained therein. All improvements, alterations and additions made at one time in connection with any one job will be aggregated for the purposes of determining whether the $25,000 limit has been exceeded. Any alterations, addition or improvement made to the Leased Premises in accordance with this Section 10 will at all times remain the property of Landlord (excluding Tenant's racking and trade fixtures, even if affixed to the Building). If Landlord consents to any proposed alteration, addition or improvement, the same will be made by Tenant at Tenant's sole expense. At the time Landlord gives its consent to any proposed alteration, addition or improvement, Landlord will specify whether such alteration, addition or improvement must be removed by Tenant upon the expiration of the Lease Term, with Tenant being responsible for repairing any damage to the Leased Premises caused by such removal. Section 11. Mechanics Liens. Tenant will indemnify and hold Landlord harmless from any liability or expense associated with its construction of any alteration, addition or improvement to the Leased Premises. Tenant will discharge, within 30 days, any mechanics lien filed against the Leased Premises, the Building or the Land in connection with any work performed by or at the request of Tenant; provided, however, that Tenant may contest any such lien upon Tenant bonding or otherwise insuring over the lien to the reasonable satisfaction of Landlord. Section 12. Assignment and Subletting. Except as otherwise expressly provided in this Lease, Tenant will not assign this Lease or sublet all or any part of the Leased Premises without the prior written consent of Landlord, which consent will not be unreasonably withheld. For the purposes of this section, Landlord will be deemed to be unreasonably withholding its consent to any proposed assignment or sublease if Landlord fails to respond within 15 days of Tenant's request for Landlord's consent to any proposed assignment or sublease, which request will be accompanied by all information reasonably requested by Landlord concerning the proposed assignment or sublease, including, without limitation, information concerning the identity of the proposed assignee or sublessee, the type of 5 business to be conducted in the Leased Premises by the proposed sublessee or assignee and the proposed sublesse's or assignee's current financial statements. Landlord shall not be deemed to have unreasonably withheld its consent if, in the judgment of Landlord: (i) the assignee or sublessee is of a character or engaged in a business which is not keeping with the standards or criteria used by Landlord in leasing the building; (ii) the financial condition of the sublessee or assignee is such that it may not be able to perform its obligations in connection with this Lease; (iii) the assignee or sublessee is a tenant or negotiating for space in the Building; (iv) the assignee or sublessee is a governmental unit; (v) Tenant is in default under this Lease; (vi) in the reasonable judgment of Landlord, such an assignment or subleasing would violate any term, condition, covenant or agreement of the Landlord involving the Building or any other tenant's lease within it; or (vii) any other basis which Landlord reasonably deems appropriate. In the event of an assignment or sublease, Landlord and Tenant agree to share the monthly profit, if any, equally. In determining whether there is a profit, Tenant will be first allowed to recover expenses incurred by Tenant in connection with such assignment or sublease. Notwithstanding the above, Tenant may assign this Lease, or any part thereof, without Landlord's prior consent, to any successor-in-interest of Tenant in connection with a reorganization, merger, consolidation or sale of all or substantially all of the stock or assets of Tenant, so long as Tenant's successor-in-interest expressly assumes all of Tenant's obligations hereunder. Section 13. Subordination. Tenant's rights and interests under this Lease will be subordinate to all mortgages and other encumbrances now or hereafter affecting any portion of the Building or the Land. In the event of the foreclosure of any mortgage or other encumbrance, Tenant will, upon request of any person succeeding to the interest of Landlord, attorn to and automatically become the tenant of such successor-in-interest without change in the terms or conditions of this Lease; provided, however, that such successor-in-interest will not be liable for any act or omission of any prior landlord or subject to any offsets or defenses which Tenant may have against any such prior landlord. Within 15 days after its receipt of Landlord's request therefor, Tenant will execute and deliver to Landlord a certificate confirming such subordination and attornment and setting forth such information as Landlord shall reasonably request concerning the current status and facts related to this Lease and Tenant's occupancy of the Leased Premises. Additionally, Tenant hereby agrees that it will fully cooperate with Landlord and provide all information in Tenant's possession in order to help Landlord complete any disclosure form for the Leased Premises required by the Illinois Responsible Property Transfer Act. Tenant's subordination as set forth in this section is contingent upon Landlord providing to Tenant a non-disturbance agreement from Landlord's mortgagee of ground lessor, on terms and conditions reasonably acceptable to such mortgagee of ground lessor and Tenant, which in essence provides that, if Tenant is not then in default under this Lease, then Tenant's occupancy and all other rights granted to Tenant hereunder will not be disturbed by such mortgagee and such mortgagee's enforcement of its mortgage. Section 14. Limitation of Landlord's Personal Liability. Tenant will look solely to Landlord's interest in the Leased Premises, the Building and the Land for the recovery of any judgment against Landlord; it being the express intent of the parties hereto that neither Landlord, nor any of its shareholders, directors, officers or employees will ever be personally liable for any such judgment. Section 15. Indemnification and Insurance. Landlord will not be liable for and Tenant will indemnify and hold Landlord harmless from any liability or expense associated with any damage or injury to any person or property (including any person or property of Tenant or any one claiming under Tenant) which arises directly or indirectly in connection with the Leased Premises or Tenant's use or occupancy thereof; provided, however, that Tenant will not be obligated to indemnify Landlord as to any liability or expense occasioned by the negligence or intentional misconduct of Landlord. All property stored or placed by Tenant in or about the Leased Premises will be so stored or placed at the sole risk of Tenant. Tenant will at its sole expense maintain in full force and effect at all times during the Lease Term: (a) comprehensive public liability insurance for personal injury and property damage with liability limits of not less than $5,000,000 for injury to one person, $10,000,000 for injury from one occurrence and $2,000,000 for property damage; (b) extended coverage insurance on all property stored or placed by Tenant in or about the Leased Premises in an amount equal to the full replacement value thereof; (c) insurance against abatement or loss of rent in case of fire or other casualty in an amount at least equal to the Base Rent and Estimated Operating Expense Payments to be paid 6 by Tenant during the two years next ensuing as reasonably determined by Landlord; and (d) worker's compensation and employer's liability insurance covering all Tenant's employees working in the Leased Premises. Landlord will maintain in full force and effect at all times during the Lease Term: (a) comprehensive public liability insurance for personal injury and property damage with liability limits of not less than $5,000,000 for injury to one person, $10,000,000 for injury from one occurrence and $2,000,000 for property damage; and (b) fire and extended coverage insurance on the Building in an amount equal to the full replacement cost of the Building (excluding foundations). Each insurance policy maintained by any party hereunder (other than the fire and extended coverage insurance policy maintained on the Building by Landlord) will be primary as respects to any claims, losses or liabilities and will name the other party as an additional insured thereunder. Each insurance policy required to be maintained by any party hereunder will specifically provide that such insureds policy cannot be terminated without giving at least 30 days prior written notice to the other party. Each party will furnish certificates evidencing such insurance coverage to such other party on or before the Commencement Date and thereafter within 30 days prior to the expiration of each such certificate. All insurance required under this Section 15 will include provisions denying to the insurer acquisition by subrogation of rights against the other party. Subject to compliance with the requirements set forth in the immediately preceding sentence, each party waives any rights of recovery against the other for loss or injury, to the extent of any amount recovered by reason of insurance. Section 16. Hazardous Substances. Tenant will not itself, nor permit others to use, store, generate, treat or dispose of any Hazardous Substance (as that term is hereafter defined) on or about the Leased Premises, except for immaterial amounts that are exempt from or do not give rise to any violation of applicable law. Notwithstanding the above, Tenant will not be responsible for the migration on to the Land of Hazardous Substances used, stored, generated, treated or disposed of on any property located adjacent to the Land. Landlord will retain responsibility for any remediation required by law in connection with any Hazardous Substance found on or about the Land or the Building as of the Commencement Date, except for immaterial amounts that are exempt from or do not give rise to any violation of applicable law. Notwithstanding the above, Landlord will not be responsible for the migration onto the Land of Hazardous Substances used, stored, generated, treated or disposed of on any property located adjacent to the Land. For the purposes of this Section 16, the term "Hazardous Substance" means any "hazardous substance", "toxic substance" (as those terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act), "hazardous waste" (as that term is defined in the Resource Conservation Recovery Act), polychlorinated biphenyls, asbestos, radioactive material or any other pollutant, contaminant or hazardous, dangerous or toxic material or substance which is regulated by any federal, state or local law, regulation, ordinance or requirement. Section 17. Surrender of Premises. Upon the termination of Tenant's right of possession under this Lease, Tenant will immediately surrender possession of the Leased Premises to Landlord in the same condition as existed as of the Commencement Date, reasonable wear and tear and fire and casualty excepted. Tenant will at the same time remove all of its movable trade fixtures from the Leased Premises and any alterations, additions and improvements which Landlord requests be removed pursuant to Section 9 and Section 10 hereof. Tenant will promptly repair any damage caused to the Leased Premises by the removal of any of such movable trade fixtures, alterations, additions or improvements. Section 18. Casualty. If the Leased Premises are damaged by fire or other casualty, Landlord shall promptly give written notice to Tenant whether the Leased Premises can reasonably be repaired within 180 days after the date of the occurrence of such fire or other casualty. If Landlord notifies Tenant that it does not believe that the Leased Premises can reasonably be repaired within such 180-day period, then Tenant will have the option of terminating this Lease by giving written notice thereof to Landlord at any time within 30 days after the date of Tenant's receipt of the aforementioned notice from Landlord. If Landlord determines that the Leased Premises can reasonably be repaired within such 180-day period or if Tenant does not elect to terminate this Lease despite the fact that Landlord has determined that the Leased Premises cannot be reasonably repaired within such 180-day period, then Landlord will proceed to repair the Leased Premises at its sole expense; provided, however, that Landlord will in no event be required to repair any improvements previously made to or any fixtures previously installed in the Leased Premises by Tenant. If the Leased Premises are rendered untenantable in whole or in part as a result of a fire or other casualty, then all rent 7 accruing after the occurrence of any such fire or other casualty and prior to the completion of the repair of the Leased Premises will be equitably and proportionately abated to reflect the untenantable portion of the Leased Premises. Landlord will not be liable to Tenant for any inconvenience or interruption to Tenant's business occasioned by such fire or other casualty or the concomitant repair of the Leased Premises. If Landlord notifies Tenant that it believes that the Leased Premises can reasonably be repaired within 180 days after the occurrence of such fire or other casualty or if Tenant does not elect to terminate this Lease, notwithstanding the fact that the projected repair period is longer than 180 days, and if Landlord thereafter fails to complete the repairs within the longer of (i) 180 days after the date of the occurrence of such fire or other casualty or (ii) such longer repair period as is identified as the projected repair period in Landlord's initial notice to Tenant under this Section 18 (in the event Tenant does not elect to terminate the Lease, notwithstanding the length of such projected repair period) ("Applicable Repair Period") for any reason other than the occurrence of a Delay Event (but in no event will the occurrence of any Delay Event permit an extension of the time period for the completion of such repairs by more than 90 days beyond the last day of the Applicable Repair Period), then Tenant may elect to terminate this Lease by delivery of written notice delivered to Landlord within 30 days after the expiration of the Applicable Repair Period (as extended, if applicable, for no more than 90 days for the occurrence of any Delay Event). Notwithstanding anything to the contrary contained herein, if at least 50% of the rentable square footage contained within the Building is rendered wholly untenantable as a result of the occurrence of any fire or other casualty within the last 12 months of the Lease Term (or any extension thereof), then either Landlord or Tenant may terminate this Lease by giving written notice to the other party within 30 days after the date of the occurrence of such fire or other casualty. Section 19. Condemnation. If all of the Leased Premises is taken by or under threat of condemnation, then this Lease will automatically terminate as of the date of the transfer of possession of the Leased Premises to the condemning authority. If a substantial portion of the Leased Premises is taken by or under threat of condemnation and Tenant, in its reasonable judgment, determines that it cannot conduct its business in the remaining portion of the Leased Premises, then, at the option of Tenant, this Lease will terminate as of the date of the transfer of possession of the Leased Premises to the condemning authority. If Tenant does not so terminate this Lease or if any taking is of less than a substantial portion of the Leased Premises, then, in either such event, this Lease will continue in full force and effect in accordance with its terms, except that the Base Rent and Tenant's Proportionate Share will be adjusted to fairly reflect the portion of the Leased Premises which was so taken and Landlord will promptly restore the balance of the Leased Premises to a secure, self-contained facility. Landlord will not be liable to Tenant for any inconvenience or interruption to Tenant's business occasioned by any such taking. Landlord will be entitled to receive the entire award made by the condemning authority for any such taking, with the exception that Tenant will be entitled to any separate award made by the condemning authority which is expressly attributed to the value of Tenant's trade fixtures or equipment, loss of business and relocation and moving expenses, so long as such separate award does not diminish the amount of Landlord's award from the condemning authority. Section 20. Holding Over. Tenant will not hold over in its occupancy of the Leased Premises after the expiration of the Lease Term, without the prior written consent of Landlord. If Tenant holds over without the prior written consent of Landlord, then Tenant will pay double the Base Rent and Estimated Operating Expense Payment then in effect for each month during the entire holdover term. Any holding over with the consent of Landlord will constitute this Lease as a lease from month-to-month. Section 21. Default. If Tenant fails to pay any installment of Base Rent, any Estimated Operating Expense Payment or any other sum payable by it hereunder on or before ten days after the date when due, or if Tenant defaults in the performance of any of its other obligations under this Lease and such default continues for 30 days after written notice thereof is given to Tenant (unless the nature of the default is such that it cannot be cured within 30 days, in which case Tenant will not be deemed in default if Tenant commences to cure within 30 days and diligently pursues the cure to completion within 90 days after written notice of such default is given to Tenant) except in the case of an emergency, in which event such non-performance will be cured as quickly as practicable, then, in addition to any other legal rights and remedies available to Landlord at law or in equity, Landlord may: (a) terminate this Lease and declare immediately due and payable from Tenant the sum of all then delinquent installments of Base Rent, Estimated Operating Expense Payments and other sums payable under this Lease, and the excess, if any, of the present value of 8 all Base Rent and Estimated Operating Expense Payments due for the remainder of the Lease Term over the present value of the fair rental value of the Leased Premises during the same period, both of which sums will be discounted at a rate equal to 8%; (b) re-enter and attempt to relet the Leased Premises without terminating this Lease, in which event Tenant will remain obligated to pay to Landlord any deficiency between all sums payable by Tenant pursuant to this Lease and any sums collected by Landlord from any reletting of the Leased Premises (net of any sums paid by Landlord in connection with such reletting, including, without limitation, leasing commissions, attorneys' fees and costs of improvements to the Leased Premises); or (c) cure any such default by Tenant, with any sums expended by Landlord in connection with such cure becoming immediately due and payable from Tenant, with interest thereon until paid at the Delinquent Rate. To the extent required by applicable law, Landlord will relet the Leased Premises or any part thereof. If Landlord elects to relet the Leased Premises, Landlord may change the locks to the Leased Premises and may redecorate, repair and alter the Building and the Leased Premises in such a manner as is deemed reasonably necessary or appropriate by Landlord. Any reletting costs incurred by Landlord will be paid by Tenant within 30 days after Tenant's receipt of written demand for the payment thereof, together with interest thereon at the Delinquent Rate. If Landlord exercises any of the rights and remedies provided herein or otherwise at law or in equity which involves its reentering the Leased Premises, Landlord may do so and remove all occupants and property from the Leased Premises, in accordance with applicable law and without the use of force, without any liability, and without being deemed guilty of trespass, eviction or forcible entry and detainer. Any property of Tenant removed from the Leased Premises by Landlord pursuant to any provisions of this Lease or by law shall be stored by Landlord, at Tenant's sole cost and expense, and Landlord, upon storage of such property, will in no event be responsible for the value, preservation or safekeeping thereof. Tenant will pay Landlord for all reasonable expenses incurred by Landlord in connection with such removal and (provided Landlord provides access to Tenant for this limited purpose) for reasonable storage charges for Tenant's property. Any property of Tenant not removed from the Leased Premises or retaken from storage by Tenant within 45 days after the expiration or earlier termination of the Lease Term (or of Tenant's right to possess the Leased Premises) will be conclusively deemed to have been conveyed by Tenant to Landlord as by bill of sale, without further payment or credit by Landlord to Tenant. Section 22. Prevailing Party's Fees. If any legal action is commenced by either Landlord or Tenant, to enforce its rights hereunder, then all attorneys' fees and other expenses incurred by the prevailing party in such action shall be promptly paid by the non-prevailing party. Section 23. Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and the successors and permitted assigns of Tenant. Section 24. No Waiver. No waiver of any covenant or condition of this Lease by either party will be deemed to constitute a future waiver of the same or any other covenant or condition of this Lease. In order to be effective, any such waiver must be in writing and must be delivered to the other party to this Lease. Section 25. Brokerage Commissions. Each of Landlord and Tenant hereby represents and warrants that it has not dealt or consulted with any real estate broker or agent in connection with this Lease other than those real estate brokers and agents specifically identified in the Agency Disclosure Statement attached hereto as Exhibit E. Each of Landlord and Tenant agrees to indemnify and hold the other harmless from and against any liability or expense occasioned by a breach of the foregoing representation. Section 26. Reasonableness of Consent. Landlord will not unreasonably withhold or condition any consent or approval which is required to be given by it pursuant to the terms of this Lease. Section 27. Amendment. This Lease may not be amended except by a written instrument signed by both Landlord and Tenant. Section 28. Governing Law. This Lease will be governed by and construed in accordance with the laws of the State of Illinois. 9 Section 29. Notices. All notices required or permitted under this Lease must be in writing and must be delivered to Landlord and Tenant at their addresses set forth in the Lease Summary (or such other address as may hereafter be designated by such party). Any such notice must be personally delivered or sent by either registered or certified mail or overnight courier and will be deemed sufficiently served upon delivery, with signed receipts evidencing same, if personally delivered or sent by overnight courier, or two days after the date of mailing thereof, if mailed. Section 30. Entire Agreement. This Lease sets forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises. There are no covenants, promises, agreements, conditions or understandings, whether oral or written, between the parties, except as are specifically set forth herein. Except as otherwise provided herein, no subsequent alteration, amendment, change or addition to this Lease will be binding upon Landlord or Tenant, unless expressed in writing and executed by both parties hereto. Section 31. Time Period. TIME IS OF THE ESSENCE FOR EACH AND EVERY PROVISION HEREOF. Section 32. Financial Statements. [Intentionally Omitted] Section 33. Special Terms. Exhibit F sets forth those special provisions, if any, which supplement the provisions of this Lease. [Signatures and Acknowledgements Appear on Next Page] 10 SIGNATURES AND ACKNOWLEDGEMENTS Landlord and Tenant have executed this Lease as of the date specified in the Lease Summary. LANDLORD: CAROL STREAM I DEVELOPMENT COMPANY By Pizzuti Equities Inc. By /s/ Richard C. Daley -------------------------------- Richard C. Daley, Vice President TENANT: PARTYLITE GIFTS, INC. By /s/ Frank P. Mineo -------------------------------- Frank P. Mineo, Vice President STATE OF OHIO COUNTY OF FRANKLIN: SS Before me, a notary public in and for said state and county, personally appeared Richard C. Daley, the Vice President of Pizzuti Equities Inc., the duly authorized representative of the Landlord in the foregoing Lease, who acknowledged the signing of the Lease to be his free act and deed on behalf of the Landlord. Date: 6/25/97 /s/ Nova S. White ---------------------------------- Notary Public STATE OF CONNECTICUT COUNTY OF FAIRFIELD: SS Before me, a notary public in and for said state and county, personally appeared Frank P. Mineo, the Vice President of PartyLite Gifts, Inc. the Tenant in the foregoing Lease, who acknowledged the signing of the Lease to be his free act and deed on behalf of Tenant. Date:6/20/97 /s/ Christina Kaufman ----------------------------------- Notary Public 11 EXHIBIT A DESCRIPTION OF LEASED PREMISES See legal description, site plan, parking plan, building plan and floor plan attached hereto as Schedule 1. The address of the Building is _______________________. Initialed and Approved by Tenant: --------------------------------- 12 EXHIBIT B ILLUSTRATIVE EXAMPLES OF OPERATING EXPENSES The following are illustrative examples of some of the expenses which are included within the definition of "Operating Expenses": 1. Costs of all required maintenance and repair (but not replacement) of the foundation, floor, roof and exterior walls of the Building and all common areas serving the Building; 2. Real estate taxes and assessments on the Building and the Land; 3. Insurance premiums for liability and extended coverage insurance policies maintained by Landlord on the Building and the Land; 4. Costs of maintaining and repairing the landscaping and irrigation system which serves the Land and the cost of snow plowing and snow removal from those areas of the Land covered by pavement; 5. Costs related to the provision of water, sewer, gas, telephone, electricity and other utility services to or for the benefit of the Building, unless such utility services are separately metered and placed in the name of a tenant; 6. [Intentionally Omitted] 7. A reasonable property management fee (not to exceed 2% of Base Rent, so long as Tenant occupies 100% of all rentable space contained within the Building; 8. Costs of maintaining and repairing the fire protection and life safety systems for the Buildings; 9. Accounting, legal (with any legal costs only being related to the contest of any imposition of real estate taxes or assessments against the Building and the Land) and other professional services rendered in connection with the operation, management and maintenance of the Building and the Land (not to exceed .75% of Base Rent); and 10. Except as otherwise specifically provided herein, all other costs and expenses incurred by Landlord related to the operation, management, maintenance and repair of the Building and the Land, which are considered "operating expenses" (and not "capital expenditures") under generally accepted accounting principles. The following are those expenses which are excluded from the definition of "Operating Expenses": 1. Landlord's lease payments or debt service on any financing related to the Building or the Land; 2. Franchise, excess profits or revenue tax, excise tax, inheritance tax, gift tax, franchise tax, corporation tax, capital levy transfer, state successor or income taxes payable by Landlord; 3. Salaries, benefits and related costs of Landlord's off-site administrative personnel; 4. Costs of all tenant improvements; 5. Leasing commissions; 13 6. Costs of utility usage for utility services separately metered in the name of Tenant; 7. Costs of the initial construction of the Building and the common areas and any capital improvements made after the substantial completion of the same, except as otherwise permitted above, in the examples of expenses included in Operating Expenses; 8. Costs associated with abatement of environmental hazards existing as of the Commencement Date, except to the extent, if any, caused or contributed to by the acts or omissions of Tenant, its employees, agents, contractors or invitees; 9. Costs associated with the failure of the Leased Premises, the Building or the Land to be in compliance with any statute, ordinance, rule or regulation applicable thereto as of the Commencement Date, except in the event that such noncompliance is the result of any act or omission of Tenant, its employees, agents, contractors or invitees; 10. Expenses in the nature of interest (except as otherwise specifically provided in this Exhibit), fines or penalties, except to the extent incurred as a result of acts or omissions of Tenants, its employees, agents, contractors or invitees; 11. Costs of repairs, alterations or replacements caused by casualty losses to the extent of any insurance proceeds related thereto; 12. Costs of repairs, alterations or replacements caused by the exercise of rights of eminent domain; 13. Costs of any special services rendered or costs reimbursed to another tenant which are not generally reimbursed or rendered to other tenants in the Building; 14. Amounts paid to any person or entity related to or affiliated with Landlord to the extent that the same exceed the reasonable and customary cost thereof; and 15. Costs of correcting defects in the initial construction of any of the improvements on the Land made by Landlord, including, without limitation, the Building; and any costs directly or indirectly associated with the initial development of the Land and the Building, including, without limitation, annexation fees, utility tap-in fees, and legal fees. Operating Expenses will be computed for each calendar year during the Lease Term based upon the accrual method of accounting. If the Building is ever less than 95% occupied, then Operating Expenses shall be calculated as if the Buildings had been 95% occupied and the results will constitute Landlord's Operating Expenses for such calendar year for all purposes of this Lease. Initialed and Approved by Tenant: --------------------------------- 14 EXHIBIT D LEASEHOLD IMPROVEMENTS The Base Building improvements to be provided by Landlord, at Landlord's sole cost, will be consistent with the Project Specifications attached hereto as Schedule 1. Landlord will provide a tenant improvement allowance of $100,000 for the construction of the Improvements to the office portion of the Leased Premises (presently anticipated to consist of 2,500 rentable square feet, although Tenant may elect to increase the size of the office portion of the Leased Premises, without, however, any concomitant increase in the amount of the aforementioned tenant improvement allowance for the construction of the improvements to such office portion of the Leased Premises). The final plans for such office Improvements are attached hereto as Schedule 2. If the cost of the construction of the office Improvements ultimately approved by Landlord and Tenant exceeds the amount of the aforementioned tenant improvement allowance, then such excess cost will be paid by Tenant in accordance with the provisions of Section 9 of the Lease. Initialed and Approved by Tenant: --------------------------------- 15 EXHIBIT E AGENCY DISCLOSURE STATEMENT The following are the only real estate agents and brokers involved in the leasing transition between Landlord and Tenant: - Representative of Landlord --------------------- Commission to be paid by ------------------------ - Representative of Tenant --------------------- Commission to be paid by ------------------------- Initialed and Approved by Tenant: --------------------------------- 16 EXHIBIT F SPECIAL TERMS The following special terms modify and supplement the provisions of the Lease Agreement between Landlord and Tenant. All capitalized terms used but not defined in this Exhibit F will have the meanings attributed thereto in the Lease Agreement. In the event of a conflict between the provisions of the other portions of this Lease and this Exhibit F, the provisions of this Exhibit F will control. 1. Renewal Option. Tenant will have the option to renew this Lease for two consecutive renewal terms of five years each. Each such renewal option must be exercised, if at all, by Tenant's delivery of written notice of exercise to Landlord not more than 18, nor less than 12, months prior to the scheduled expiration of the Lease Term. Tenant's right to renew this Lease will be conditioned upon the Lease being in full force and effect, without any uncured default on the part of Tenant, both at the time of Tenant's exercise of such option and at the time of the scheduled commencement of such renewal term. Each such renewal term will be upon all of the same terms and conditions set forth in this Lease with respect to the initial Lease Term, except that the Base Rent for each such renewal term will be 95% of the fair market rent, as of the date of Tenant's exercise of each such renewal term, for comparable space in comparable light industrial/warehouse buildings in the DuPage County Illinois market. Landlord will furnish Tenant with Landlord's determination of such fair market rent within 30 days after Tenant's exercise of its renewal option. If Tenant does not agree with Landlord's determination of such fair market rent and if Landlord and Tenant cannot otherwise reach agreement upon such fair market rent within 45 days after Tenant's receipt of Landlord's written determination of such fair market rent, then, in either such event, Tenant may give notice to Landlord prior to expiration of such latter 45-day period revoking Tenant's exercise of such renewal option. If Tenant does not send a revocation notice to Landlord within such 45 day period, then, except as otherwise expressly provided herein, the fair market rent will in all events be determined in accordance with the appraisal procedure hereinafter set forth in this Paragraph 1. If the aforementioned 45 day period expires without Tenant sending a revocation notice to Landlord, then, within seven days after the expiration of such 45 day period, Landlord and Tenant shall each promptly select an appraiser and notify the other of the appraiser so selected. The two appraisers shall determine the fair market rental within ten days after their selection and shall report in writing to the Landlord and Tenant the fair market rental. If the two appraisers cannot agree on the fair market rental within such ten day period, a third appraiser shall be selected within the following ten days by the Illinois chapter of the American Institute of Real Estate Appraisers (or any successor organization thereto). All three appraisers shall then determine the fair market rental within ten days after the selection of a third appraiser and shall report in writing to Landlord and Tenant the fair market rental. In case of a disagreement among the three appraisers on the fair market rental, the average of the two appraisals closest in amount shall control; provided, however, that the fair market rental of the third appraiser shall not be greater than the higher of the other two appraisals, nor be less than the lower of such two appraisals. All appraisers shall be members in good standing of the American Institute of Real Estate Appraisers and shall have previous experience in making appraisals of leasehold interests in commercial warehouse buildings in the greater Chicago, Illinois area. Landlord and Tenant shall each pay the charges of its own appraiser and one half of the charges of any third appraiser selected in the aforesaid manner. Notwithstanding the foregoing, (i) in no event shall the annual Base Rent per square foot during each year of any renewal term be lower than the annual Base Rent per square foot payable by Tenant during the last year of the immediately preceding term of the Lease (be it the initial lease term or the first renewal term); and (ii) if for any reason the foregoing procedures fail to establish, through no fault of Landlord, the amount of the fair market rental applicable to the subject renewal term at least 210 days prior to the scheduled expiration of the Lease Term, then, at Landlord's option, Tenant's exercise of its renewal option shall be deemed ineffective and of no force and effect. With respect solely to the first such renewal term, Landlord will also provide Tenant with an allowance of up to $75,000 to make cosmetic improvements to the Leased Premises (excluding, however, for this purpose, the acquisition of any furniture or equipment), such allowance to be paid by Landlord to Tenant upon Tenant's completion of such improvements and Tenant's presentation to Landlord of reasonably detailed invoices supporting the costs incurred by Tenant in connection with the making of such improvements (in an amount up to but not exceeding $75,000). Tenant's exercise of its renewal option will apply to all space which it is leasing at the time of such exercise (including, the Expansion Space 17 if then being leased by Tenant pursuant to Paragraph 4, below). If the Expansion Space has been leased to Tenant at the time of Tenant's exercise of its first renewal option, then the tenant improvement allowance referred to earlier in this P. 1 will be increased by $.21 for each rentable square foot contained within the Expansion Space. 2. Early Occupancy. To the extent permitted by the applicable local governmental authorities, Landlord will use its reasonable efforts to provide Tenant with access to 50% of the rentable square feet contained within the Leased Premises by June 15, 1997 and access to the remaining 50% of the rentable square feet contained within the Leased Premises by no later than June 30, 1997. Such access will be granted to Tenant pursuant to a letter from Landlord to Tenant stating that the floor is complete and authorizing Tenant to begin installing its racking and other fixtures and otherwise preparing the Leased Premises for its occupancy; provided, however, that Tenant's pre-Commencement Date activities in the Leased Premises will not unreasonably interfere with Landlord's construction of the Improvements to the Leased Premises. If Landlord is unable to provide such access to Tenant by the dates first set forth above for any reason, then Landlord will pay a penalty to Tenant equal to $2,000 per day for every day of the delay in its providing of the requisite access to Tenant hereunder (which penalty will be credited against Base Rent). If Landlord provides Tenant with access to the entire Leased Premises for the purpose of installing all of its racking by no later than June 1, 1997, then Tenant will, within thirty days after such access is granted to Tenant, pay a $50,000 incentive bonus to Landlord. For the purpose of this Paragraph 3, access to space within the Leased Premises will be deemed to have been granted to Tenant if the floors in the affected portion of the Leased Premises are "complete" within the meaning of ss.9 of the Lease Agreement. 3. Expansion Option. Upon the terms and subject to the conditions hereinafter set forth, Tenant will have the right to expand the Leased Premises by leasing approximately an additional 157,000 square feet of space to be constructed by Landlord, at Landlord's cost, either as an attached addition to the existing Building or as an adjacent but free-standing structure ("Expansion Space"). Landlord agrees to use all reasonable efforts to construct the Expansion Space as an attached addition to the east side of the Building and on the same grade, so long as such construction would comply with all applicable governmental laws, regulations, rules and ordinances. The Expansion Space will include 15 additional docks with 40,000 pound levelers and restrooms per building code for 100 employees, and will also include three cut-outs to the Expansion Space and employee parking for 100 cars. To the extent Tenant requires more than 15 docks in the Expansion Space, Landlord will endeavor to make sure additional docks available at a maximum cost of $10,000 each. Landlord will provide a tenant improvement allowance of $40 per rentable square foot for 1,500 rentable square feet of office improvements to the Expansion Space, with the preparation and approval of the plans and specifications for such office improvements to be governed by the same terms as apply to the preparation or approval of plans and specifications for the office improvements to the initial Leased Premises. If the Expansion Space is constructed as an attached addition to the existing Building, then Tenant acknowledges and agrees that its office improvements will be located in the glassed area located in the southeast corner of the existing Building. The truck apron for the Expansion Space will match specifications for the main Building along the entire south elevation of the same. The architectural design and the construction plans and specifications for the Expansion Space will otherwise generally be consistent with the architectural design and construction plans and specifications for the Building (as illustrated in Schedule 1 to Exhibit D of this Lease). Landlord's obligation to construct the Expansion Space will be subject to its preparation and approval of all construction plans and specifications associated with the Expansion Space, as well as the final review and approval of such construction plans and specifications by the Village of Carol Stream and the final review and approval by Tenant of the construction plans and specifications for the tenant improvements to be made to the Expansion Space (being the 1,500 rentable square feet of office improvements and any improvements to be made to the warehouse portion of the Expansion Space, which are above and beyond those improvements to be made to the warehouse space in accordance with the requirements set forth above in this paragraph 3) ("Expansion Space Tenant Improvements"). The commencement date of Tenant's leasing of the Expansion Space (and, hence, the commencement of Tenant's obligation to pay Base Rent and Estimated Operating Expense Payments for the Expansion Space) shall be March 2, 1998, provided that on or before March 2, 1998 (i) there exists commercially reasonable ingress and egress to the Expansion Space (which, for this purpose, will include access to the Expansion Space through an overhead service door to be located at the rear of the Expansion Space)), (ii) the construction of the improvements to the 18 Expansion Space are such that Tenant can begin installing and testing of all of its trade fixturing (including, without limitation, its automatic distributor equipment) in the Expansion Space, and (iii) Landlord has obtained the necessary governmental approvals, if any, to permit Tenant's occupancy of the Expansion Space for the limited purpose of beginning the installation and testing of its trade fixturing. If the March 2, 1998 deadline is not met, then the commencement date of Tenant's leasing of the Expansion Space shall be the actual date on which items (i), (ii) and (iii) are satisfied. Notwithstanding the above, if the commencement date of Tenant's leasing of the Expansion Space has not occurred by April 1, 1998 (for any reason other than Tenant-caused delays or the failure, through no fault of Landlord, to achieve the milestones by the applicable milestone dates hereinafter set forth in this paragraph 3), then Landlord shall incur a penalty of $2,000 each day from April 1, 1998, to the commencement date of Tenant's leasing of the Expansion Space, which penalty, if any, shall be credited against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments for the Expansion Space. In the event Landlord has met the March 2, 1998 deadline, but subsequent construction progress and approvals are not forthcoming such that Tenant cannot begin to bring its product into the Expansion Space on or before June 1, 1998, then, notwithstanding the commencement of Tenant's leasing of the Expansion Space, Base Rent and Estimated Operating Expense Payments shall abate until such time as Tenant can begin to bring its product into the Building and, if Tenant has prepaid Base Rent and Estimated Operating Expense Payments for the Expansion Space, Tenant shall be entitled to a pro rata credit against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments for the Expansion Space based upon the number of days from June 1, 1998 to the date Tenant can begin to bring its product into the Expansion Space. If construction of the improvements to the Expansion Space is not substantially complete (as that term is defined in Section 9 of the Lease) on or before July 1, 1998, then Base Rent and Estimated Operating Expense Payments for the Expansion Space shall abate as of July 1, 1998, until such time as the Expansion Space is substantially completed and, if Tenant has prepaid Base Rent and Estimated Operating Expense Payments for the Expansion Space, Tenant shall be entitled to a pro rata credit against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments for the Expansion Space based upon the number of days from July 1, 1998 to the date the Expansion Space is substantially completed. In the event the Expansion Space is not substantially completed by July 1, (other than solely due to Tenant- caused delays or the failure, through no fault of Landlord, to achieve the milestones by the applicable milestone dates hereinafter set forth in this paragraph 3 Landlord shall incur a penalty of $2,000 per day from July 1 to the date the Expansion Space is substantially completed or such earlier date as Tenant provides written notice to Landlord that Tenant is exercising its self-help remedy under the third to the last grammatical paragraph of this Paragraph 3, which penalty, if any, shall be credited against the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments for the Expansion Space. The following are those milestones and milestone dates referred to in the immediately preceding paragraph of this paragraph 3: - Execution and delivery by Tenant of an indemnification agreement, indemnifying Landlord (upon terms and conditions reasonably acceptable to Landlord and Tenant), against any monetary liabilities incurred by Landlord (i.e., liabilities which are reasonably necessary to incur prior to Tenant exercising the Expansion Option in order for Landlord to meet the deadlines set forth herein) in connection with the design and construction of the Expansion Space prior to Tenant's formal exercise of its expansion option hereunder - June 20, 1997; - Exercise of Expansion Option by Tenant - July 1, 1997; - Final approval by Tenant of construction plans and specifications for the Expansion Space Tenant Improvements within ten business days after the date of delivery of such construction plans and specifications by Landlord to Tenant; - Final approval of construction plans and specifications for the Expansion Space by the Village of Carol Stream (including the issuance of a building permit for the construction of the Expansion Space) - August 29, 1997; 19 Notwithstanding anything to the contrary contained herein, if the Village of Carol Stream has not given its final approval of construction plans and specifications for the Expansion Space and issued a building permit for the construction of the Expansion Space by December 1, 1997, then Tenant will have the right, exercisable by its delivery of written notice of termination to Landlord on or before December 31, 1997, to rescind and terminate the exercise of its Expansion Option under this Paragraph 3 and Tenant shall thereafter be relieved of all obligations with respect to the Expansion Space, including, without limitation, all obligations under the indemnity agreement executed on June 12, 1997 by Tenant for the benefit of Landlord. Tenant acknowledges and agrees that, except for the termination right set forth in the immediately preceding sentence and the self-help rights provided for below, its exclusive remedies with respect to any delays associated with the construction and delivery to it of the Expansion Space will be as set forth in this Paragraph 3 and except for such termination rights with respect to the Expansion Space, Tenant will in no event have any right to terminate this Lease as it relates to the initial Leased Premises or the Expansion Space for any failure to timely construct and deliver the Expansion Space to Tenant in the manner contemplated hereunder. In the event the substantial completion of the Expansion Space occurs and the construction of the Expansion Space is not 100% complete or a permanent certificate of occupancy has not been issued, then Landlord and Tenant will promptly prepare a punchlist and Landlord will have an additional 30 days from the substantial completion date for the Expansion Space to complete the punchlist items and to obtain the permanent certificate of occupancy (or such longer period of time as may be required to complete any punchlist items which are weather sensitive - e.g., landscaping and exterior paving). If Landlord and Tenant cannot agree on the punchlist items, then Tenant will promptly select an architect and notify Landlord of the architect so selected. Tenant's architect and Landlord's architect will determine the punchlist items and will report in writing to Landlord and Tenant the punchlist items. If the two architects do not agree on the punchlist items, a third architect (mutually acceptable to Landlord's architect and Tenant's architect) will be selected within the following five days. In such event, the third architect will determine the punchlist items within five days after his or her selection and will report in writing to Landlord and Tenant the punchlist items. All architects will be members in good standing with the American Institute of Architects and will have previous experience in making evaluations of industrial buildings in the metropolitan Chicago real estate market. Landlord and Tenant will each pay the charges of its own architect and one-half of the charges of the third architect. Notwithstanding anything contained herein to the contrary, if Landlord has not 100% completed the punchlist items and the improvements (including, without limitation, the landscaping and exterior paving) and obtained a permanent certificate of occupancy by August 3, 1998, for any reason other than the occurrence of a Tenant-caused delay, then Tenant may, following its delivery of written notice to Landlord that it is exercising its self-help remedy hereunder, proceed to complete the punchlist items and improvements and deduct the cost thereof reasonably incurred by Tenant from the immediately succeeding installments of Base Rent and Estimated Operating Expense Payments; provided, however, that if Tenant's use and occupancy of the Leased Premises is interrupted by any governmental authority at any time thereafter, including, without limitation, during the course of Tenant completing the punchlist items and the improvements, due to the fact that a permanent certificate of occupancy has not been issued, then Base Rent and Estimated Operating Expense Payments shall abate until such time as Tenant's use and occupancy is restored by governmental authority. Notwithstanding anything to the contrary contained herein, if Landlord's inability to meet any of the various time deadlines set forth in this paragraph 3 (that is, the March 2, 1998, June 1, 1998 and July 1, 1998 deadlines) is attributable solely to a Tenant-caused delay (which, for the purposes of this Paragraph 3, will include Tenant's failure to timely respond to any matter submitted for its review, delays caused by Tenant's requested change orders, as verified by Landlord's general contractor, Tenant's making of installations in the Expansion Space, provided that the making of any such installations unreasonably interferes with Landlord's construction of the improvements, and Tenant's failure, through no fault of Landlord, to achieve the first three milestones referred to in this Paragraph 3 by the appropriate milestone dates set forth above), then Tenant's obligation to commence paying Base Rent and Estimated Operating Expense Payments will commence and continue unabated in the same manner as would be required hereunder if such Tenant-caused delay had not occurred and Landlord had accordingly met the applicable time deadline. Tenant's expansion option will be exercised, if at all, by Tenant's delivery of written notice of the exercise of the same on or before July 1, 1997. Except as otherwise provided above with respect to the scope of and 20 improvements to the Expansion Space, Tenant's leasing of such Expansion Space will be upon all of the same terms and conditions as are applicable to its leasing of the initial Lease Premises (including, without limitation, the termination date of its leasing of the Expansion Space, which termination date will be co-terminus with its leasing of the Leased Premises), except that: (i) the commencement date of its leasing of the Expansion Space will be the date specified above in this Paragraph 3; and (ii) all provisions of the Lease Agreement which are expressly tied to the square footage contained in the space being leased by Tenant hereunder (for example, the description in the Leases Summary of the Leased Premises, Base Rent, Tenant's Proportionate Share of Operating Expenses and the Initial Estimated Operating Expense Payments), will be modified to reflect Tenant's leasing of both the Expansion Space and the Leased Premises; and (iii) the annual Base Rent payable by Tenant during the last 60 months of its leasing of the Expansion Space will be $4.08 per rentable square foot contained within the Expansion Space, with the annual Base Rent for the prior period of Tenant's leasing of the Expansion Space being $3.60 per rentable square foot contained within the Leased Premises. 4. Sale of Building. Tenant acknowledges that it is Landlord's intention to sell the Building and the land on which it is situated (as well as any Expansion Space and associated land) to the Prudential Insurance Company of America. If the Prudential Insurance Company of America thereafter decides to market for sale the Building and Expansion Space and any associated land, The Prudential Insurance Company of America will give Tenant prior notification that it is contemplating such a marketing effort and The Prudential Insurance Company of America will entertain Tenant's bids for the purchase of the Building and Expansion Space and any associated land for 15 days after Tenant's receipt of such notification from The Prudential Insurance Company of America. 5. Installation of Fixtures. Tenant may use its own licensed contractors for the installation of its fixtures and racking, provided that the activities of such contractors do not unreasonably interfere with Landlord's efforts to complete construction of the Building and Tenant Improvements. 6. Exterior Signage. All exterior building signs identifying Tenant will be installed by Landlord at Tenant's sole cost and expense. Tenant will be responsible for maintaining and repairing all such exterior building signs. Initialed and Approved by Tenant: --------------------------------- The Prudential Insurance Company of America is signing this Exhibit F for the limited purpose of acknowledging its obligation under Paragraph 4 of this Exhibit F. The Prudential Insurance Company of America By ------------------------------ (Name) (Title) 21 EXHIBIT C RULES AND REGULATIONS 1. Landlord will provide Tenant with two sets of keys to the Leased Premises. Tenant may obtain additional keys to the Leased Premises at Tenant's sole expense. Tenant will provide only its authorized agents and employees with copies of such keys. Upon termination of the Lease, Tenant will return all keys to Landlord. 2. Tenant will not alter or add locks or bolts on doors providing ingress and egress to the Leased Premises, without the prior written consent of Landlord. 3. Tenant will lock the Leased Premises before leaving the Leased Premises each day. 4. [Intentionally omitted] 5. Tenant will place garbage and refuse only in trash containers approved by Landlord. Such containers will be kept outside the Leased Premises in such areas as are designated by Landlord in the Final Plans (which Final Plans include locations for pads for garbage containers). Landlord must approve the trash collection and disposal service utilized to empty and haul away such garbage and refuse and the times and days of the week such containers will be emptied. Tenant will pay for the cost of the containers and the periodic trash collection and disposal charges. 6. No aerials, antennae, satellite dishes or other communication equipment will be placed by Tenant on or about the Building without the prior consent of Landlord which consent will not be unreasonably withheld. Tenant may, however, place aerials, antennae, satellite dishes or other communication equipment on the Land (but not on the Building) without the consent of Landlord. Landlord shall not, for itself or any third party, install or construct aerials, antennae, satellite dishes or other communication equipment on or about the Leased Premises without first obtaining the prior written consent of Tenant, which consent will not be unreasonably withheld. Any aerials, antennae, satellite dishes or other communication equipment installed on the Land or the Building in accordance with this Paragraph 6 will be so installed in compliance with all applicable laws. If any aerial, antennae, satellite dish or other communication equipment installed on or about the Leased Premises by Landlord at any time interferes with the signal of any such items placed on or about the Leased Premises by Tenant, then, promptly following its receipt of written notice from Tenant that such signal interference is occurring, Landlord will, at its expense, remove such aerial, antennae, satellite dish or other communication from the Leased Premises. Within 30 days after the expiration or sooner termination of the Lease Term, Tenant, at its sole cost, will remove all antennae, satellite dishes or other communication equipment installed by it under this Paragraph 6 and will repair all damage caused by any such removal. 7. [Intentionally omitted] 8. Tenant will not use the plumbing facilities serving the Leased Premises for the disposal of refuse or any other improper use. Tenant will, at its sole expense repair any damage to such plumbing facilities caused by any such misuse. 9. No animals or birds will be allowed in or about the Leased Premises. 10. Tenant will not store any personal property outside the Leased Premises. 11. Tenant will not burn or incinerate trash, refuse or any other items in or outside the Leased Premises. 12. Tenant will not allow anyone to reside or sleep in the Leased Premises. 22 13. Landlord will not be responsible for any loss, theft or disappearance of personal property from the Leased Premises, unless due to Landlord's negligence or intentional misconduct. 14. Tenant will not cover all or any part of any window or door to the Leased Premises without obtaining the prior written consent of Landlord. 15. Tenant will not conduct or permit to be conducted any auction or public sale on or about the Leased Premises, without the prior written consent of Landlord. 16. Tenant will maintain the inside of the Leased Premises at a temperature sufficiently high to prevent freezing of water, pipes, fixtures and fire protection systems inside the Leased Premises. 17. Tenant will not overload the floors of the building and the Leased Premises beyond the stated maximum capacity thereof, which is 4000 psi. 18. Tenant will not cause or permit any unusual or objectionable odors to be produced upon or permeated from the Leased Premises. 19. The sidewalk, entrances, passages, halls and parking areas will not be obstructed or encumbered by Tenant or used for any purpose other than ingress or egress to and from the Leased Premises. 20. Tenant will not create or maintain any nuisance (including without limitation, loud noises, bright lights, smoke or dust) which will be visible from the exterior of the Leased Premises. 21. Tenant will not conduct any noxious or offensive trade or activity at the Leased Premises. 22. All deliveries and shipments will be made only at Tenant's loading dock(s) or other areas reasonably designated by Landlord. 23. [Intentionally omitted] 24. [Intentionally omitted] 25. [Intentionally omitted] 26. Tenant shall not load any vehicle beyond the weight limits established by the state and will be responsible for any damage caused to the common areas by overweight vehicles making deliveries to or transporting goods from the Leased Premises. 27. Tenant agrees to cooperate and assist Landlord in the prevention of canvassing, soliciting and peddling within the Building. 28. [Intentionally omitted]. 29 It is Landlord's desire to maintain the Building and the Park with the highest standard of dignity and good taste consistent with comfort and convenience for tenants. Landlord reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be necessary for the safety, care and cleanliness of the Leased Premises, the Building and the Park and the preservation of good order therein. 23 These Rules and Regulations (and any amendments hereto which are consistent with the Lease) are intended to supplement the terms and provisions of the Lease and shall be applied and interpreted in a manner which is consistent with the terms and provisions of the Lease. In the event of a conflict between the Lease and these Rules and Regulations (or any amendments thereto), the Lease will govern. Initialed and Approved by Tenant: --------------------------------- 24 GUARANTY June 20, 1997 This Guaranty is made as of the date first set forth above by Blyth Industries, Inc. ("Guarantor"). This Guaranty is being given by Guarantor to Carol Stream I Development Company, its successors and assigns (together with all successor owners of the Building, "Landlord") for the purpose of inducing Landlord to lease space in its building known as Carol Stream #1 in Carol Stream, Illinois ("Building") to Partylite Gifts, Inc. ("Tenant"). Tenant's lease of space in the Building (the "Premises") will be governed by a Lease Agreement ("Lease") which will be entered into by Tenant and Landlord contemporaneously with Guarantor's execution and delivery of this Guaranty to Landlord. In consideration of Landlord's execution and delivery of the Lease and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby agrees as follows: 1. Guarantor hereby absolutely, unconditionally and irrevocably guaranties to Landlord the due and punctual payment of each installment of rent and other charges payable under the Lease (whether by acceleration or otherwise) and the prompt and complete performance by Tenant of all other covenants, conditions and provisions of the Lease which are required to be performed by Tenant (collectively, the "Liabilities"). Guarantor will pay to Landlord all reasonable costs (including, without limitation, attorney's and paralegal's fees) incurred by Landlord in seeking to enforce the Lease or Guarantor's obligations hereunder, regardless whether legal action is formally instituted against Tenant or Guarantor. 2. This Guaranty is a present, absolute, continuing and unlimited guaranty of payment and performance and not merely a guaranty of collection and Landlord will not be required to take any action against Tenant or to realize upon any security for Tenant's performance under the Lease or give any notice to Guarantor (unless otherwise expressly required under the Lease) as a condition precedent to demanding performance hereunder by Guarantor or otherwise exercising its rights under the Guaranty. This Guaranty and the liability of the Guarantor hereunder will not be impaired or affected by any assignment of the Lease or any subletting of Tenant's space in the Building (unless Guarantor is expressly released by a written instrument signed by Landlord at the time of any such assignment or subletting), nor by any extension, forbearance or delay in enforcing any of the terms, conditions, covenants or provisions of the Lease, nor by any amendment, modification or revision of the Lease, nor by: (i) any transfer, waiver, compromise, settlement, modification, surrender or release of Tenant's obligations under the Lease; (ii) the existence of any defenses to enforcement of the Lease; (iii) any failure, omission, delay or inadequacy, whether entire or partial, of Landlord to exercise any right, power or remedy regarding the Lease or to enforce or realize upon (or to make any guarantor a party to the enforcement or realization upon) any of Landlord's security for the Lease, including, but not limited to, any impairment or release of such security by Landlord; (iv) the existence of any setoff, claim or counterclaim or the reduction or diminution of the Liabilities, or any defense of any kind or nature, which Guarantor may have against Tenant or which any party has against Landlord; (v) the application of payments received from any source to the payment of any obligation other than the Liabilities, even though Landlord might lawfully have elected to apply such payments to any part or all of the Liabilities; (vi) the addition or release of any and all other guarantors, obligors and other persons liable for the payment of the Liabilities, and the acceptance or release of any and all other security for the payment of the Liabilities; or (vii) any distress or reentry by Landlord or dispossession of Tenant or any action or remedy taken by Landlord under the Lease, or any failure to notify Guarantor of any default by Tenant (unless otherwise expressly required under the Lease); whether or not Guarantor shall have had notice or knowledge of any act or omission referred to in the foregoing clauses (i) through (vii) inclusive of this Paragraph. 3. No action or proceeding brought or instituted against Guarantor under this Guaranty (nor any recovery with respect thereto) will be a bar or defense to any further action or proceeding which may be brought under this Guaranty. 4. The liability of Guarantor will not be deemed to be waived, released, discharged, impaired or affected by reason of the release or discharge of the Tenant in any creditor, receivership, bankruptcy (including Chapter VII or Chapter XI bankruptcy proceedings or other reorganization proceedings under the Bankruptcy Act) or other proceeding, or the rejection or disaffirmance of the Lease in any such proceeding. Guarantor agrees that, if at any time all or any part of any payment theretofore applied by Landlord to any Liabilities is rescinded or returned by Landlord due to the insolvency, bankruptcy, liquidation or reorganization of any party), such Liabilities shall, for the purposes of this Guaranty, be deemed to have continued in existence to the extent of such payment, notwithstanding such application by Landlord, and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by Landlord had not been made. Guarantor does hereby further agree that with respect to any payments made by Guarantor hereunder, Guarantor shall not have any rights based on suretyship, subrogation or otherwise to stand in the place of Landlord so as to compete with Landlord as a creditor of Tenant, and Guarantor hereby waives all such rights to the fullest extent permitted b y law. 5. Guarantor expressly waives: (i) notice of the acceptance by Landlord of this Guaranty; (ii) notice of the existence, creation, payment or nonpayment of the Liabilities; (iii) presentment, demand, notice of dishonor, protest and all other notices whatsoever, unless otherwise expressly required under the Lease; and (iv) any failure by Landlord to inform Guarantor of any facts Landlord may now or hereafter know about Tenant, the Lease or the Premises, it being understood and agreed that Guarantor has and will maintain personal knowledge of and is familiar with Tenant's financial condition and business affairs and has the ability to influence Tenant's decision-making processes, and that Landlord has no duty so to inform, and that Guarantor is fully responsible for being and remaining informed by, Tenant of all circumstances bearing on the Lease and this Guaranty. No modification or waiver of any of the provisions of this Guaranty will be binding upon Landlord except as expressly set forth in a writing duly signed and delivered on behalf of Landlord. 6. There will be no modification of the provisions of this Guaranty unless the same are in writing and signed by Guarantor and Landlord. 7. Guarantor will submit a current and accurate financial statement to Landlord on or before the first day of April of each calendar year. 8. All of the terms, agreements and conditions of this Guaranty are joint and several, and will extend to and be binding upon the undersigned (and both of them jointly and severally, if more than one), their heirs, executors, administrators, and assigns, and will inure to the benefit of Landlord, its successors and assigns, and to any future owner of the fee of the Building. 9. Guarantor acknowledges that Landlord's entry into the Lease is in reliance upon and would not have been made but for Guarantor's execution of this Guaranty and the truth, accuracy and completeness of all financial information which has been furnished to Landlord by Guarantor. In the event that such financial information or any subsequent financial information furnished by Guarantor is found to be untrue or inaccurate in any material respect, or in the event that Guarantor has misrepresented in any material respect Guarantor's financial condition, then the same shall constitute a default under the Lease, entitling Landlord to exercise any and all rights and remedies authorized or permitted to be exercised in the event of such a default, including, without limitation, the recourse available to Landlord under this Guaranty. Guarantor agrees that, to the extent it ceases to be a publicly-traded corporation over a nationally-recognized stock exchange (and, therefore, its annual financial statements are no longer available in the public domain), Guarantor will provide its most recent financial statements (including a balance sheet and income and loss statement) to Landlord within five months after the end of each of Guarantor's fiscal years during the Lease Term. Guarantor has executed this Guaranty on June 20, 1997. Signed and acknowledged in GUARANTOR: the presence of: BLYTH INDUSTRIES, INC. /s/ Sarah Scova - ------------------------------ - ------------------------------ By: /s/ Bruce Kreiger -------------------------------- (Name) (Title) Vice President STATE OF Connecticut ----------------------- COUNTY OF Fairfield --------------------- The foregoing instrument was sworn to and acknowledged before me on June 20, 1997 by Bruce Kreiger. /s/ Christina Kaufman -------------------------------- Notary Public Exhibit 10.8 PROMISSORY NOTE $350,000.00 March 17, 1995 FOR VALUE RECEIVED, ELWOOD L. LA FORGE, JR. AND MARY G. LA FORGE (individually and collectively, the "Maker"), having an address at 51 Southridge Court, Ridgefield, Connecticut 06877 jointly and severally promise to pay to the order of BLYTH INDUSTRIES, INC. (the "Holder" or "holder", which term shall also include all subsequent holders of this Note) the principal amount of THREE HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS ($350,000.00), together with interest thereon as provided for below. Such principal amount shall be payable by the Maker in seven (7) consecutive annual payments, commencing on March 1, 1997 and continuing on March 1 of each year thereafter with the final seventh payment due on March 1, 2003 ("the Final Maturity Date") with each such payment to be in the amount of $50,000. All payments shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender therein for the payment of public and private debts. Maker shall pay interest in arrears at the rate provided for below on the unpaid principal balance hereof outstanding from time to time until paid in full. Interest shall commence to accrue on the date hereof. Interest shall be payable by the Maker, annually, in arrears, commencing on March 1, 1996 and continuing on each succeeding March 1 thereafter until the principal hereunder is paid in full. The Maker hereby represents that they are applying the proceeds of the loan evidenced by this Note for the purchase by the Maker of a principal residence in Ridgefield, Connecticut. The rate of interest hereunder shall be equal to 5 percent (5%) per annum (the "Interest Rate"). After the Final Maturity Date and during any period in which any other Event of Default (as hereinafter defined) is continuing, the rate of interest hereunder shall be increased, at the option of the holder hereof, to a rate of two percent (2%) in excess of the rate that would otherwise be charged hereunder. Anything contained in this Note to the contrary notwithstanding, the holder does not intend to charge and the Maker shall not be required to pay interest in excess of the maximum permitted under applicable law and any interest paid in excess of such maximum shall be either refunded to the Maker or credited against principal hereunder. All payments of principal of and interest on this Note shall be made to the holder hereof at such address as the holder specifies. Payment of this Note is secured by a certain Mortgage, of even date herewith, from the Maker to the Holder, with respect to the property located at 51 Southridge Court, Ridgefield, Connecticut 06877 (the "Mortgage"). Each of the following should constitute an Event of Default hereunder: (a) Default in the payment or prepayment when due of any principal of or interest on this Note and such default shall continue for a period of at least ten (10) days after the holder hereof shall have given the Maker notice of such default; or (b) The Maker shall become insolvent or admit in writing his or her inability to pay his or her debts as they mature; or the Maker applies for, consents to, or acquiesces in the appointment of, a trustee or receiver for the Maker or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee or receiver is appointed for the Maker or for a substantial part of the property of the Maker and is not discharged within 60 days; or (c) Any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is instituted by or against the Maker and is consented to or acquiesced in by the Maker or remains for 60 days undismissed; or (d) Death of Elwood L. La Forge, Jr. or (e) Any termination (with or without cause) of the employment of Elwood L. La Forge, Jr. with Blyth Industries, Inc., its subsidiaries, or any of its affiliates. Upon the occurrence and anytime during the continuance of any Event of Default, the holder hereof shall have the right, upon written notice to the Maker, to declare the entire unpaid principal and interest hereunder and any other indebtedness owed by the Maker to the holder to be immediately due and payable and upon such declaration such principal, interest and other indebtedness shall become immediately due and payable; provided, however, that in the case of any Event of Default under clauses (b) and (c) above, such principal and interest hereunder and other indebtedness shall become immediately due and payable without any such declaration or notice; provided, further, that in the case of any Event of Default under clause (d), the holder hereof shall have the right any time after the day of death, upon written notice to the Maker or Maker's representatives, to declare the entire unpaid principal and interest hereunder and any other indebtedness owed by the Maker to the holder to be due and payable on any date (the "selected date") which is at least seventy-five (75) days after the day of death and if such notice is given, such principal, interest and other indebtedness shall become due and payable on the selected date; provided, further, that in the case of any Event of Default under clause (e), the holder hereof shall have the right any time on or after the date of termination of employment, upon notice to the Maker, to declare the entire unpaid principal 2 hereunder and any other indebtedness owed by the Maker to the holder to be due and payable one year after the date such notice is given and if such notice is given, such principal, interest and other indebtedness shall become due and payable one year after the date such notice is given. The Mortgage provides for additional events upon which the principal of this Note may be accelerated and the Holder shall have the right to accelerate the principal of this Note, whether the right to accelerate is given under this Note or the Mortgage. Any written notice hereunder shall be by: (i) registered mail, return receipt requested, postage prepaid, to the Maker and, in such case, shall be deemed given three (3) days after mailed or (ii) by Federal Express or other nationally recognized overnight courier to the Maker, and, in such case, shall be deemed given two (2) days after sent, or (iii) hand delivery and, in such case, shall be deemed given when delivered or (iv) such method of notice as shall be permitted under the Mortgage. Any notices by the holder to the Maker shall be made sent notice address set forth in the first paragraph of this Note (or such other address as the Maker may designate by notice to the holder by notice sent by any of the methods referred to in clauses (i), (ii), (iii) or (iv) of the prior sentence. No course of dealing between the Maker and the holder hereof or any delay on the part of the holder hereof in exercising any rights hereunder shall operate as a waiver of any rights of the holder hereof. The Maker and any endorsers, guarantors, and sureties hereof, for themselves and their respective representatives, heirs, successors and assigns expressly (a) waive, to the fullest extent permitted under law, presentment, demand, protest, notice of dishonor, notice of non-payment, notice of acceptance, notice of maturity, notice of default, notice of protest, notice of demand and all other notices to which each of them may otherwise be entitled, and (b) consent that the Holder may release or surrender, exchange or substitute any property now held or which may hereafter be held as security for the payment of this Note, may add any property as security, or may extend the time for payment or otherwise modify the terms of payment of any part of or the whole of the debt evidenced hereby, all without releasing the obligations of any such party for the payment of this Note. The holder may release any such party from the obligations without in any way affecting the obligations of any such other party(ies). This Note shall be binding upon the Maker and Maker's successors, assigns, heirs and representatives and shall inure to the benefit of the holder and its successors, assigns, heirs and representatives. Maker shall have the right to prepay, in whole or in part, without penalty, the principal or any interest hereunder. Unless waived by the Holder, all prepayments of principal (whether mandatory or voluntary) shall be accompanied by the simultaneous payment of the interest accrued in the amount prepaid. All payments shall be applied as follows: first to costs and expenses of collection and enforcement of holder's rights under this Note, second to accrued and unpaid interest, and third to the outstanding principal hereunder. All prepayments of principal shall, unless the holder otherwise agrees, be applied in inverse order of maturity. 3 The Maker agrees to reimburse the holder for all costs and expenses, including reasonable attorneys' fees and court costs, incurred by the holder of this Note in collecting or otherwise enforcing this Note or otherwise protecting the interests of the holder hereof. This Note shall be governed by, and construed in accordance with, the laws of the State of Connecticut. Maker hereby submits to the non-exclusive personal jurisdiction of the courts of the State of Connecticut with respect to any suit or action relating to this Note or the Mortgage. Nothing contained herein shall be construed to (1) constitute an employment contract (whether express or implied) or (2) restrict, limit or otherwise interfere with the right of Blyth Industries, Inc., its subsidiaries or affiliates to at any time terminate the employment of Elwood L. La Forge, Jr. WITNESS: /s/ Claudia K. St. John /s/ Elwood L. LaForge, Jr. - ------------------------ -------------------------- Claudia K. St. John Elwood L. La Forge, Jr. /s/ Claudia K. St. John /s/ Mary G. LaForge - ------------------------ ---------------------------- Claudia K. St. John Mary G. La Forge 4 Exhibit 10.9 MORTGAGE THIS MORTGAGE is made this 17th day of March 1995 between the Mortgagor ELWOOD L. LA FORGE, JR. and MARY G. LA FORGE jointly and severally (herein "Borrower", and the Mortgagee BLYTH INDUSTRIES, INC. a corporation organized and existing under the laws of the State of Delaware whose address is Two Greenwich Plaza, Greenwich, Connecticut 06830 (herein "Lender"). BORROWER, in consideration of the indebtedness herein recited, grants and conveys to Lender and Lender's successors and assigns the following described property, buildings and other, located in the Town of Ridgefield, State of Connecticut: See Schedule A attached hereto and made a part hereof + buildings and other which has the address of 51 Southridge Court, Ridgefield, Connecticut 06877 (herein "Property Address"); TO HAVE AND TO HOLD such property unto Lender and Lender's successors and assigns, forever, together with all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances and rents, all of which shall be deemed to be and remain a part of the property covered by this Mortgage; and all of the foregoing, together with said property (or the leasehold estate if this Mortgage is on a leasehold) are hereinafter referred to as the "Property;" TO SECURE to Lender on condition of the repayment of the indebtedness evidenced by Borrower's note dated March 17, 1995 and extensions and renewals thereof (herein "Note"), in the principal sum of U.S. $350,000 with interest thereon, such Note having a final maturity date of March 1, 2003; the payment of all other sums, with interest thereon, advanced in accordance herewith to protect the security of this Mortgage; and the performance of the covenants and agreements of Borrower herein contained. Borrower covenants that Borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the Property, and that the Property is unencumbered, except for encumbrances set forth on Schedule A. Borrower covenants that Borrower warrants and will defend generally the title to the Property against all claims and demands, subject to encumbrances of record. SCHEDULE A ALL THOSE CERTAIN pieces of parcels of land, with the improvements thereon, situated in the Town of Ridgefield, County of Fairfield and State of Connecticut shown and designated as Lot 10, Parcel A, and Parcel C as shown on that certain map entitled "Subdivision Map of Southridge Ridgefield, Connecticut Date = May 13, 1985, Scale 1" = 100' Area 30.007 AC.Zone: R-AA Revised August 29, 1985, September 30, 1985 and Nov. 6, 1985" which map is certified "Substantially Correct" by Robert H. Bergendorff and is on file in the Office of the Town Clerk of Ridgefield as Map No. 7175. Said premises are also shown and described on a certain map entitled "Parcel #10 Map Prepared For Elwood L. La Forge, Jr. and Mary G. La Forge Ridgefield, Connecticut R-"AA" Residence Zone Survey Date Nov. 9, 1994 by RKW Land Surveying New Canaan, CT Lawrence R. Rizzo Lic. No. 12060" which map is on file in the Office of the Town Clerk of Ridgefield as Map No. 8140. TOGETHER WITH a right of way over "Parcel B 0.1221 AC." on Map No. 7175 for the benefit of Lots 8, 9 and 10 as shown on said map. TOGETHER WITH any rights and/or privileges as conveyed by the Town of Ridgefield in and to certain easements as recorded in Volume 335 at Page 169 and in Volume 335 at Page 332 of the Ridgefield Land Records. Subject to: 1. Limitations of use imposed by governmental authority which do not impair the use of the premises as a single family residence. 2. Taxes of the Town of Ridgefield hereafter due and payable. 3. The effect, if any, of notations and conditions on Maps 4709 and 7175. 4. The effect, if any, of a pedestrian easement from Scandia Construction & Development Corporation to the Town of Ridgefield, dated November 12, 1985 and recorded in Volume 334 at page 908. 5. Riparian rights of others in and to any brook or stream flowing on or across said premises. 6. The effect, if any, of an easement from the Town of Ridgefield to Scandia Construction & Development Corporation recorded in Volume 335 at Page 169 of the Ridgefield Land Records. 7. The effect, if any, of an easement recorded in Volume 335 at Page 332 of the Ridgefield Land Records. 8. Easement to Connecticut Light & Power Company dated April 4, 1986 and recorded in Volume 343 at Page 922 of the Ridgefield Land Records. 9. Easements in favor of Lots 8 and 9 across Parcels A and C more particularly set forth in instruments recorded in Volume 472 at Page 598 and in Volume 505 at Page 148 of the Ridgefield Land Records. 10. Rights, if any, of the owner of Parcel #9 (being the same piece of land as Lot #9 as shown on Ridgefield Map No. 7175) regarding the conditions depicted on Ridgefield Map No. 8140 with respect to the driveway and lawn area. 11. Mortgage from Elwood L. La Forge, Jr. and Mary G. La Forge to the Village Bank and Trust Company in the principal amount of $250,000.00 dated March 17, 1995 and recorded in the Ridgefield Land Records on March 20, 1995. UNIFORM COVENANTS. Borrower and Lender covenant and agree as follows: 1. Payment of Principal and Interest. Borrower shall promptly pay when due the principal and interest indebtedness evidenced by the Note and late charges, if any, as provided in the Note. 2. [Omitted] 3. Application of Payments. Unless applicable law provides otherwise, all payments received by Lender under the Note and paragraphs 1 hereof shall be applied by Lender first to interest payable on the Note, and then to the principal of the Note. 4. Prior Mortgages and Deeds of Trust; Charges; Liens. Borrower shall perform all of Borrower's obligations under any mortgage, deed of trust or other security agreement with a lien which has priority over this Mortgage, including Borrower's covenants to make payments when due. Borrower shall pay or cause to be paid all taxes, assessments and other charges, fines and impositions attributable to the Property which may attain a priority over this Mortgage, and leasehold payments or ground rents, if any. 5. Hazard Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "extended coverage", and such other hazards as Lender may require and in such amounts and for such periods as Lender may require. The insurance carrier providing the insurance shall be chosen by Borrower subject to approval by Lender; provided, that such approval shall not be unreasonably withheld. All insurance policies and renewals thereof shall be in a form acceptable to Lender and shall include a standard mortgage clause in favor of and in a form acceptable to Lender. Lender shall have the right to hold the policies and renewals thereof, subject to the terms of any mortgage, deed of trust or other security agreement with a lien which has priority over this Mortgage. In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender. Lender may make proof of loss if not made promptly by Borrower. If the Property is abandoned by Borrower, or if Borrower fails to respond to Lender within 30 days from the date notice is mailed by Lender to Borrower that the insurance carrier offers to settle a claim for insurance benefits, Lender is authorized to collect and apply the insurance proceeds at Lender's option either to restoration or repair of the Property or to the sums secured by this Mortgage. 6. Preservation and Maintenance of Property; Leaseholds; Condominiums; Planned Unit Developments. Borrower shall keep the Property in good repair and shall not commit waste or permit impairment; or deterioration of the Property and shall comply with the provisions of any lease if this Mortgage is on a leasehold. If this Mortgage is on a unit in a condominium or a planned unit development, Borrower shall perform all of Borrower's obligations under the declaration or covenants creating or governing the condominium or planned unit development, the by-laws and regulations of the condominium or planned unit development, and constituent documents. 7. Protection of Lender's Security. If Borrower fails to perform the covenants and agreements contained in this Mortgage, or if any action or proceeding is commenced which materially affects Lender's interest in the Property, then Lender, at Lender's option, upon notice to Borrower, may make such appearances, disburse such sums, including reasonable attorneys' fees, and take such action as is necessary to protect Lender's interest. If Lender required mortgage insurance as a condition of making the loan secured by this Mortgage, Borrower shall pay the premiums required to maintain such insurance in effect until such time as the requirement for such insurance terminates in accordance with Borrower's and Lender's written agreement or applicable law. Any amounts disbursed by Lender pursuant to this paragraph 7, with interest thereon, at the Note rate, shall become additional indebtedness of Borrower secured by this Mortgage. Unless Borrower and Lender agree to other terms of payment, such amounts shall be payable upon notice from Lender to Borrower requesting payment thereof. Nothing contained in this paragraph 7 shall require Lender to incur any expense or take any action hereunder. 8. Inspection. Lender may make or cause to be made reasonable entries upon and inspections of the Property, provided that Lender shall give Borrower notice prior to any such inspection specifying reasonable cause therefor related to Lender's interest in the Property. 9. Condemnation. The proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of the Property, or part thereof, or for conveyance in lieu of condemnation, are hereby assigned and shall be paid to Lender, subject to the terms of any mortgage, deed of trust or other security agreement with a lien which has priority over this Mortgage. 10. Borrower Not Released: Forbearance by Lender Not a Waiver. Extension of the time for payment or modification or amortization of the sums secured by this Mortgage granted by Lender to any successor in interest of Borrower shall not operate to release, in any manner, the liability of the original Borrower and Borrower's successors in interest. Lender shall not be required to commence proceedings against such successor or refuse to extend time for payment or otherwise modify amortization of the sums secured by this Mortgage by reason of any demand made by the original Borrower and Borrower's successors in interest. Any forbearance by Lender in exercising any right or remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any such right or remedy. 11. Successors and Assigns Bound; Joint and Several Liability; Co-signers. The covenants and agreements herein contained shall bind, and the rights hereunder shall inure to, the respective successors and assigns of Lender and Borrower, subject to the provisions of paragraph 16 hereof. All covenants and agreements of Borrower shall be joint and several. 12. Notice. Except for any notice required under applicable law to be given in another manner, (a) any notice to Borrower provided for in this Mortgage shall be given by delivering it or by mailing such notice by certified mail addressed to Borrower at the Property Address or at such other address as Borrower may designate by notice to Lender as provided herein or by any method referred to in the attached Note, and (b) any notice to Lender shall be given by certified mail to Lender's address stated herein or to such other address as Lender may designate by notice to Borrower as provided herein. Any notice provided for in this Mortgage shall be deemed to have been given to Borrower or Lender when given in the manner designated herein. 13. Governing Law; Severability. The state and local laws applicable to this Mortgage shall be the laws of the jurisdiction in which the Property is located. The foregoing sentence shall not limit the applicability of Federal law to this Mortgage. In the event that any provision or clause of this Mortgage or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Mortgage or the Note which can be given effect without the conflicting provision, and to this end the provisions of this Mortgage and the Note are declared to be severable. As used herein, "costs", "expenses" and "attorneys' fees" include all sums to the extent not prohibited by applicable law or limited herein. 14. Borrower's Copy. Borrower acknowledges having received a conformed copy of the Note and of this Mortgage at the time of execution or after recordation hereof. 15. Rehabilitation Loan Agreement. Borrower shall fulfill all of Borrower's obligations under any home rehabilitation, improvement, repair, or other loan agreement which Borrower enters into with Lender. Lender, at Lender's option, may require Borrower to execute and deliver to Lender, in a form acceptable to Lender, an assignment of any rights, claims or defenses which Borrower may have against parties who supply labor, materials or services in connection with improvements made to the Property. 16. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Mortgage. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Mortgage. If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Mortgage. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Mortgage without further notice or demand on Borrower. NON-UNIFORM COVENANTS. Borrower and Lender further covenant and agree as follows: 17. Acceleration; Remedies. Except as provided in paragraph 16 hereof, upon Borrower's breach of any covenant or agreement of Borrower in this Mortgage, including the covenants to pay when due any sums secured by this Mortgage, Lender prior to acceleration shall give notice to Borrower as provided in paragraph 12 hereof specifying: (1) the breach; (2) the action required to cure such breach; (3) a date, not less than 10 days from the date the notice is mailed to Borrower, by which such breach must be cured; and (4) that failure to cure such breach on or before the date specified in the notice may result in acceleration of the sums secured by this Mortgage and sale of Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the nonexistence of a default or any other defense of Borrower to accelerate and sale. If the breach is not cured on or before the date specified in the notice. Lender at Lender's option may declare all of the sums secured by this Mortgage to be immediately due and payable without further demand (the Lender shall also have the right to accelerate as provided in the Note) and may upon such declaration or upon acceleration under the Note invoke the power of sale and any other remedies permitted by applicable law. Lender shall be entitled to collect all reasonable costs and expenses incurred in pursuing the remedies provided in this paragraph 17 or under the Note, including, but not limited to, reasonable attorneys' fees. 18. Borrower's Right to Reinstate. Notwithstanding Lender's acceleration of the sums secured by this Mortgage due to Borrower's breach, Borrower shall have the right to have any proceedings begun by Lender to enforce this Mortgage discontinued at any time prior to the earlier to occur of (i) the fifth day before sale of the Property pursuant to the power of sale contained in the Mortgage or (ii) entry of a judgment enforcing the Mortgage if; (a) Borrower pays Lender all sums which would be then due under this Mortgage and the Note had no acceleration occurred; (b) Borrower cures all breaches of any other covenants or agreements of Borrower contained in this Mortgage; (c) Borrower pays all reasonable expenses incurred by Lender in enforcing the covenants and agreements of Borrower contained in this Mortgage, and in enforcing Lender's remedies as provided in paragraph 17 hereof; including, but not limited to, reasonable attorneys' fees; and (d) Borrower takes such action as Lender may reasonably require to assure that the lien of this Mortgage, Lender's interest in the Property and the Borrower's obligation to pay the sums secured by this Mortgage shall continue unimpaired. Upon such payment and cure by Borrower, this Mortgage and the obligations secured hereby shall remain in full force and full effect if no acceleration had occurred. 19. Assignment of Rents; Appointment of Receiver; Lender in Possession. As additional security hereunder, Borrower hereby assigns to Lender the rents of the Property, provided that Borrower shall, prior to acceleration under paragraph 16 hereof or abandonment of the Property, have the right to collect and retain such rents as they become due and payable. Upon acceleration under paragraph 17 hereof or abandonment of the Property, Lender, in person, by agent or by judicially appointed receiver, shall be entitled to enter upon, take possession of and manage the Property and to collect the rents of the Property including those past due. All rents collected by Lender or the receiver shall be applied first to payment of the costs of management of the Property and collections of rents, including, but not limited to, receiver's fees, premiums on receiver's bonds and reasonable attorneys' fees, and then to the sums secured by this Mortgage. Lender and the receiver shall be liable to account only for those rents actually received. 20. Release. Upon payment of all sums secured by this Mortgage, this Mortgage shall become null and void and Lender shall release this Mortgage without charge to Borrower. Borrower shall pay all costs of recordation, if any. REQUEST FOR NOTICE OF DEFAULT AND FORECLOSURE UNDER SUPERIOR MORTGAGES OR DEEDS OF TRUST Borrower and Lender request the holder of any mortgage, deed of trust or other encumbrance with a lien which has priority over this Mortgage to give Notice to Lender, at Lender's address set forth on page one of this Mortgage, of any default under the superior encumbrance and of any sale or other foreclosure action. IN WITNESS WHEREOF, Borrower has executed this Mortgage. Signed, sealed and delivered in the presence of: /s/ Edward A. Weiss /s/ Elwood L. La Forge, Jr. - -------------------------------- --------------------------- Edward A. Weiss (as to both) Elwood L. La Forge, Jr. Borrower /s/ Edward S. Rimer, Jr. /s/ Mary G. La Forge - -------------------------------- ---------------------------- Edward S. Rimer, Jr. (as to him) Mary G. La Forge Borrower STATE OF CONNECTICUT Fairfield County ss: The foregoing instrument was acknowledged before me this 17th day of March, 1995 by Elwood L. La Forge, Jr. and Mary G. La Forge as their free act and deed (person acknowledging) /s/ Edward S. Rimer, Jr. ---------------------------------- Commissioner of the Superior Court My Commission expires: Record and Return To: Harold B. Finn III, Esq. Finn Dixon & Herling One Landmark Square Stamford, Connecticut 06901 REC'D. FOR RECORD Mar 20, 1995 AT 11:54 AM Attest /s/ Doris Cassivechia --------------------- Town Clerk Mortgage Deed Elwood L. La Forge, Jr Mary G. La Forge to Blyth Industries, Inc. Date: 3/17/95 Property: 51 Southridge Court Ridgefield, CT Return to: Ed Weiss, Esq. Finn, Dixon & Herling One Landmark Square Suite 600 Stamford, CT 06801 RIDGEFIELD LAND RECORDS REC'D. March 20 1995 AT 11:54 AM VOL. 505 PAGE 1025 /s/ Doris Cassivechia - ---------------------- TOWN CLERK EXHIBIT 13 Financial Highlights 1 Financial Highlights - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Years ended January 31, % (In thousands, except per share data) 1997 1998 Increase - -------------------------------------------------------------------------------- Operating Results Net Sales $531,480 $687,474 29% Gross Profit Operating Profit 74,047 98,774 33% Net Earnings 42,757 54,590(1) 28% Diluted Net Earnings Per Common and Common Equivalent Share(2) $ 0.88 $ 1.10(1) 25% Diluted Weighted Average Number of Common Shares Outstanding(2) 48,476 49,543 Financial Position Total Assets $303,879 $447,390 Total Debt 44,704 120,630 Total Stockholders' Equity 189,403 246,832 Market for Common Stock(2) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The price range for the Company's Common Stock on the New York Stock Exchange as reported by the New York Stock Exchange was as follows: Fiscal 1997 (ended January 31, 1997) High Low - -------------------------------------------------------------------------------- First Quarter $26.50 $18.75 Second Quarter $33.17 $26.25 Third Quarter $33.83 $24.67 Fourth Quarter $31.08 $22.42 Fiscal 1998 (ended January 31, 1998) High Low - -------------------------------------------------------------------------------- First Quarter $26.25 $21.08 Second Quarter $38.44 $24.17 Third Quarter $39.13 $23.25 Fourth Quarter $31.25 $22.63 Fiscal 1999 (ended January 31, 1999) High Low - -------------------------------------------------------------------------------- First Quarter (through April 9, 1998) $35.94 $28.81 (1) Net Earnings and Diluted Net Earnings Per Common and Common Equivalent Share, excluding one-time non-recurring transaction costs incurred by Endar Corp. prior to its acquisition by Blyth, increased 35% and 33%, respectively, over the prior year. (2) Reflects the June 1997 three-for-two stock split effected as a stock dividend. Net Sales (In Millions) Fiscal 1994 $167.8 Fiscal 1995 229.6 Fiscal 1996 356.7 Fiscal 1997 531.5 Fiscal 1998 687.5 Operating Profit (In Millions) Fiscal 1994 $14.9 Fiscal 1995 23.7 Fiscal 1996 43.7 Fiscal 1997 74.0 Fiscal 1998 98.8 Net Earnings (In Millions) Fiscal 1994 $ 8.0 Fiscal 1995 13.6 Fiscal 1996 25.2 Fiscal 1997 42.8 Fiscal 1998 54.6 - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- Financial Review Selected Consolidated Financial Data 10 Management's Discussion and Analysis 11 Consolidated Balance Sheets 18 Consolidated Statements of Earnings 19 Consolidated Statements of Stockholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 Report of Independent Accountants 30 Report of Independent Certified Public Accountants 31 Directors and Officers 32 Shareholder Information 33 [PHOTO OMITTED] Opposite: Fragrance Originals-Aromatherapy This page: Fragrance Originals-Aromatherapy votives - -------------------------------------------------------------------------------- 10 Financial Review - -------------------------------------------------------------------------------- Selected Consolidated Financial Data Set forth below are selected summary consolidated financial and operating data of the Company for fiscal years 1994 through 1998, which have been derived from the Company's audited financial statements for those years. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report to Shareholders. Years ended January 31, ====================================================================================== 1994 1995 1996 1997 1998 (In thousands, except per share and percent data) - -------------------------------------------------------------------------------------- Statement of Earnings Data: Net sales $167,773 $229,617 $356,702 $531,480 $687,474 Gross profit 77,848 113,528 185,369 287,402 388,912 Operating profit 14,866 23,659 43,682 74,047 98,774 Interest expense 1,750 1,240 2,662 3,554 4,816 Earnings before income taxes and minority interest 13,255 22,752 42,474 71,939 89,930 Earnings before minority interest 8,009 13,605 25,552 42,951 54,862 Net earnings 8,009 13,605 25,175 42,757 54,590 Basic earnings per common share(1) 0.21 0.32 0.56 0.89 1.11 Diluted earnings per common share(1) 0.21 0.32 0.55 0.88 1.10 Basic weighted average number of common shares outstanding(1) 37,972 42,040 45,089 47,974 49,063 Diluted weighted average number of common shares outstanding(1) 37,972 42,208 45,373 48,476 49,543 Operating Data: Gross profit margin 46.4% 49.4% 52.0% 54.1% 56.6% Operating profit margin 8.9% 10.3% 12.2% 13.9% 14.4% Capital expenditures $6,998 $ 10,448 $ 35,878 $ 50,526 $ 62,481 Depreciation and amortization 2,519 2,890 4,683 8,778 12,396 Balance Sheet Data: Working capital $ 15,101 $ 42,494 $110,538 $113,177 $140,101 Total assets 70,861 102,591 223,469 303,879 447,390 Total debt 31,583 9,837 36,662 44,704 120,630 Total stockholders' equity 16,651 61,196 141,879 189,403 246,832 - -------------------------------------------------------------------------------------- (1) Restated for a December 1995 two-for-one stock split and a June 1997 three-for-two stock split, each of which was effected as a stock dividend. Earnings per common share for fiscal 1995, fiscal 1996, and fiscal 1997 reflects the issuance of 6,000,000 shares of Common Stock as part of the Company's initial pubic offering in May 1994, the issuance of 3,600,000 shares of Common Stock in a secondary offering in October 1995, and the issuance of 993,745 shares of Common Stock in connection with the acquisition of New Ideas International, Inc. in December 1996, respectively. Earnings per common share for all periods gives effect to the issuance of 2,999,808 shares of Common Stock upon conversion of certain convertible notes in April 1994 and the issuance of 1,900,786 shares of Common Stock in connection with the acquisition of Endar Corp. in May 1997. Earnings per common share for the applicable periods also includes the Company's equity in earnings from its investments in Colony Gift Corporation Ltd. in September 1993 and March 1995, results of operations of Jeanmarie Creations, Inc., 88% owned, of which 80% was acquired in April 1995, 4% was acquired in May 1996, and 4% was acquired in May 1997, the results of operations from the Company's acquisition of 75% ownership in Eclipse Candles, Ltd. in July 1995 and October 1996, the results of operations of New Ideas International, Inc., which was acquired in December 1996, and the December 1997 acquisition of the Sterno and Handy Fuel assets, none of which had a material effect on the Company's results of operations in the period during which they occurred, or thereafter, and also includes the results of operations of Endar Corp., which was acquired through a pooling of interests in May 1997 (the Company's results have been restated to include the historical results of operations of Endar Corp.). - -------------------------------------------------------------------------------- Financial Review 11 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth, for the periods indicated, the percentage relationship to net sales, and the percentage increase, of certain items included in the Company's consolidated statements of earnings: Increase from Prior Period -------------------------- Percentage of Net Sales Fiscal 1997 Fiscal 1998 Years Ended January 31 Compared Compared -------------------------- to Fiscal to Fiscal 1996 1997 1998 1996 1997 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 49.0% 29.4% Cost of goods sold 48.0 45.9 43.4 42.5 22.3 Gross profit 52.0 54.1 56.6 55.0 35.3 Selling and shipping 30.3 30.9 32.9 51.7 37.7 Administrative 9.3 9.1 9.2 45.6 30.5 Operating profit 12.2 13.9 14.4 69.5 33.4 Net earnings 7.1 8.0 7.9 69.8 27.6 Fiscal 1998 Compared to Fiscal 1997 Net sales increased $156.0 million, or 29.4%, from $531.5 million in fiscal 1997 to $687.5 million in fiscal 1998, which percentage increase is consistent with the Company's annual net sales growth goal of 25% for the next two fiscal years. Virtually all of these increases were attributable to unit growth in sales of the Company's consumer everyday and seasonal holiday products, particularly scented candles and accessories. In particular, two areas of the business experienced the highest growth rate for fiscal 1998: PartyLite Gifts, our party plan direct seller in the United States; and International, particularly Europe and Canada. Several factors contributed to the increase in unit sales. The increase in sales to new domestic customers was attributable to improved penetration of select channels of distribution and to geographic expansion in the United States, particularly by the Company's direct selling activities. International sales, including sales in Canada, grew at a faster rate than the Company as a whole, and accounted for approximately 25% of the net sales increase. International sales accounted for over 15% of the total net sales for fiscal 1998. The Company's results were restated to include the historical results of operations of Endar Corp. (which was acquired in a pooling of interests transaction in May 1997). The acquisition of the Sterno and Handy Fuel assets on December 31, 1997 did not have a material impact on the Company's results of operations. Sales of scented candles, which are typically higher gross profit margin products, also continued to grow at a substantially faster rate than unscented products. Consumable products (which consist of candles, potpourri, home fragrance products, portable heating fuels and decorative gift bags and tags) accounted for approximately 60% of the Company's net sales for fiscal 1998. Candle accessories continued to account for the balance of net sales. - -------------------------------------------------------------------------------- 12 Financial Review - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) Gross profit increased $101.5 million, or 35.3%, from $287.4 million in fiscal 1997 to $388.9 million in fiscal 1998. Gross profit margin increased from 54.1% for fiscal 1997 to 56.6% for fiscal 1998. Such increases were due, in substantial part, to the continued increased direct sales of the Company's products, such as scented candles and candle accessories; these products generally carry higher gross profit margins than other of the Company's products. The increase in gross profit margin was also attributable to increased international sales and to cost savings from the recent implementation of two automated pick and pack systems, which have lower operational costs than the manual processes historically used. As in fiscal 1997, the Company experienced cost benefits from continuing capital investments in process and technology improvements. Selling and shipping expense increased $61.9 million, or 37.7%, from $164.0 million in fiscal 1997 (30.9% of net sales), to $225.9 million in fiscal 1998 (32.9% of net sales). Selling and shipping expense consists of advertising, sales commissions, printed promotional materials and business development costs, all of which were higher due to increased sales to the consumer market, particularly sales through the Company's direct selling activities in which sales expenses, as a percentage of sales, are relatively higher. In addition, the Company's consumer products generally require a higher level of product development and sales and marketing expense than the Company's institutional products. Finally, the increase in selling and shipping expense as a percentage of net sales was also attributable, in part, to bad debt write-offs of $2.1 million (principally related to the bankruptcy of one customer) and to non-recurring one-time costs incurred during and after the United Parcel Service strike of approximately $2.0 million. Administrative expense increased $14.8 million, or 30.5%, from $48.5 million in fiscal 1997 (9.1% of net sales) to $63.3 million in fiscal 1998 (9.2% of net sales). Such increases were a result of increases in personnel (from approximately 388 administrative employees at January 31, 1997 to approximately 451 administrative employees at January 31, 1998) and the incurrence of approximately $1.1 million in transition expenses due to the shutdown of duplicative facilities. In connection with anticipated growth in its consumer product sales, which generally require somewhat greater administrative expenditures, the Company expects further increases in administrative expenses due to expected increases in the number of employees. Additionally, the Company expects increased spending to bring its computer systems into Year 2000 compliance. See "--Year 2000 Compliance" below. Endar Corp. incurred one-time, non-recurring transaction costs of approximately $5.2 million prior to its acquisition by the Company. These one-time, non-recurring transaction costs consisted of a non-cash exercise of options, payment of bonuses and payment of legal and professional fees. Interest expense increased $1.2 million, or 33.3%, from $3.6 million in fiscal 1997 to $4.8 million in fiscal 1998. Such increase was attributable to increased borrowing to fund working capital requirements, capital expenditures and the acquisition of the Sterno and Handy Fuel assets. - -------------------------------------------------------------------------------- Financial Review 13 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) Income tax expense increased $6.1 million, or 21.0%, from $29.0 million in fiscal 1997 to $35.1 million in fiscal 1998. The effective income tax rate decreased from approximately 40.0% for fiscal 1997 to approximately 39.0% for fiscal 1998 due to growth in sales in countries with lower tax rates than U.S. tax rates. As a result of the foregoing, net earnings increased $11.8 million, or 27.6%, from $42.8 million in fiscal 1997 to $54.6 million in fiscal 1998. Excluding the one-time non-recurring transaction costs incurred by Endar prior to the date of acquisition, the net earnings for fiscal 1998 increased 35.1% compared to the prior year. Basic earnings per share based upon the weighted average number of shares outstanding were $1.11 compared to $0.89 for the same period last year. Diluted earnings per share based upon the potential dilution that could occur if options to issue common stock were exercised or converted were $1.10 compared to $0.88 for the same period last year. Earnings per share have been restated for a 3-for-2 stock split effected as a stock dividend in June 1997 and to include the shares issued in connection with the acquisition of Endar Corp. Fiscal 1997 Compared to Fiscal 1996 Net sales increased $174.8 million, or 49.0%, from $356.7 million in fiscal 1996 to $531.5 million in fiscal 1997. Virtually all of this increase was attributable to unit growth in sales of the Company's consumer scented candles and candle accessories in the United States, Canada and Europe. Several factors contributed to the increase in unit sales. Sales to new customers continued to represent at least 15% of the net sales increase. The increase in sales to new domestic customers was attributable to improved penetration of existing channels of distribution and to geographic expansion in the United States, particularly by the Company's direct selling activities. In addition, the Company was able to increase sales to existing customers, particularly mass merchandisers and specialty chains, and to a lesser extent, department and gift stores. Sales of the Ambria brand, the Company's new line of coordinated home fragrance and decorative lighting products, contributed to the increase in sales. This coordinated line replaced certain single product lines such as Old Harbor and Aromatic's, while generally increasing sales in the same shelf space. Sales to Hallmark Gold Crown Stores also contributed, to a lesser extent, to the increase in domestic sales. In fiscal 1996, the Company did not have a strategic partnering arrangement with Hallmark Cards, Incorporated. For fiscal 1997, international net sales (which accounted for 14% of net sales, compared to 10% in fiscal 1996) continued to grow at a substantially higher rate than domestic sales. Sales of scented candles and accessories also continued to grow at a substantially faster rate than unscented products. Consumable products accounted for approximately 65% of the Company's net sales for fiscal 1997, down from 70% of net sales in fiscal 1996. Candle accessories continued to account for the balance of net sales. - -------------------------------------------------------------------------------- 14 Financial Review - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) Gross profit increased $102.0 million, or 55.0%, from $185.4 million in fiscal 1996 to $287.4 million in fiscal 1997. Gross profit margin increased from 52.0% for fiscal 1996 to 54.1% for fiscal 1997. Such increases were due, in substantial part, to increased sales of the Company's products to the consumer market, as well as to the continued shift in the mix of the Company's products for the consumer market to a greater percentage of higher gross profit margin products, such as scented candles and candle accessories. Selling and shipping expense increased $55.9 million, or 51.7%, from $108.1 million in fiscal 1996 (30.3% of net sales), to $164.0 million in fiscal 1997 (30.9% of net sales). Administrative expense increased $15.2 million, or 45.6%, from $33.3 million in fiscal 1996 (9.3% of net sales) to $48.5 million in fiscal 1997 (9.1% of net sales). Such increases were a result of increases in personnel, substantially improved information and data processing capabilities (including increases in order processing personnel) and increases in leased and owned office space. Interest expense increased $0.9 million, or 33.3%, from $2.7 million in fiscal 1996 to $3.6 million in fiscal 1997. Interest expense was generally higher as a result of the issuance of $25.0 million aggregate principal amount of Senior Notes in July 1995. See "--Liquidity and Capital Resources." Income tax expense increased $12.1 million, or 71.6%, from $16.9 million in fiscal 1996 to $29.0 million in fiscal 1997. The effective income tax rate was approximately 40.0% for fiscal 1996 and fiscal 1997. As a result of the foregoing, net earnings increased $17.6 million, or 69.8%, from $25.2 million in fiscal 1996 to $42.8 million in fiscal 1997. Seasonality Approximately 43% of the Company's annual net sales typically occur in the first and second fiscal quarters of the fiscal year, with the larger balance experienced in the third and fourth fiscal quarters, generally due to consumer buying patterns. The Company's net sales are strongest in the third and fourth fiscal quarters due to increased shipments to meet year-end holiday season demand for the Company's products. In addition, during the third and fourth fiscal quarters, the mix of products shipped by the Company shifts to a greater percentage of higher gross profit margin products. Operating profit largely follows these patterns, although a somewhat larger portion of the Company's annual operating profit is earned in the second half of the fiscal year. Financial Review 15 Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Operating assets and liabilities increased from January 31, 1997 to January 31, 1998 due to the Company's internally generated growth and from the Company's acquisition of Endar Corp. and the Sterno and Handy Fuel assets. During fiscal 1998, the Company increased its inventory to meet increases in current and anticipated demand and expects to continue to manage its inventory in the ordinary course for the coming fiscal year. Inventory increased from $112.4 million at January 31, 1997 to $135.5 million at January 31, 1998. However, measured in terms of number of days' worth of cost of goods sold, inventory decreased slightly from 165 days' worth of inventory at the end of fiscal 1997 to 163 days' worth of inventory at the end of fiscal 1998. Accounts receivable increased $11.4 million, or 28.1%, from $40.6 million at the end of fiscal 1997 to $52.0 million at the end of fiscal 1998. Accounts payable and accrued expenses increased $7.1 million, or 11.5%, from $61.6 million at the end of fiscal 1997 to $68.7 million at the end of fiscal 1998. The increases in accounts receivable and in accounts payable and accrued expenses are attributable to the increases in operating assets and the Company's overall growth. The increase in the Company's outstanding balance under its revolving credit facility at January 31, 1998 is attributable to working capital requirements, capital expenditures and the acquisition of the Sterno and Handy Fuel assets. Capital expenditures for property, plant and equipment were $62.5 million in fiscal 1998. The Company anticipates total capital spending of approximately $40.0 million for fiscal 1999, of which approximately $20.0 million will be used for a new European distribution facility in The Netherlands, with the balance of approximately $20.0 million to be used for upgrades to machinery and equipment in existing facilities, improvements to leased facilities, and computer hardware and software. The Company has grown in part through acquisitions and, as part of its growth strategy, the Company expects to continue from time to time in the ordinary course of its business to evaluate and pursue opportunities to acquire other companies, assets and product lines that either complement or expand its existing business. The Company currently has no arrangements, agreements or understandings with respect to such acquisitions. The Company paid $65.0 million in connection with the December 1997 acquisition of the Sterno and Handy Fuel assets. In May 1997, the Company acquired Endar Corp., a manufacturer of potpourri, scented candles and other fragrance products. The Company issued 1,900,786 shares of its Common Stock in the Endar transaction. In October 1997, the Company refinanced most of its existing term loans and credit facility under a new revolving credit facility (the "Credit Facility") arranged by J.P. Morgan Securities, Inc. with participation by a syndicate of eight banks (together with J.P. Morgan, the "Banks") maturing October 17, 2002. Under the new agreement, the Company has substantially improved the terms and pricing of its Credit Facility. Pursuant to the Credit Facility, the Banks have agreed, subject to certain conditions, to provide an unsecured revolving credit facility to the Company in an aggregate amount of up to $140.0 million, and the Banks have agreed to provide under certain circumstances an additional $35.0 million, to fund ongoing working capital requirements, letter of credit requirements - -------------------------------------------------------------------------------- 16 Financial Review - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources (continued) and general corporate purposes of the Company. Amounts which may be outstanding under the Credit Facility bear interest, at the Company's option, at Bank of America's prime rate (8.50% at January 31, 1998) or at the Eurocurrency rate plus a credit spread ranging from 0.25% to 0.50% based on a pre-defined financial ratio, for a weighted average interest rate of 6.48% at January 31, 1998. The Credit Facility is guaranteed by certain of the Company's subsidiaries and contains, among other provisions, requirements to maintain certain financial ratios and limitations on certain payments. At January 31, 1998, the Company was in compliance with such covenants. The Company does not believe that such covenants will have a material effect on its operations. The $25.0 million of 7.54% Senior Notes are obligations of the Company and are guaranteed by certain of the Company's subsidiaries. The Note Purchase Agreement governing the sale of such Senior Notes contains standard covenants, including maintenance of certain financial ratios. The Company does not believe that such covenants will have a material adverse effect on its operations. A significant portion of the proceeds of the Senior Notes was used to finance a portion of the Company's facilities expansion. Net cash provided by operating activities amounted to $43.6 million in fiscal 1998 compared to $31.6 million in fiscal 1997, an improvement of $12.0 million. At January 31, 1998, $95.9 million (including outstanding letters of credit) was outstanding under the Credit Facility. The Company's primary capital requirements are for working capital to fund the increased inventory and accounts receivable to sustain the Company's sales growth and for capital expenditures (including capital expenditures related to planned facilities expansion). The Company is building its inventory to meet increased demand. The Company believes that its cash from operations and available borrowings under the Credit Facility will be sufficient to fund its operating requirements, capital expenditures and all other obligations for fiscal 1999 and fiscal 2000. Impact of Adoption of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement, effective for fiscal years beginning after December 15, 1997, would require the Company to report components of comprehensive income in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined by Concepts Statement No. 8, Elements of Financial Statements, as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS 130 is not expected to have a significant impact on the Company's financial statement disclosures. - -------------------------------------------------------------------------------- Financial Review 17 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Impact of Adoption of Recently Issued Accounting Standards (continued) Also, in June 1997, the FASB issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company is evaluating the effects of this pronouncement, and intends to make appropriate disclosures upon its adoption of SFAS 131. Year 2000 Compliance The Company continues to assess the impact of the Year 2000 on its information systems, including the Year 2000 readiness of those it conducts business with, and is developing and implementing a Year 2000 compliance strategy. The Company expects increased spending to bring its systems into Year 2000 compliance, but Year 2000 related expenses are not expected to be material to the Company's results of operations and financial position and are being expensed as incurred. However, if modifications and conversions by the Company and those it conducts business with are not completed in a timely manner, the Year 2000 issue may have a material adverse affect on the Company's business, results of operations and financial position. Forward-looking and Cautionary Statements Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully elsewhere in this Annual Report and in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for fiscal 1998 to be filed on or about April 29, 1998. - -------------------------------------------------------------------------------- 18 Financial Review - -------------------------------------------------------------------------------- Consolidated Balance Sheets January 31, (in thousands, except share data) 1997 1998 - ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 27,832 $ 21,273 Accounts receivable, less allowance for doubtful receivables of $1,054 in 1997 and $1,353 in 1998 40,558 51,980 Inventories 112,427 135,524 Prepaid expenses 323 612 Deferred income taxes 1,000 2,442 - ------------------------------------------------------------------------------ Total current assets 182,140 211,831 Property, plant and equipment, at cost: Land and buildings 25,951 63,745 Leasehold improvements 3,220 5,038 Machinery and equipment 67,987 115,635 Office furniture and data processing equipment 17,924 26,541 Construction in progress 20,300 1,500 - ------------------------------------------------------------------------------ 135,382 212,459 Less accumulated depreciation and amortization 30,532 41,749 - ------------------------------------------------------------------------------ 104,850 170,710 Other assets: Investment 4,991 6,438 Excess of cost over fair value of assets acquired, net of accumulated amortization of $1,493 in 1997 and $2,417 in 1998 11,146 57,419 Deposits 752 992 - ------------------------------------------------------------------------------ 16,889 64,849 - ------------------------------------------------------------------------------ $303,879 $447,390 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit $ 4,440 $ -- Current maturities of long-term debt 1,985 1,013 Accounts payable 36,358 39,138 Accrued expenses 25,265 29,574 Income taxes 915 2,005 - ------------------------------------------------------------------------------ Total current liabilities 68,963 71,730 Deferred income taxes 4,900 7,100 Long-term debt, less current maturities 38,279 119,617 Excess of fair value over cost of assets acquired, net of accumulated amortization of $571 in 1997 and $691 in 1998 833 713 Minority interest 1,501 1,398 Commitments and Contingencies Stockholders' equity: Preferred stock - authorized, 10,000,000 shares of $0.01 par value; no shares issued and outstanding -- -- Common stock - authorized, 100,000,000 shares of $0.02 par value; issued and outstanding, 48,921,518 shares in 1997 and 49,100,953 shares in 1998 651 982 Additional contributed capital 89,522 92,357 Retained earnings 99,230 153,493 - ------------------------------------------------------------------------------ 189,403 246,832 - ------------------------------------------------------------------------------ $303,879 $447,390 ============================================================================== The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Financial Review 19 - -------------------------------------------------------------------------------- Consolidated Statements of Earnings January 31, (in thousands, except per share data) 1996 1997 1998 - -------------------------------------------------------------------------------------- Net sales $356,702 $531,480 $687,474 Cost of goods sold 171,333 244,078 298,562 - -------------------------------------------------------------------------------------- Gross profit 185,369 287,402 388,912 Selling and shipping 108,114 164,019 225,933 Administrative 33,348 48,500 63,257 Amortization of goodwill 225 836 948 - -------------------------------------------------------------------------------------- 141,687 213,355 290,138 - -------------------------------------------------------------------------------------- Operating profit 43,682 74,047 98,774 Other expense (income): Interest expense 2,662 3,554 4,816 Interest income (805) (872) (486) Equity in earnings of investees (649) (574) (659) Non-recurring transaction costs of acquired company -- -- 5,173 - -------------------------------------------------------------------------------------- 1,208 2,108 8,844 - -------------------------------------------------------------------------------------- Earnings before income taxes and minority interest 42,474 71,939 89,930 Income tax expense 16,922 28,988 35,068 - -------------------------------------------------------------------------------------- Earnings before minority interest 25,552 42,951 54,862 Minority interest 377 194 272 - -------------------------------------------------------------------------------------- Net earnings $ 25,175 $ 42,757 $ 54,590 ====================================================================================== Basic: Net earnings per common share $ 0.56 $ 0.89 $ 1.11 Weighted average number of shares outstanding 45,089 47,974 49,063 ====================================================================================== Diluted: Net earnings per common share $ 0.55 $ 0.88 $ 1.10 Weighted average number of shares outstanding 45,373 48,476 49,543 ====================================================================================== The accompanying notes are an integral part of these financial statements. Consolidated Statements of Stockholders' Equity January 31, (in thousands, except share data) - ----------------------------------------------------------------------------------------------------- Common stock ------------------ Additional Number contributed Retained of shares Amount capital earnings Total - ----------------------------------------------------------------------------------------------------- Balance at February 1, 1995 44,039,981 $305 $33,218 $ 27,673 $ 61,196 Net earnings for the year -- -- -- 25,175 25,175 Common stock issued in connection with acquisition 149,712 1 1,403 -- 1,404 Common stock issued in connection with exercise of stock options 24,000 1 131 -- 132 Common stock issued upon completion of secondary public offering 3,600,000 23 53,949 -- 53,972 Common stock issued in connection with 2-for-1 stock split in the form of a dividend -- 307 -- (307) -- - ----------------------------------------------------------------------------------------------------- Balance at January 31, 1996 47,813,693 637 88,701 52,541 141,879 Net earnings for the year -- -- -- 42,757 42,757 Common stock issued in connection with acquisition 993,745 13 -- 3,932 3,945 Common stock issued in connection with exercise of stock options and other 114,080 1 821 -- 822 - ----------------------------------------------------------------------------------------------------- Balance at January 31, 1997 48,921,518 651 89,522 99,230 189,403 Net earnings for the year -- -- -- 54,590 54,590 Endar options exercised prior to Endar acquisition 108,713 2 2,296 -- 2,298 Common stock issued in connection with exercise of stock options 70,722 2 539 -- 541 Common stock issued in connection with 3-for-2 stock split in the form of a dividend -- 327 -- (327) -- - ----------------------------------------------------------------------------------------------------- Balance at January 31, 1998 49,100,953 $982 $92,357 $153,493 $246,832 ===================================================================================================== The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- 20 Financial Review - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows January 31, (in thousands) 1996 1997 1998 ================================================================================= Cash flows from operating activities: Net earnings $ 25,175 $ 42,757 $ 54,590 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,683 8,778 12,396 Deferred income taxes 1,100 1,500 758 Equity in earnings of investees (649) (574) (659) Minority interest 377 194 272 Changes in operating assets and liabilities, net of effect of business acquisitions: Accounts receivable (923) (9,944) (11,422) Inventories (35,475) (31,123) (19,961) Prepaid expenses (253) 69 (289) Other assets (366) 303 (240) Accounts payable 4,063 14,107 2,780 Accrued expenses 5,394 4,086 4,309 Income taxes 387 1,453 1,090 - -------------------------------------------------------------------------------- Total adjustments (21,662) (11,151) (10,966) - -------------------------------------------------------------------------------- Net cash provided by operating activities 3,513 31,606 43,624 Cash flows from investing activities: Purchases of property, plant and equipment (35,878) (50,526) (62,481) Investments in investees (3,270) -- (814) Purchase of businesses, net of cash acquired (7,116) (7,435) (65,652) - -------------------------------------------------------------------------------- Net cash used in investing activities (46,264) (57,961) (128,947) Cash flows from financing activities: Proceeds from issuance of common stock 54,106 758 541 Borrowings from bank line of credit 44,015 30,963 81,500 Repayments on bank line of credit (44,247) (28,395) (85,940) Proceeds from issuance of long-term debt 26,991 5,000 107,993 Payments on long-term debt (686) (648) (25,330) - -------------------------------------------------------------------------------- Net cash provided by financing activities 80,179 7,678 78,764 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 37,428 (18,677) (6,559) Cash and cash equivalents at beginning of year 9,081 46,509 27,832 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 46,509 $ 27,832 $ 21,273 ================================================================================ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 2,487 $ 3,313 $ 4,082 Income taxes, net of refunds 15,989 24,968 31,567 See Note 2 for non-cash investing and financing activities. The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Financial Review 21 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies The Company, which operates in a single industry, designs, manufactures, markets and distributes an extensive line of candles and home fragrance products including scented candles, outdoor citronella candles, potpourri, and environmental fragrance products, and markets a broad range of related candle accessories and decorative gift bags and tags. It is also a leading producer of portable heating fuel products. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: Principles of Consolidation The consolidated financial statements include the accounts of Blyth Industries, Inc. and its wholly-owned subsidiaries, including Candle Corporation Worldwide, Inc. and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies which are not majority owned are reported using the equity method and are recorded in other assets. 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. Credit Concentration The Company's credit sales are principally to department and gift stores, mass merchandisers and distributors who purchase the Company's products for resale. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company makes provisions for estimated credit losses. Foreign Currency Translation All balance sheet accounts of foreign operations are translated into U.S. dollars at the year-end rate of exchange, and statement of earnings items are translated at the weighted average exchange rates for the period. The effect of the foreign currency translation on the financial statements presented was not material. Derivatives and Other Financial Instruments The Company uses forward foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain committed capital expenditures and on Canadian operations. The Company does not hold or issue derivative financial instruments for trading purposes. With regard to commitments for machinery and equipment in foreign currencies, upon payment of each commitment the underlying forward contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset. With regard to forward exchange contracts used to hedge Canadian operations, gain or loss on such hedges is recognized in income in the period in which the underlying hedged transaction occurs. If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred until the hedge item is settled. However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into income. For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the cash flow with the items being hedged. There were an immaterial amount of outstanding forward contracts at January 31, 1997 and 1998. Fair Value of Financial Instruments The Company's financial instruments include long-term debt. Management believes the carrying value of the long-term debt approximates their estimated fair values. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventories Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The elements of cost are material, labor and factory overhead. - -------------------------------------------------------------------------------- 22 Financial Review - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies (continued) Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided principally by use of the straight-line method for financial reporting purposes. The straight-line method and accelerated methods are used for income tax reporting purposes. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. The principal estimated lives used in determining depreciation and amortization are as follows: Buildings ....................................................... 27 to 40 years Leasehold improvements .......................................... 5 to 10 years Machinery and equipment ......................................... 5 to 12 years Office furniture and data processing equipment .................. 5 to 7 years Excess of Cost Over Fair Value of Assets Acquired The excess of costs of the acquisitions over the value of identifiable assets acquired less liabilities assumed is being amortized on a straight line basis ranging from 15 to 40 years. On an ongoing basis, management reviews the valuation of the intangible assets to determine possible impairment by comparing the carrying value to the undiscounted future cash flows of the related assets. Excess of Fair Value Over Cost of Assets Acquired The excess of fair value of assets acquired over their cost is amortized on a straight line basis over 12 years. Income Taxes The Company accounts for income taxes in accordance with the Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes". Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes, based upon enacted tax rates in effect for the periods the taxes are expected to be recoverable (payable). Revenue Recognition Revenue is recognized at the time of shipment of the Company's products. Earnings per Common and Common Equivalent Share In December 1995, the Company effected a two-for-one stock split and in June 1997, the Company effected a three-for-two stock split both in the form of a stock dividend. All share quantities, per share amounts, and option data have been retroactively restated to reflect these stock splits. Earnings per common and common equivalent share are computed based upon the weighted average number of shares outstanding during each year, which includes outstanding options for common stock, when dilutive. Note 2: Business Acquisitions In April 1995, the Company acquired 80% of the issued and outstanding capital stock of Jeanmarie Creations, Inc., a decorative gift bag company, for approximately $7.1 million (net of cash acquired). During May 1996 and May 1997, the Company increased its investment by an additional 4% each year. Under the purchase and sale agreement, the Company has the option to acquire, and in certain circumstances, may be required to acquire, the remaining 12% of common stock at prices set forth in the agreements. The results of operations prior to acquisition were not material. In July 1995, the Company acquired 50% of the issued and outstanding capital stock of Eclipse Candles, Ltd., an European candle manufacturer, for approximately $1.5 million in cash. In October 1996, the Company increased its investment by an additional 25%. The results of operations prior to acquisition were not material. In February 1996, the Company purchased from Hallmark Cards, Incorporated the Canterbury candle product line and related candle manufacturing equipment for approximately $8.4 million in cash. Under the terms of the purchase agreement, the Company will work jointly with Hallmark as a preferred vendor in the merchandising and distribution of the Company's candles and candle accessories through various outlets which carry Hallmark products. The results of operations prior to acquisition were not material. In December 1997, the Company acquired the Sterno and Handy Fuel assets from a division of the Colgate-Palmolive Company for $65.0 million in cash. The excess of the purchase price over the estimated fair value of assets acquired approximated $47.0 million and is being amortized over 40 years. - -------------------------------------------------------------------------------- Financial Review 23 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 2: Business Acquisitions (continued) The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Sterno and Handy Fuel assets had occurred as of February 1, 1996 and therefore includes an estimate of incremental operating expenses, interest expense, amortization of goodwill and income tax expense: (In thousands, except per share amounts) 1997 1998 - -------------------------------------------------------------------------------- Net sales $580,292 $734,410 Net earnings 43,901 55,722 Net earnings per common share Basic $ 0.92 $ 1.14 Diluted 0.91 1.12 The unaudited pro forma results do not purport to represent what the Company's results of operations or financial condition actually would have been had the acquisition been consummated as of February 1, 1996. The foregoing acquisitions have been recorded under the purchase method of accounting and, accordingly, the results of the acquired businesses are included in the consolidated financial statements since the date of acquisition. In December 1996, the Company issued 993,745 shares of its common stock in exchange for all of the outstanding capital stock of New Ideas International, Inc. ("New Ideas"), a manufacturer of home and auto fragrance products. This transaction was accounted for as a pooling of interests. Since the aggregated historical operations of New Ideas prior to the date of combination were not material to the Company's consolidated results of operations and financial position, prior period financial statements have not been restated. On May 20, 1997, the Company issued 1,900,786 shares of its common stock in exchange for all of the outstanding capital stock of Endar Corp. ("Endar"), a manufacturer of potpourri, scented candles and other fragrance products. The transaction was accounted for as a pooling of interests. All of the accompanying consolidated financial statements and footnotes have been restated to include the historical results of operations and financial position of Endar prior to the acquisition. The accompanying financial statements contain information for the period of February 1, 1997 to May 20, 1997 and for the fiscal years ended 1997 and 1996 which were prior to the acquisition. All such information was derived from the separate statements of the Company and Endar. The net sales and net earnings for the individual entities for the periods preceding the merger were as follows: Company Endar Combined - -------------------------------------------------------------------------------- Period ended May 20, 1997 (unaudited) Net sales (unaudited) $196,229 $ 9,540 $205,769 Net earnings (loss) (unaudited) 14,674 (2,857) 11,817 Year ended January 31, 1997 Net sales 495,702 35,778 531,480 Net earnings 40,137 2,620 42,757 Year ended January 31, 1996 Net sales 331,341 25,361 356,702 Net earnings 24,024 1,151 25,175 The net earnings of Endar for the period ended May 20, 1997 include one-time non-recurring transaction costs of $3.1 million net of income taxes. - -------------------------------------------------------------------------------- 24 Financial Review - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 3: Geographic Information Information about the Company's operations in different geographic areas follows (in thousands): Years ended January 31, United States International Total - -------------------------------------------------------------------------------- Net sales 1996 $321,686 $ 35,016 $356,702 1997 457,418 74,062 531,480 1998 573,214 114,260 687,474 Net earnings 1996 24,512 663 25,175 1997 40,757 2,000 42,757 1998 50,599 3,991 54,590 Identifiable assets 1996 214,160 9,309 223,469 1997 275,046 28,833 303,879 1998 397,162 50,228 447,390 - -------------------------------------------------------------------------------- Note 4: Inventories The major components of inventories are as follows (in thousands): 1997 1998 - -------------------------------------------------------------------------------- Raw materials $16,919 $19,988 Work in process 3,352 2,263 Finished goods 92,156 113,273 - -------------------------------------------------------------------------------- $112,427 $135,524 ================================================================================ Note 5: Accrued Expenses Accrued expenses consist of the following (in thousands): 1997 1998 - -------------------------------------------------------------------------------- Compensation and certain benefits $7,712 $10,330 Deferred revenue 6,268 6,015 Promotional expenses 3,453 5,217 Taxes, other than income 4,704 4,707 Other 3,128 3,305 - -------------------------------------------------------------------------------- $25,265 $29,574 ================================================================================ Note 6: Bank Lines of Credit As of January 31, 1997 Endar had a $9.0 million line of credit agreement with a financial institution of which $4.4 million was outstanding at January 31, 1997. The line of credit balance outstanding at May 20, 1997 was repaid and the agreement was terminated effective upon the acquisition of Endar by the Company. An unsecured $50.0 million revolving credit facility, with no outstanding borrowings, was terminated in 1997 in conjunction with the Company's debt refinancing (See Note 7). - -------------------------------------------------------------------------------- Financial Review 25 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 7: Long-Term Debt Long-term debt consists of the following (in thousands): 1997 1998 ================================================================================ 7.54% Senior Notes $25,000 $25,000 Term loan 5,000 -- Credit facility -- 93,557 Senior subordinated notes 3,050 -- Junior subordinated notes 2,619 -- Capital lease obligation 788 246 Other 3,807 1,827 - -------------------------------------------------------------------------------- 40,264 120,630 Less current maturities (1,985) (1,013) - -------------------------------------------------------------------------------- $38,279 $119,617 ================================================================================ In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005. Such Senior Notes are guaranteed by certain of the Company's subsidiaries and contain, among other provisions, requirements for maintaining certain financial ratios and net worth. At January 31, 1998, the Company was in compliance with such covenants. The notes are payable in seven annual installments beginning June 30, 1999. In December 1996, the Company entered into a Term Credit Agreement for an amount up to $20.0 million of which $5.0 million was outstanding at January 31, 1997 at an interest rate of 6.10%. The Term Credit Agreement was repaid in 1997 subsequent to the Company's debt refinancing. On October 17, 1997, the Company refinanced most of its term loans and credit facility under a new revolving credit facility ("Credit Facility") maturing October 17, 2002. Pursuant to the Credit Facility, the lending institutions have agreed, subject to certain conditions, to provide an unsecured revolving credit facility to the Company in an aggregate amount of up to $140.0 million and to provide, under certain circumstances, an additional $35.0 million. Amounts outstanding under the Credit Facility bear interest, at the Company's option, at Bank of America's prime rate (8.50% at January 31, 1998) or at the Eurocurrency rate plus a credit spread ranging from 0.25% to 0.50%, based on a pre-defined financial ratio, for a weighted average interest rate of 6.48% at January 31, 1998. At January 31, 1998, approximately $93.6 million was outstanding under the Credit Facility. The Credit Facility is guaranteed by certain of the Company's subsidiaries and contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments. At January 31, 1998, the Company was in compliance with such covenants. At January 31, 1997 Endar had Senior and Junior Subordinated Notes outstanding in the amounts of approximately $3.1 million and $2.6 million, respectively. The Senior and Junior Notes were repaid on May 20, 1997. Maturities under debt obligations and future minimum lease payments under the capital lease obligation are as follows (in thousands): Capital Debt Lease Obligations Obligation ================================================================================ For the years ending January 31, 1999 $767 $253 2000 4,631 -- 2001 3,571 -- 2002 3,571 -- 2003 97,128 -- Thereafter 10,716 -- - -------------------------------------------------------------------------------- $120,384 253 Less amounts representing interest (7) - -------------------------------------------------------------------------------- Present value of net minimum lease payments $246 ================================================================================ - -------------------------------------------------------------------------------- 26 Financial Review - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 8: Employee Benefit Plans The Company has defined contribution employee benefit plans covering substantially all eligible non-union employees. The Company is primarily required to contribute $100 for each participating employee; additional contributions are discretionary. Expense related to the plans for the years ended January 31, 1996, 1997 and 1998 was $872,000, $1,182,000 and $1,426,000, respectively. Note 9: Commitments The Company utilizes leases for a portion of its operating facilities and equipment. Generally, the leases provide that the Company pay taxes, maintenance, insurance and other occupancy expenses applicable to leased premises. Certain leases provide for renewal for various periods at stipulated rates. The minimum future rental commitments under operating leases are as follows (in thousands): For the years ending January 31, 1999 $ 9,873 2000 9,532 2001 8,529 2002 6,263 2003 5,066 Thereafter 11,798 - -------------------------------------------------------------------------------- Total minimum payments required $51,061 ================================================================================ Rent expense for the years ended January 31, 1996, 1997 and 1998 was $4,743,000, $6,325,000 and $8,072,000, respectively. Note 10: Income Taxes Earnings before provision for income taxes (in thousands): 1996 1997 1998 ================================================================================ United States $39,553 $67,146 $81,334 Foreign 2,921 4,793 8,596 - -------------------------------------------------------------------------------- $42,474 $71,939 $89,930 ================================================================================ Income tax expense consists of the following (in thousands): 1996 1997 1998 ================================================================================ Current income tax expense: Federal $12,158 $21,433 $25,271 State 2,375 4,123 5,430 Foreign 1,289 1,932 3,609 - -------------------------------------------------------------------------------- 15,822 27,488 34,310 Deferred income tax expense: Federal 950 1,275 644 State 150 225 114 - -------------------------------------------------------------------------------- 1,100 1,500 758 - -------------------------------------------------------------------------------- $16,922 $28,988 $35,068 ================================================================================ - -------------------------------------------------------------------------------- Financial Review 27 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 10: Income Taxes (continued) Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): 1997 1998 ================================================================================ Current deferred tax assets: Accrued compensation $ 550 $ 1,557 Allowance for doubtful receivables 330 117 Accrued expenses 120 408 Other -- 360 - -------------------------------------------------------------------------------- $ 1,000 $ 2,442 ================================================================================ Non-current deferred tax liabilities: Depreciation $(4,900) $(7,100) ================================================================================ A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows (in thousands): 1996 1997 1998 ================================================================================ Tax provision at statutory rate $14,866 $25,179 $31,471 Tax effect of: State income taxes, net of federal benefit 2,135 3,419 3,530 Other, net (79) 390 67 - -------------------------------------------------------------------------------- $16,922 $28,988 $35,068 ================================================================================ Note 11: Employee Stock Option Plans At January 31, 1998, the Company had two stock-based compensation plans, which are described below. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue to account stock-based compensation under the intrinsic value based method of accounting described by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, generally, no cost is recorded for stock options issued to employees unless the option price is below market at the time options are granted. The following pro forma net earnings and net earnings per common share are presented for informational purposes and have been computed using the fair value method of accounting for stock-based compensation as set forth in SFAS No. 123: (In thousands, except per share data) 1997 1998 ================================================================================ Net earnings: As reported $42,757 $54,590 Pro forma 42,426 54,320 Net earnings per common share: As reported Basic $0.89 $1.11 Diluted 0.88 1.10 Pro forma Basic $0.88 $1.11 Diluted 0.88 1.10 The fair value of each option is estimated on the date of grant, using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997 and 1998, respectively: expected volatility of 42.5 percent for both years, risk-free interest rates at 6.14 to 6.85 percent for 1997 and 5.69 to 6.99 percent for 1998, expected life of 7 years for both years and no dividend payments. - -------------------------------------------------------------------------------- 28 Financial Review - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 11: Employee Stock Option Plans (continued) The Company has adopted the Amended and Restated 1994 Employee Stock Option Plan (the "Employee Option Plan"), which provides for the grant to officers and employees of both "incentive stock options" and stock options that are non-qualified for Federal income tax purposes. The total number of shares of common stock for which options may be granted pursuant to the Employee Option Plan is 1,380,000. The exercise price of incentive stock options granted under the Employee Option Plan may not be less than 100% of the fair market value of the common stock at the time of grant, and the term of any option may not exceed 10 years. Options generally become exercisable over a five-year period. With respect to any employee who owns stock representing more than 10% of the voting power of the outstanding capital stock of the Company, the exercise price of any incentive stock option may not be less than 110% of the fair market value of such shares at the time of grant, and the term of such option may not exceed five years. The Company has also adopted the 1994 Stock Option Plan for Non-Employee Directors (the "Non-Employee Director Plan"). A total of 120,000 shares of common stock may be issued through the exercise of options granted pursuant to the Non-Employee Director Plan. No option may be granted under the Non-Employee Director Plan after ten years following May 18, 1994. Each Non-Employee Director who is elected to office for the first time after March 1, 1994 will, upon such date, automatically be granted an option to acquire 3,000 shares of common stock. Each Non-Employee Director who is in office on November 15 of any year thereafter will, on the immediately succeeding January 1, automatically be granted an option to acquire 1,500 shares of common stock. The price of shares that may be purchased upon exercise of an option is the fair market value of the common stock on the date of grant. Options granted pursuant to the Non-Employee Director Plan become exercisable in full on the first anniversary of the date of the grant. Transactions involving stock options are summarized as follows: Option Weighted Average Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding at February 1, 1995 414,000 $ 6.01 Options granted 396,000 12.28 Options exercised (24,000) 5.50 - -------------------------------------------------------------------------------- Outstanding at January 31, 1996 786,000 9.17 Options granted 274,500 26.17 Options exercised (68,100) 6.99 Options cancelled (25,500) 8.47 - -------------------------------------------------------------------------------- Outstanding at January 31, 1997 966,900 19.23 Options granted 279,000 25.65 Options exercised (70,201) 8.08 Options cancelled (40,800) 19.63 - -------------------------------------------------------------------------------- Outstanding at January 31, 1998 1,134,899 17.17 ================================================================================ At January 31, 1997 and 1998, options to purchase 170,700 and 308,999 shares, respectively, were exercisable. Options outstanding and exercisable as of January 31, 1998, by price range: Weighted Average Outstanding Exercisable Range of Remaining Weighted Average Weighted Average Exercise Price Shares Contractual Life Exercise Price Shares Exercise Price - -------------- ------ ---------------- -------------- ------ -------------- $5.50 - $10.00 475,800 6.62 $ 7.71 192,600 $ 7.39 14.33 - 24.83 443,100 8.54 21.78 85,500 19.15 25.58 - 31.75 215,999 9.11 28.56 30,899 29.26 The weighted average fair value of options granted during the years ended January 31, 1997 and 1998 was $14.81 and $14.13, respectively. - -------------------------------------------------------------------------------- Financial Review 29 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 12: Selected Quarterly Financial Data (Unaudited) A summary of selected quarterly information for the years ended January 31 is as follows: 1997 Quarter Ended ------------------------------------------------------ (In thousands, except per share data) April 30 July 31 October 31 January 31 Total - ---------------------------------------------------------------------------- Net sales $112,684 $107,106 $153,522 $158,168 $531,480 Gross profit 61,072 58,430 82,972 84,928 287,402 Net earnings 7,457 6,707 15,411 13,182 42,757 Net earnings per common and common equivalent share: Basic $0.16 $0.14 $0.32 $0.27 $0.89 Diluted 0.15 0.14 0.32 0.27 0.88 ============================================================================ 1998 Quarter Ended ------------------------------------------------------ (In thousands, except per share data) April 30 July 31 October 31 January 31 Total - ---------------------------------------------------------------------------- Net sales $155,060 $137,709 $192,457 $202,248 $687,474 Gross profit 85,863 77,334 106,605 119,110 388,912 Net earnings 11,314 6,419 19,626 17,231 54,590 Net earnings per common and common equivalent share: Basic $0.23 $0.13 $0.40 $0.35 $1.11 Diluted 0.22 0.13 0.40 0.35 1.10 ============================================================================ Note 13: Earnings Per Share During fiscal year 1998, the Company adopted FASB Statement No. 128, "Earnings per Share". This new accounting pronouncement eliminates the measure of performance called "primary" earnings per share and replaces it with "basic" earnings per share. The essential difference between the two calculations is that the dilutive effects of stock options are not considered in the basic computation. The pronouncement also changed the measure previously reported as "fully dilutive" earnings per share to "diluted" earnings per share. All periods have been restated to conform to this new pronouncement. The computation of basic and diluted earnings per share is as follows (in thousands): 1996 1997 1998 - -------------------------------------------------------------------------------- Net earnings $25,175 $42,757 $54,590 - -------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic 45,089 47,974 49,063 Dilutive effect of stock options 284 502 480 - -------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Diluted 45,373 48,476 49,543 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 30 Report of Independent Accountants - -------------------------------------------------------------------------------- Board of Directors and Stockholders Blyth Industries, Inc. We have audited the accompanying consolidated balance sheet of Blyth Industries, Inc. and Subsidiaries (the "Company") as of January 31, 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blyth Industries, Inc. and Subsidiaries as of January 31, 1998, and the consolidated results of their operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. Chicago, Illinois /s/ Coopers & Lybrand L.L.P. March 25, 1998 Coopers & Lybrand L.L.P. Report of Independent Certified Public Accountants 31 Board of Directors and Stockholders Blyth Industries, Inc. We have audited the accompanying consolidated balance sheet of Blyth Industries, Inc. and Subsidiaries as of January 31, 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the two years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blyth Industries, Inc. and Subsidiaries as of January 31, 1997, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. Chicago, Illinois /s/ GRANT THORNTON LLP March 28, 1997 GRANT THORNTON LLP Exhibit 21 Subsidiaries of Blyth Industries, Inc. Name Jurisdiction of Organization ---- ---------------------------- 1. Candle Corporation Worldwide, Inc. Delaware 2. PartyLite Gifts, Inc. Delaware 3. Candle Corporation of America New York 4. Aromatic Industries, Inc. California 5. PartyLite Gifts Ltd. Canada 6. Candle Corporation of America Hong Kong Limited Hong Kong 7. PartyLite Ireland Limited Ireland 8. PartyLite GMBH Germany 9. JMC Holdings, Inc. Delaware 10. Jeanmarie Creations, Inc. Oklahoma 11. Blyth Industries, Ltd. Barbados 12. PartyLite U.K., Ltd. England 13. FVB, Inc. Delaware 14. Fabrica de Velas Borinquen, Inc. Illinois 15. New Ideas International, Inc. Delaware 16. CCW Manufacturing Limited England 17. Eclipse Candles Limited England 18. PartyLite SA Switzerland 19. PartyLite Trading SA Switzerland 20. PartyLite BV Netherlands 21. PartyLite Handelsgesellschaft m.b.H. Austria 22. Endar de Mexico SA Mexico 23. Endar Corp. California Blyth Industries, Inc. also owns 50% of the capital stock of Colony Gift Corporation Limited, a corporation organized under the laws of England. Exhibit 23.1 [Letterhead] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Blyth Industries, Inc. on Form S-8 (No. 33-91954 and 333-50011) and Form S-3 (No. 333-37659) of our report dated March 25, 1998, on our audit of the consolidated financial statements and financial statement schedule of Blyth Industries, Inc. and Subsidiaries as of January 31, 1998, and for the year then ended, which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. Chicago, Illinois April 27, 1998 Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Blyth Industries, Inc. and Subsidiaries on Form S-8 (Nos. 33-91954 and 333-50011) and Form S-3 (No. 333-37659) of our report dated March 28, 1997, on our audits of the consolidated financial statements and financial statement schedule of Blyth Industries, Inc. and Subsidiaries as of January 31, 1997 and 1996 and for each of the two years in the period ended January 31, 1997 which report is included in the Annual Report on Form 10-K for the year ended January 31, 1998. /s/ Grant Thornton LLP ----------------------- GRANT THORNTON LLP Chicago, Illinois April 29, 1998 Exhibit 24.1 POWER OF ATTORNEY FORM 10-K ANNUAL REPORT FOR FISCAL 1998 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert B. Goergen, Howard E. Rose, Richard T. Browning and Bruce D. Kreiger, and each of them, until July 31, 1998, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K Annual Report of Blyth Industries, Inc. for the fiscal year ended January 31, 1998, and any amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ Robert B. Goergen Chairman, Chief Executive Officer April 29, 1998 - ------------------------ and President, Director Robert B. Goergen (Principal Executive Officer) /s/ Richard T. Browning Vice President and Chief April 29, 1998 - ------------------------ Financial Officer Richard T. Browning (Principal Financial and Accounting Officer) /s/ Howard E. Rose Vice Chairman and Director April 29, 1998 - --------------------- Howard E. Rose /s/ Roger A. Anderson Director April 29, 1998 - ---------------------- Roger A. Anderson /s/ John W. Burkhart Director April 29, 1998 - ----------------------- John W. Burkhart /s/ Pamela M. Goergen Director April 29, 1998 - ------------------------ Pamela M. Goergen /s/ Neal I. Goldman Director April 29, 1998 - ------------------------ Neal I. Goldman /s/ Roger H. Morley Director April 29, 1998 - ---------------------- Roger H. Morley /s/ John E. Preschlack Director April 29, 1998 - ------------------------ John E. Preschlack /s/ Frederick H. Stephens, Jr. Director April 29, 1998 - ------------------------------- Frederick H. Stephens, Jr. Exhibit 24.2 BLYTH INDUSTRIES, INC. CERTIFICATION I, the undersigned Secretary of BLYTH INDUSTRIES, INC., a Delaware corporation, certify that the attached is a true copy of resolutions adopted by the Board of Directors of Blyth Industries, Inc. on April 8, 1998, at a meeting throughout which a quorum was present, and that the same is still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Blyth Industries, Inc. this 29th day of April, 1998. /s/ Bruce D. Kreiger ------------------------ Name: Bruce D. Kreiger Title: Secretary BLYTH INDUSTRIES, INC. Board of Directors Resolution April 8, 1998 * * * FORM 10-K ANNUAL REPORT RESOLVED, that the form, terms, and provisions of the Annual Report on Form 10-K (the "Form 10-K") in substantially the draft form presented to this Board, are approved and that Robert B. Goergen, Howard E. Rose and Richard T. Browning be, and each of them with full power to act without the other hereby is, authorized (i) to sign the Form 10-K on behalf of the Corporation and any amendments thereto as either of them may approve on behalf of the Corporation, in such form as the officer executing the Form 10-K or any such amendment may approve, with any changes from the form presented to this meeting as he may approve, such execution to be conclusive evidence of such approval, and (ii) to file the Form 10-K with the Securities and Exchange Commission (the "Commission"); RESOLVED, that each of the directors, the Chairman, President and Chief Executive Officer, the Vice Chairman and the Vice President and Chief Financial Officer, of Blyth Industries, Inc. are each hereby authorized to execute in their respective capacities, a power of attorney in favor of Robert B. Goergen, Howard E. Rose, Richard T. Browning and Bruce D. Kreiger designating each of them as the true and lawful attorneys-in-fact and agents of the signatory with full power and authority to execute and to cause to be filed with the Securities and Exchange Commission the Form 10-K Annual Report for fiscal 1998 with all exhibits and other documents in connection therewith as such attorneys-in-fact, or any one of them, may deem necessary or desirable; and to do and perform each and every act and thing necessary or desirable to be done in and about the premises as fully to all intents and purposes as such officers and directors could do themselves. End