<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                       OR

_____             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
                  TRANSITION PERIOD FROM             TO

                         COMMISSION FILE NUMBER 333-3689

                                 WAXMAN USA INC.
                                 ---------------

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  DELAWARE                             34-1761514
                  --------                             ----------
          (STATE OF INCORPORATION)                     (I.R.S. EMPLOYER
                                                   IDENTIFICATION NUMBER)

                  24460 AURORA ROAD,
                 BEDFORD HEIGHTS, OHIO                   44146
                 ---------------------                   -----
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)

                                 (440) 439-1830
                                 --------------
               (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           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 ninety (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
                             ---

         Registrant meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K and is therefore filing this form in reduced
disclosure format.

         Number of shares of Common Stock outstanding as of September 14, 1998:

                               Common Stock                       100


<PAGE>   2



     DOCUMENTS INCORPORATED BY REFERENCE

         Registrant has omitted information by Items 4, 10, 11, 12, and 13 of
Form 10-K because Registrant meets the conditions set forth in General
Instruction (I) (1)(a) and (b) of Form 10-K and is, therefore, filing this
Report in reduced disclosure format. However, the information that has been
omitted from this Report is included in the periodic reports of Waxman
Industries, Inc. the parent of Registrant, filed in accordance with the
Securities Exchange Act of 1934.

         Waxman USA Inc. (the "Company") is a direct wholly-owned subsidiary of
Waxman Industries, Inc. ("Waxman Industries"). The Company consists of Waxman
USA Inc. and subsidiaries in which Waxman USA Inc. directly or indirectly has a
majority voting and/or economic interest. Fiscal 1997 quarterly results have
been restated to account for Barnett Inc. ("Barnett") under the equity method of
accounting due to the reduction of the Company's ownership of Barnett to 44.5%
in the fiscal 1997 fourth quarter. Prior to the sale, the Company consolidated
Barnett's results, with a minority interest charge for the portion of Barnett
not owned by the Company.

CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on the beliefs of the Company and its management. When
used in this document, the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to, the
risk that the Company may not be able to implement its deleveraging strategy in
the intended manner, risks associated with currently unforeseen competitive
pressures and risks affecting the Company's industry, such as decreased consumer
spending, customer concentration issues and the effects of general economic
conditions. In addition, the Company's business, operations and financial
condition are subject to the risks, uncertainties and assumptions which are
described in the Company's reports and statements filed from time to time with
the Securities and Exchange Commission, including this Report. Should one or
more of those risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein.

                                     PART I

ITEM 1.   BUSINESS

        GENERAL

        The Company is a direct wholly-owned subsidiary of Waxman Industries.
The common stock of Waxman Industries trades on the New York Stock Exchange
under the symbol "WAX." The Company believes it is one of the leading suppliers
of specialty plumbing, security hardware and other products to the repair and
remodeling market in the United States. The Company distributes its products to
approximately 7,600 customers, including a wide variety of large national and
regional retailers, professional security installers and independent retail
customers. The Company's consolidated net sales were $105.7 million in fiscal
1998.

        The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC
Inc. ("WOC") and TWI International, Inc. ("TWI"). WOC is comprised of two
divisions, U.S. Lock ("U.S. Lock"), a distributor of a full line of security
hardware products, and Medal Distributing, a supplier of hardware products. TWI
includes the Company's foreign sourcing operations, including manufacturing,
packaging and sourcing operations in China and Taiwan, and an operation in
Mexico that threads galvanized, black, brass, and chrome pipe and imports
malleable fittings. Consumer Products, WOC and Barnett utilize the Company's and
non-affiliated foreign sourcing suppliers.

        At June 30, 1998, the Company owned 44.4% of Barnett Inc. ("Barnett"), a
direct marketer and distributor of an extensive line of plumbing, electrical and
hardware products to approximately 65,000 active customers throughout the United
States. Barnett offers approximately 11,900 name brand and private label
products through its industry-recognized Barnett(R) catalogs and telesales
operations. Barnett markets its products through five distinct, comprehensive
catalogs that target professional contractors, independent hardware stores,
maintenance managers and liquid propane gas dealers. Barnett's net sales for
fiscal 1998 were $199.6 million. In fiscal 1998, the Company recognized $6.3
million in equity income from this investment.

         In April 1996, the Company completed an initial public offering of the
common stock of Barnett (the "Barnett Common Stock"), reducing its interest in
the former wholly-owned subsidiary to 49.9% of the outstanding Barnett Common
Stock and, together with certain convertible non-voting preferred stock owned by
the Company, approximately a 54% economic interest. In April 1997, the Company
completed a secondary offering of 1.3 million shares of Barnett Common Stock,
reducing its voting and economic interest to 44.5% and, accordingly, began to
account for its interest in Barnett under the equity method of accounting. In
July 1997, as 




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a result of the sale of a substantial portion of the business of LeRan Gas
Products, one of WOC's operations, to Barnett, the Company received cash and an
additional 24,730 shares of Barnett Common Stock, which increased the Company's
ownership to the current level of 7,186,530 shares. The Barnett Common Stock
trades on the Nasdaq National Market under the symbol "BNTT"(R).

CONSUMER PRODUCTS

         Consumer Products markets and distributes approximately 6,200 products
to a wide variety of retailers, primarily do-it-yourself ("D-I-Y") warehouse
home centers, home improvement centers, mass merchandisers and hardware stores.
Consumer Products' customers include large national retailers such as Kmart,
Wal-Mart, Sears and Hechinger / Builders Square, as well as several large
regional D-I-Y retailers. According to rankings of the largest D-I-Y retailers
published in National Home Center News, an industry trade publication, Consumer
Products' customers include 12 of the 25 largest D-I-Y retailers in the United
States. Consumer Products works closely with its customers to develop
comprehensive marketing and merchandising programs designed to improve their
profitability, efficiently manage shelf space, reduce inventory levels and
maximize floor stock turnover. Consumer Products also offers certain of its
customers the option of private label programs and direct import programs.
Consumer Products' net sales for fiscal 1998 were $55.2 million.

         In recent years, the rapid growth of large mass merchandisers and D-I-Y
retailers has contributed to a significant consolidation of the United States
retail industry and the formation of large, dominant, product specific and
multi-category retailers. These retailers demand suppliers who can offer a broad
range of quality products and can provide strong marketing and merchandising
support. Due to the consolidation in the D-I-Y retail industry, a substantial
portion of Consumer Products' net sales are generated by a small number of
customers. In July 1997, Kmart agreed to sell its Builders Square chain to
Leonard Green & Partners, a merchant-banking firm. Leonard Green also acquired
another home improvement retailer, Hechinger Co., and has combined the two
companies to form the nation's third largest home improvement chain. In fiscal
1997, Builders Square accounted for 21.9% of Consumer Products' net sales. The
combined operations of Hechinger / Builders Square is Consumer Products' largest
customer, accounting for approximately $11.7 million, or 21.1%, of its net sales
in fiscal 1998. Net sales to the combined operations declined during fiscal
1998, with $5.1 million being sold in the last six months. In August 1998,
Consumer Products was informed that the Hechinger / Builders Square operations
were consolidating their supplier relationships and Consumer Products would
retain only the bulk plumbing business of approximately $2.3 million annually.
The supplier relationship is expected to change late in the second quarter of
fiscal 1999. Due to the loss of this revenue base, Consumer Products has
developed plans to reduce its cost structure to be more in line with its revenue
base. The Company expects the impact to operating income to be approximately
$0.8 million in fiscal 1999. In the event Consumer Products were to lose any
additional large retail accounts as a customer or one of its largest accounts
were to significantly curtail its purchases from Consumer Products, there would
be additional material short-term adverse effects until the Company could
further modify Consumer Products' cost structure to be more in line with its
anticipated revenue base. Consumer Products would likely incur significant
charges if a materially adverse change in its customer relationships were to
occur.

         In furtherance of its continuing efforts to improve Consumer Products'
prospects, the Company has augmented certain existing product lines, streamlined
its packaged plumbing product lines, enhanced the appearance and appeal of its
existing plumbing product packaging and undertaken certain customer retention
and development programs. The Company believes the redesign effort will help in
its effort to diversify its customer base by attracting new business and
retaining existing business. In order to minimize the financial impact on
Consumer Products, the rollout of the package redesign program will continue
into fiscal 1999.

         Consumer Products' marketing strategy includes offering mass
merchandisers and D-I-Y retailers a comprehensive merchandising program, which
includes design, layout and setup of selling areas. Sales and service personnel
assist the retailer in determining the proper product mix in addition to
designing department layouts to effectively display products and optimally
utilize available floor and shelf space. Consumer Products supplies
point-of-purchase displays for both bulk and packaged products, including
color-coded product category signs and color-coordinated bin labels to help
identify products and backup tags to identify products that require reordering.
Consumer Products also offers certain of its customers the option of private
label programs for their plumbing and floor care products. In-house design,
assembly and packaging capabilities enable Consumer Products to react quickly
and effectively to service its customers' changing needs. In addition, Consumer
Products' products are packaged and designed for ease of use, with "how to"
instructions included to simplify installation, even for the uninitiated D-I-Y
consumer.

         Consumer Products' sales and service representatives visit stores
regularly to take reorders and recommend program improvements. These
representatives also provide reports to Consumer Products, enabling it to stay
abreast of changing consumer demand and identify developing trends. In order to
support its customers' "just-in-time" requirements, Consumer Products has
sophisticated EDI capabilities, enabling customers to reduce inventory levels
and increase return on investment. During fiscal 1998, Consumer Products
completed the modifications of all of its information systems to be Year 2000
compliant. Consumer Products operates and distributes its products through two
strategically located distribution facilities in Cleveland, Ohio and Dallas,
Texas. In


                                       3
<PAGE>   4

July 1998, Consumer Products announced its intention of moving its distribution
warehouse from Cleveland, Ohio to a more modern and efficient center in Grove
Port, Ohio, a suburb of Columbus. The Company expects the charges associated
with this move will be approximately $1.3 million, including the write-off of
specific tangible assets at its Cleveland warehouse. The cost savings of the new
facility is expected to offset these charges in less than two years. The
Company's non-warehouse functions will continue to be performed in Cleveland.

PRODUCTS

         The following is a discussion of Consumer Products' principal product
groups:

         Plumbing Products. Consumer Products' plumbing products include valves
and fittings, rubber products, repair kits and tubular products such as traps
and elbows. Many of Consumer Products' plumbing products are sold under the
proprietary trade names Plumbcraft(R), PlumbKing(R) and KF(R). In addition,
Consumer Products offers certain of its customers the option of private label
programs. Consumer Products also offers proprietary lines of faucets under the
trade name Premier(R), as well as a line of shower and bath accessories under
the proprietary trade name Spray Sensations(R).

         Floor Protective Hardware Products. Consumer Products' floor protective
hardware products include casters, doorstops and other floor, furniture and wall
protective items. Consumer Products markets a complete line of floor protective
hardware products under the proprietary trade name KF(R) and also under private
labels. In addition, a new line of surface protection products are being
distributed under the proprietary trade name SoftTouch (TM).

WOC OPERATIONS

         The Company has two operations which are conducted through WOC. The
more significant of the WOC operations is U.S. Lock, a full line supplier of
security hardware products. WOC's other operation is its Medal Distributing
division, a supplier of hardware products. In late fiscal 1997 and early fiscal
1998, two of WOC's divisions were sold, including the Madison Equipment division
("Madison"), a supplier of electrical products, which was sold in April 1997,
and substantially all of the business of the LeRan Gas Products division
("LeRan"), a supplier of copper tubing, brass fittings and other related
products, which was sold to Barnett on July 1, 1997. WOC's net sales amounted to
$28.0 million in fiscal 1998. In connection with management's strategic review
of its wholly-owned operations and as a result of certain business factors
affecting those operations in fiscal 1996, the Company recorded substantial
charges, primarily for a reduction in the carrying value of day-to-day operating
assets and liabilities and a $12.1 million asset impairment charge at U.S. Lock.
See Note 3B to the Consolidated Financial Statements.

         U.S. Lock

         U.S. Lock, which was acquired by the Company in 1988, carries a full
line of security hardware products, including locksets, door closers and
locksmith tools. Many of these products are sold under the U.S. Lock(R) and
Rx(TM) trademarks. U.S. Lock markets and distributes its products primarily to
locksmiths through a telemarketing sales team. U.S. Lock's telemarketing effort
is supplemented with a catalog that is mailed annually to existing customers and
monthly promotional flyers. Since its acquisition by the Company, U.S. Lock has
increased its number of warehouses from one to five.

         U.S. Lock believes that its business model has enabled it to become a
cost-efficient, significant supplier of security hardware to the domestic
professional market. U.S. Lock markets approximately 8,500 name brand and
private label products through its approximately 500-page annual product catalog
and through its telesales operations. U.S. Lock's 19 telesales representatives
include knowledgeable security hardware professionals and customer service and
support personnel that work together to serve customers by providing technical
information and offering product advice. To attract new customers and provide
special promotions to existing customers, U.S. Lock supplements its catalog by
mailing promotional flyers, of which 18,000 were mailed on average each month in
fiscal 1998. Approximately two-thirds of the monthly promotional flyers are sent
to new business prospects, while the remaining are sent to active customers. In
fiscal 1998, U.S. Lock increased its customer base by approximately 300
customers through such mailings. At June 30, 1998, U.S. Lock had approximately
6,200 customers. During fiscal 1997, U.S. Lock introduced its Rx "Dealer Only"
(TM) restricted keyway program, which is a completely integrated system of
restricted cylinders and keys and exclusive lock line. The Company believes that
this proprietary, comprehensive program aides in linking the dealer to U.S.
Lock. U.S. Lock's strategy of being a low-cost, competitively priced supplier is
facilitated by its ability to purchase in volume and its foreign sourcing
capabilities. The success of the Rx program has increased the authorized dealers
from 580 to 1,200 in the past three years. The Company believes that efficient
growth in the security hardware business can be achieved through the expansion
of product offerings and by adding knowledgeable telesales staff and additional
distribution facilities. Accordingly, U.S. Lock expects to add approximately 6
telesales representatives a year for the next five years and also expects to
open 6 to 8 additional distribution warehouses during the same period, while
expanding its product offerings and customer base. The cost of opening a new
7,000 square foot warehouse is 


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approximately $200,000, excluding inventory.

FOREIGN SOURCING OPERATIONS

         Through TWI, the Company conducts its foreign sourcing operations in
Mexico, China and Taiwan, which support Consumer Products, WOC and Barnett. For
the years ended June 30, 1998 and 1997, products purchased overseas, primarily
from Taiwan, China and Mexico, accounted for approximately 24.0% and 36.0%,
respectively, of the total product purchases made by the Company. For fiscal
1998, the operations owned by TWI had net sales of $39.2 million, of which $16.6
million were to Barnett and $16.7 million were intercompany transactions, which
eliminate in consolidation.

         TWI, through its subsidiaries, operates the Taiwan and Mainland China
facilities, which source, manufacture, assemble and package plumbing products.
In addition, a facility in Mainland China manufactures and packages plastic
floor protective hardware products and another facility manufactures faucets.
The Company believes that these facilities give it competitive advantages in
terms of cost and flexibility in sourcing. Both labor and physical plant costs
are significantly below those in the United States.

         Western American Manufacturing, Inc. ("WAMI"), a manufacturer of
galvanized, black, brass, and chrome plumbing pipe nipples in Tijuana, Mexico,
provides the Company vertical integration in the manufacture and distribution of
pipe nipples. Pipe nipples are lengths of pipe which range from 1/2 of an inch
to 10 feet long, threaded at each end. In order to take advantage of lower labor
costs, the Company has relocated certain of its packaging operations to WAMI.

         Substantially all of the other products purchased by the Company are
manufactured by third parties. The Company estimates that it purchases products
and materials from approximately 600 suppliers and is not dependent on any
single unaffiliated supplier for a material portion of its requirements.

         The following table sets forth the approximate percentage of net sales
attributable to the Company's principal product groups. Fiscal 1998 and 1997
information does not include Barnett's net sales, which accounted for 70.5% of
the electrical product sales in fiscal 1996. In fiscal 1996, Consumer Products
eliminated its electrical product line.

<TABLE>
<CAPTION>
                                            1998       1997        1996
                                           -----       ----       -----

<S>                                         <C>        <C>        <C>
          Plumbing                           63%        71%        71%
          Electrical                          1%         1%        12%
          Hardware                           36%        28%        17%
                                            ---        ---        ---
          Total net sales                   100%       100%       100%
                                            ===        ===        ===
</TABLE>

IMPORT RESTRICTIONS AND CUSTOMS ISSUES

         Under current United States government regulations, some products
manufactured offshore are subject to import restrictions. The Company currently
imports goods from Mexico under the preferential import regulations commonly
known as '9802', formerly item `807', United States goods assembled abroad, and
directly imported from China and Taiwan. The '9802' arrangement permits an
importer who purchases raw materials in the United States and then ships the raw
materials to an offshore factory for assembly, to reimport the goods without
quota restriction and to pay a duty only on the value added in the offshore
factory.

         When the Company chooses to directly import goods purchased outside of
the United States, the Company may be subject to import quota restrictions,
depending on the country of origin of assembly. These restrictions may limit the
amount of goods from a particular country that may be imported into the United
States. If the Company cannot obtain the necessary quota, the Company will not
be able to import the goods into the United States. Export visas for the goods
purchased offshore by the Company are readily available.

         The above arrangements, both '9802' and quota restrictions, were
superseded by more favorable regulations with respect to Mexico under the North
American Free Trade Agreement ("NAFTA") and may be limited by revision or
canceled at any time by the United States government. The Company does not
believe that its relative competitive position is adversely affected by NAFTA.
As a result of the passage of NAFTA, importation from Mexico is more competitive
relative to importation from other exporting countries. As indicated above, many
of the Company's imported goods are of Chinese origin. Favorable tariff rates
under the tariff hearings for China are dependent upon review of most favored
nations status (MFN) which has currently been extended, but there is no
guarantee this will continue to be the case in the future.

EQUITY INVESTMENT - BARNETT AFFILIATE


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         Barnett is a direct marketer and distributor of an extensive line of
plumbing, electrical and hardware products to approximately 65,000 active
customers throughout the United States. Barnett offers and promotes
approximately 11,900 name brand and private label products through its
industry-recognized Barnett(R) catalogs and telesales operations. Barnett
markets its products through five distinct, comprehensive catalogs that target
professional contractors, independent hardware stores, maintenance managers and
liquid propane gas dealers. Barnett's staff of over 101 knowledgeable telesales,
customer service and technical support personnel work together to serve
customers by assisting in product selection and offering technical advice. To
provide rapid delivery and a strong local presence, Barnett has established a
network of 32 distribution centers strategically located in 32 major
metropolitan areas throughout the United States and Puerto Rico. Through these
local distribution centers, approximately 70% of Barnett's orders are shipped
directly to the customer on the same day the order is received. The remaining
30% of the orders are picked up by the customer at one of Barnett's local
distribution centers. Barnett's strategy of being a low-cost, competitively
priced supplier is facilitated by its volume of purchases and the offshore
sourcing of a significant portion of its private label products. Products are
purchased from over 500 domestic and foreign suppliers, including TWI.

         Barnett believes that its distinctive business model has enabled it to
become a high-volume, cost-efficient direct marketer of competitively priced
plumbing, electrical and hardware products. Barnett's approximately 900-page
catalogs offer an extensive selection of products in an easy to use format
enabling customers to consolidate purchases with a single vendor. Barnett
provides an updated version of its catalogs to its customers on average three
times a year. To attract new customers and offer special promotions to existing
customers, Barnett supplements its five comprehensive catalogs with monthly
promotional flyers. Barnett mailed approximately 5.5 million promotional flyers
during fiscal 1998, compared to approximately 4.3 million promotional flyers
during fiscal 1997. Barnett's experienced and knowledgeable inbound telesales
staff, located at Barnett's centralized headquarters in Jacksonville, Florida,
uses Barnett's proprietary information systems to take customer orders as well
as offer technical advice. Barnett's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations, encourages
additional purchases and solicits new customers. Targeted customer accounts are
typically assigned an outbound telesalesperson in order to enhance customer
relationships and improve customer satisfaction. Barnett's high in-stock
position and extensive national network of local distribution centers enable it
to fulfill approximately 94% of the items included in each customer order and
provide rapid delivery. As a result of its emphasis on customer service,
Barnett's customer retention rate (i.e., customers who place orders in the
following year) has consistently remained in the 80% range for the past three
years.

         Barnett was a wholly-owned subsidiary of the Company until the
completion of an initial public offering in April 1996 (the "Barnett Initial
Public Offering"). In such offering, 7,207,200 shares, representing
approximately 55.1% of the Barnett Common Stock, were sold in the aggregate by
Barnett and the Company at an initial public offering price per share of $14.00,
resulting in aggregate net proceeds of $92.6 million. As a result of the
Company's conversion of a portion of the convertible non-voting preferred stock
of Barnett to Barnett Common Stock during the fiscal 1996 fourth quarter, the
Company beneficially owned approximately 49.9% of the Barnett Common Stock and,
together with the convertible non-voting preferred stock of Barnett,
approximately a 54% economic interest of the capital stock of Barnett at June
30, 1996. In April 1997, a secondary offering of 1,300,000 shares of Barnett
Common Stock (the "Barnett Secondary Offering"; and together with the Barnett
Initial Public Offering, the "Barnett Public Offerings") was completed and the
Company converted its remaining convertible non-voting preferred stock of
Barnett to Barnett Common Stock. The Company received a per share price of
$17.50, before the underwriter's discount, resulting in $21.6 million of net
proceeds. In July 1997, as a result of the sale of a substantial portion of the
business of LeRan , one of WOC's operations, to Barnett, the Company received
cash and an additional 24,730 shares of Barnett Common Stock. At June 30, 1998,
the Company owned 44.4% of the outstanding shares of Barnett Common Stock. The
Barnett Common Stock trades on the Nasdaq National Market under the symbol
"BNTT"(R).


COMPETITION

         The Company faces significant competition within each of its product
lines, although it has no competitor offering the range of products in all of
the product lines that the Company offers. The Company believes that its buying
power, extensive inventory, emphasis on customer service and merchandising
programs have contributed to its ability to compete successfully in its various
markets. The Company faces significant competition from smaller companies, which
specialize in particular types of products and larger companies, which
manufacture their own products and have greater financial resources than the
Company. The Company believes that competition in sales to retailers is
primarily based on price, product quality and selection, as well as customer
service, which includes speed of responses for packaging and merchandising for
retailers.

EMPLOYEES

         As of June 30, 1998, the Company employed 754 persons, 125 of whom were
clerical and administrative personnel, 71 of whom were sales service
representatives and 558 of whom were either production or warehouse personnel.
Sixty of the Company's employees are represented by collective bargaining units.
The Company considers its relations with its employees, including those



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<PAGE>   7
 
represented by collective bargaining units, to be satisfactory. In July 1998,
Consumer Products announced its intention of moving its distribution warehouse
from Cleveland, Ohio to a more modern and efficient center in Grove Port, Ohio,
a suburb of Columbus. The move, which will affect approximately 50 warehouse
jobs, is expected to be complete in November 1998. Consumer Products is working
with the union representatives and its membership to address severance and other
employee benefit matters. The Company's non-warehouse functions will continue to
be performed in Cleveland, while an equivalent number of warehouse positions
will be created at the new distribution center.

TRADEMARKS

         Several of the trademarks and trade names used by the Company are
considered to have significant value in its business. See "Business -- Consumer
Products -- Products" and "WOC Operations."

ENVIRONMENTAL REGULATIONS

         The Company is subject to certain federal, state and local
environmental laws and regulations. The Company believes that it is in material
compliance with such laws and regulations applicable to it. To the extent any
subsidiaries of the Company are not in compliance with such laws and
regulations, the Company, as well as such subsidiaries, may be liable for such
non-compliance. However, in any event, the Company is not aware of any such
liabilities which could have a material adverse effect on it or any of its
subsidiaries.

SEASONALITY

         The Company's sales are generally consistent throughout its fiscal
year, although the third fiscal quarter is generally weaker in sales than the
other quarters.



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<PAGE>   8



ITEM 2. DESCRIPTION OF PROPERTIES

         The following table sets forth, as of June 30, 1998, certain
information with respect to the Company's principal physical properties:

<TABLE>
<CAPTION>
                                                                                                        LEASE
                                 APPROXIMATE                                                         EXPIRATION
    LOCATION                     SQUARE FEET                PURPOSE                                     DATE
    --------                     -----------                -------                                     ----

<S>                                  <C>                   <C>                                  <C>
24455 Aurora Road                    125,000               Consumer Products Corporate                 6/30/02 
Bedford Hts., OH (1)                                       Office and Distribution Center

902 Avenue T.                        108,000               Consumer Products                           5/31/00
Grand Prairie, TX (2)                                      Office and Distribution Center

24001 Aurora Road                     33,000               Consumer Products Corporate                 4/30/99
Bedford Hts., OH                                           Office and Distribution Center

77 Rodeo Drive                        46,000               U.S. Lock                                     Owned
Brentwood, NY                                              Office and Distribution Center

330 Vine Street                       80,000               Medal Distributing                          2/28/01
Sharon, PA                                                 Office and Distribution Center

No. 10, 7th Road                      55,000               TWI                                           Owned
Industrial Park                                            Office, Packaging
Taichung, Taiwan                                           and Distribution Center
Republic of China

Dan Keng Village                      45,000               TWI/CWI
Fu Ming County                                             Office, Packaging, Manufacturing              Owned
Shenzhen, P.R. China                                       and Distribution Center

113, 9 Sur Y 6 Oriente St., CD        41,000               WAMI                                        6/15/00
Industrial Mesa De Otay                                    Office and Manufacturing Center
Tijuana, Mexico

16002, 9 Sur St., CD                  37,000               WAMI                                        3/31/99
Industrial Mesa De Otay                                    Packaging Center
Tijuana, Mexico

9430 Cabot Drive                      13,000               WAMI Sales                                  1/31/00
San Diego, California                                      Office and Distribution Center

20052, 6 Oriente St., CD              12,000               WAMI                                 month-to-month
Industrial Mesa De Otay                                    Manufacturing Center                          lease
Tijuana, Mexico
<FN>

(1)      Aurora Investment Co., a partnership owned by Melvin and Armond Waxman, together with certain other
         members of their families, is the owner and lessor of this property. In July 1998, Consumer Products
         announced its intention of moving its warehouse to Grove Port, Ohio and will sublease the warehouse
         section of this facility. Rent expense under this lease was $314,150 in fiscal 1998, $314,150 in fiscal
         1997 and $314,200 in fiscal 1996.

(2)      The Company has the option to renew the lease for three additional five-year terms. 
</FN>
</TABLE>

         In addition to the properties shown in the table, the Company operates
5 distribution centers ranging in size from 5,000 to 9,000 square feet.

         Handl-it Inc., a corporation owned by John S. Peters, a consultant to
the Company, together with certain other members of his family and Melvin
Waxman, Chairman of the Board and Co-Chief Executive Officer of the Company,
provided Consumer Products with certain outside warehousing services under
month-to-month rental arrangements for part of the year. Mr. Waxman 


                                       8
<PAGE>   9

acquired his interest in Handl-it Inc. in fiscal 1997. Consumer Products may
enter into month-to-month leases in the future, depending on its business
requirements at the time. Rent expense under these lease arrangements was
$30,000, $137,000 and $232,000 for fiscal 1998, 1997 and 1996, respectively.

         The Company believes that its facilities are suitable for its
operations and provide the Company with adequate productive capacity and that
the related party leases are on terms not materially less favorable than those
that would be available from unaffiliated third parties.

ITEM 3.     LEGAL PROCEEDINGS

         The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the financial position or operations of the Company.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Omitted pursuant to General Instructions (I)(2)(c) of Form 10-K.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

         Omitted pursuant to General Instructions (I)(2)(c) of Form 10-K.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         There is no established public trading market for the common stock of
the Company. All of the issued and outstanding common stock of the Company is
owned by Waxman Industries. The Company declared no dividends in fiscal 1998 or
1997. Restrictions contained in the Company's debt instruments currently
prohibit the declaration and payment of any cash dividends.



                                       9
<PAGE>   10



ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                                                     FISCAL YEARS ENDED JUNE 30,

INCOME STATEMENT DATA (1):
(AMOUNTS IN THOUSANDS)                                                 1998          1997          1996       1995          1994
                                                                      -------       ------       -------       ----        ------
<S>                                                                  <C>           <C>           <C>           <C>        <C>     
Net sales                                                            $105,662      $120,081      $235,067      $232,304    $213,571
Cost of sales                                                          69,429        86,425       160,556       152,368     140,262
                                                                     --------      --------      --------      --------    --------
Gross profit                                                           36,233        33,656        74,511        79,936      73,309
Selling, general and administrative expenses                           26,661        30,604        66,433        58,590      53,321
Corporate charge                                                        3,306         3,872         4,195         3,891       4,217
Restructuring and other non-recurring charges(2)                           24           746        19,507         2,779          --
                                                                     --------      --------      --------      --------    --------
                                                                                                                              
       Operating  income (loss)                                         6,242        (1,566)      (15,624)       14,676      15,771
Gain on sale of Barnett stock(3)                                           --        16,693        65,917            --          --
Equity earnings of Barnett                                              6,341         5,843            --            --          --
Interest expense, net                                                   5,614         7,144        16,263        18,952      13,790
                                                                     --------      --------      --------      --------    --------
Income (loss) from continuing  operations before
income taxes,  minority  interest,  discontinued
operation,  extraordinary  loss  and  cumulative
effect of change in accounting                                          6,969        13,826        34,030        (4,276)      1,981
Provision  (benefit) for income taxes                                   2,659         4,671        17,019        (1,100)      1,100
                                                                     --------      --------      --------      --------    ---------
Income (loss) from continuing operations
before minority interest, discontinued
operation, extraordinary loss and cumulative effect of                        
change in accounting                                                    4,310         9,155        17,011        (3,176)        881
Minority interest in consolidated affiliate                                --            --           975            --          --
Discontinued operation (4):
  Reversal of loss (and loss) on  disposal,  net of tax                    --            --         6,600        (6,600)         --
                                                                     --------      --------      --------      --------    --------
Income  (loss)  before  extraordinary  loss  and
cumulative effect of  change in accounting                              4,310         9,155        22,636        (9,776)        881
Extraordinary loss, net of tax benefit (5)                                115            --         3,750            --          --
                                                                                                                     
Cumulative  effect of change in accounting,  net
of tax benefit (6)                                                         --            --         4,928            --          --
                                                                     --------      --------      --------      --------    --------
Net income (loss)                                                     $ 4,195       $ 9,155      $ 13,958      $( 9,776)    $   881
                                                                     ========      ========      ========      ========    ========


BALANCE SHEET DATA:

Working capital                                                    $   17,345    $   31,312     $  51,712     $  22,522   $  39,933
Total assets                                                           96,732        97,944       133,063       154,769     167,334
Total long-term debt                                                   36,444        49,057        49,613        88,521      88,419
Stockholder's equity                                                   29,814        23,929        11,817       (20,025)     (1,090)
                                                                       
<FN>

(1)      In fiscal 1997, due to the sale of additional shares in the Barnett Secondary Offering, the Company began to 
         account for its remaining 44.5% ownership in Barnett under the equity method of accounting. Prior
         to the sale, the Company consolidated Barnett's results and recorded a minority interest charge for the portion 
         of Barnett not owned by the Company. Earnings per share data is not presented and is not
         meaningful, as the Company is a wholly-owned subsidiary of Waxman Industries, Inc.

(2)      In the first quarter of fiscal 1998, the Company recorded an estimated non-recurring charge of $133 for warehouse 
         closure costs and other expenses associated with the sale of LeRan . In the fourth quarter of fiscal 1998, 
         the estimated loss was adjusted to $24. In the fourth quarter of fiscal 1997, the Company sold Madison and 
         recorded a loss on sale of $0.7 million. During fiscal 1996, the Company recorded a $19.5 million restructuring 
         and asset impairment loss, which included a $7.4 million restructuring charge primarily attributable to strategic
         initiatives at Consumer Products and a $12.1 million asset impairment charge primarily attributable to U.S. Lock 
         in accordance with SFAS 121.  During fiscal 1995, the Company incurred $2.8 million in warehouse closure costs as 
         Consumer Products' distribution network was downsized from four locations to three. See Note 3 to the Consolidated 
         Financial Statements for further discussion of the fiscal 1997, 1996 and 1995 charges.

(3)      Reflects the gains on the Barnett Public Offerings as further described in Note 2 to the Consolidated Financial 
         Statements.

(4)      Fiscal 1996 amount represents the reversal of the fiscal 1995 estimated loss on the disposal of Consumer Products.

(5)      Represents the write-off of deferred financing costs resulting from the repayment and refinancing of debt in fiscal 
         1998 and 1996, as further described in Notes 2 and 6 to the Consolidated Financial Statements.

(6)      See Note 5 to the Consolidated Financial Statements for a discussion  regarding the cumulative effect of a change 
         in accounting for procurement costs of $4.9 million, net of applicable tax benefit of $3.3 million, in fiscal 1996.
</TABLE>

                                       10
<PAGE>   11

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

GENERAL

         The Company operates in two business segments -- the distribution of
specialty plumbing, security hardware and other products and the sourcing,
manufacturing and packaging of plumbing and hardware products through its
foreign operations. In fiscal 1998, approximately 41.4% and 44.4% of the
Company's foreign operations' sales were to the Company's domestic wholly-owned
operations and Barnett, respectively.

         The Company is the single largest stockholder of Barnett, owning 7.2
million shares, or 44.4% of the outstanding Barnett Common Stock at June 30,
1998. The market value of this equity investment is significantly greater than
the carrying value. Until the Barnett Initial Public Offering in April 1996,
Barnett was a wholly-owned subsidiary of the Company. The Barnett Initial Public
Offering resulted in the sale of 7,207,200 shares, representing approximately
55.1% of the Barnett Common Stock, at an initial public offering price per share
of $14.00, resulting in aggregate net proceeds of $92.6 million. The Company
further reduced its interest in Barnett in April 1997 when it completed the
Barnett Secondary Offering of 1.3 million shares of Barnett Common Stock for
$17.50 per share, resulting in aggregate net proceeds of $21.6 million, and a
net pre-tax gain of $16.7 million. As a result of the Barnett Secondary Offering
and subsequent conversion of non-voting convertible preferred stock to Barnett
Common Stock, the Company's economic ownership in Barnett was reduced from
approximately 54% to approximately 44.5% and the Company began accounting for
its interest in Barnett under the equity method of accounting, restating the
results for each of the quarters of fiscal 1997. An historic overview of other
recent strategic developments in the Company are summarized below.

         In August 1995, Waxman Industries announced that it had decided to sell
its Consumer Products business and entered into a letter of intent, which
subsequently expired. As a result of the consummation of the Barnett Initial
Public Offering in fiscal 1996, Waxman Industries ceased its efforts to sell
Consumer Products, completed a review of its operations and began classifying
Consumer Products as a continuing operation.

         In fiscal 1996, in connection with the likely completion of the Barnett
Initial Public Offering and consequent retention of the Consumer Products
business, the Company embarked upon a strategic review of Consumer Products and
its other wholly-owned operations, taking into account the difficulties
encountered during the sale process of Consumer Products, as well as certain
weaknesses in the industry in which the Company competed. As a result of
management's review and refocus on Consumer Products as a continuing operation
and consistent with its strategic direction, an $11.9 million charge, primarily
for a reduction in the carrying value of day-to-day operating assets and
liabilities, was recorded by Consumer Products in operating results during the
fiscal 1996 third and fourth quarters, which represented an increase of $6.9
million to cost of goods sold and $5.0 million to selling, general and
administrative expenses. Such charge, comprised of $7.7 million and $4.2 million
recorded in the fiscal 1996 third and fourth quarters, respectively, included
$5.1 million for the impairment and write-down of inventory, $2.7 million for
certain accounts receivable balances, $2.0 million representing a portion of the
costs of developing a management information system, $0.5 million of abandoned
product development costs and $1.6 million for various liabilities.

         The traditional customers of certain of WOC's operations, smaller
retail establishments, have been adversely affected by the movement by large
national retailers to expand in more rural locations and compete with such
smaller retail establishments. In addition, the market has been increasingly
impacted by the availability of lower cost foreign sourcing to both domestic and
foreign competitors. In fiscal 1996, in connection with management's strategic
review of its other wholly-owned operations and as a result of business factors
affecting these other operations, including increased competition from
multi-category retailers and competitive pricing from overseas competitors, the
effect of which was exacerbated by excess manufacturing capacity at the
Company's foreign facilities, the Company recorded an additional charge of $2.9
million in the fiscal 1996 fourth quarter operating results primarily for a
reduction in the carrying value of day-to-day operating assets and liabilities.
Such charge included $1.7 million to reduce the carrying value of inventory and
other assets at WOC and TWI, $0.4 million of accelerated depreciation as a
result of a change in the estimated useful lives of certain property and
equipment and $0.8 million for various liabilities.

         During the fourth quarter of fiscal 1996, the Company recorded an
additional $19.5 million pre-tax restructuring and asset impairment charge.
Below is a summary of the components comprising such charge (in millions of
dollars):
<TABLE>
<S>                                                          <C>   
         Exiting product lines                               $  4.1
         Warehouse closure costs                                1.3
         Reduction of excess capacity                           1.1
         Other                                                  0.9
         Asset impairment                                      12.1
                                                              -----
                  Total                                       $19.5
                                                              =====
</TABLE>

                                       11
<PAGE>   12
 
         EXITING PRODUCT LINES: In furtherance of its efforts to strengthen the
         Consumer Products business, in fiscal 1996, the Company decided to
         eliminate Consumer Products' electrical product line and reduce the
         number of individual products offered in its plumbing and floor care
         product lines. These actions enabled Consumer Products to reduce fixed
         costs as well as optimize and focus its product offerings to its major
         retail customers. With the exception of one small account, Consumer
         Products no longer services the electrical product line and reduced the
         number of products offered in its plumbing and floor care product lines
         and did not incur cash outlays for these reductions. The $4.1 million
         charge in fiscal 1996 was primarily for the write-down of related
         inventory, which was disposed of prior to June 30, 1997.

         WAREHOUSE CLOSURE COSTS: During the fourth quarter of fiscal 1996, the
         Company downsized Consumer Products' distribution network from three
         locations to two and, as a result, incurred warehouse closure costs of
         $1.3 million. In fiscal 1997, the Company recorded an additional $0.2
         million for additional costs associated with the remaining lease term
         of the warehouse. The warehouse closure costs included costs associated
         with the remaining noncancellable term of an operating lease of $0.5
         million, incremental employee salaries and benefits associated with
         closing the warehouse of $0.5 million, loss on fixed assets of $0.2
         million and other miscellaneous expenses associated with the closing of
         $0.3 million. All of the costs associated with this lease have been
         paid as of June 30, 1998.

         REDUCTION OF EXCESS CAPACITY: In fiscal 1996, with the discontinuance
         and downsizing of Consumer Products' product lines, the foreign
         operations which support Consumer Products identified excess capacity
         in both buildings and equipment. As a result, a $1.1 million charge was
         recorded to reduce the net book value of buildings by $0.8 million and
         equipment by $0.3 million.

         OTHER: In connection with the strategic review in fiscal 1996, a
         division of WOC discontinued certain product offerings, which resulted
         primarily in a write-down of inventory and excess equipment.

         ASSET IMPAIRMENT: The fiscal 1996 asset impairment charge of $12.1
         million related to the Company's U.S. Lock division. Due to the
         continued decline in the locksmith industry brought about by the
         competitive nature of the D-I-Y retail market, as required by SFAS No.
         121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
         Assets to Be Disposed Of," the Company expensed $9.8 million of
         goodwill and $2.3 million of property and equipment, as the carrying
         value for the division exceeded its fair value. Fair value was
         determined based on a multiple of cash flows.

         Effective July 1, 1995, the Company changed its method of accounting
for procurement costs. Procurement costs represent the amount paid in connection
with a customer's commitment to purchase products from the Company for a
specified period. The amount capitalized is the consideration paid by the
Company to the new or existing customer (i) for the right to supply such
customer for a specified period and (ii) to purchase competitor's merchandise
that the customer has on hand when it changes suppliers, less the salvage value
received by the Company. The Company believes that amortization in the fiscal
year incurred for such costs is consistent with the Company's strategic review
of Consumer Products and is preferable due to the uncertainty of today's
competitive retail environment. Previously, the Company amortized these costs
over the period deemed to be benefited. The cumulative effect of this change on
years prior to fiscal 1996 of $4.9 million, net of applicable income tax benefit
of $3.3 million, is reported separately in the fiscal 1996 consolidated
statement of operations. The additional effect of the change in fiscal 1996 was
to decrease the operating loss by $2.1 million.

         The Company recorded an extraordinary charge of approximately $3.8
million, net of applicable income tax benefit of $2.5 million in fiscal 1996
related to a premium paid on the retirement of certain indebtedness and the
accelerated amortization of the related unamortized debt discount and debt
issuance costs attributed to indebtedness repaid and/or refinanced in connection
with the Barnett Initial Public Offering, the Private Exchange Offer not yet
defined and a credit facility (the "Credit Agreement") entered into by Consumer
Products and WOC with BankAmerica Business Credit, Inc. ("BankAmerica").

         In fiscal 1997, the Company recorded charges totaling $6.4 million,
including adjustments to cost of sales of $4.3 million, SG&A (as hereinafter
defined) expenses of $1.8 million and $0.3 million to sales allowances. The
largest portion of the adjustments were made at Consumer Products, with charges
of $4.2 million, $1.1 million and $0.3 million to cost of sales, SG&A expenses
and sales, respectively, related to the decision to augment certain existing
product lines, streamline its packaged plumbing product line, enhance and
redesign its existing plumbing product packaging, undertake certain customer
retention and development programs and establish inventory reserves which were
necessary, in part, for the reduction in the buying patterns of Builders Square
and Kmart. In addition, the Company recorded $0.1 million and $0.7 million in
additional cost of sales and SG&A expenses, respectively, in total at its
remaining operations, primarily related to inventory adjustments and charges for
valuation reserves. The Company also recorded a 


                                       12
<PAGE>   13

loss of $0.7 million on the disposal of Madison in the fourth quarter of fiscal
1997 (described in Note 4 to the Consolidated Financial Statements).

         In April 1997, Madison, a supplier of electrical products, was sold for
$2.0 million, and in July 1997, substantially all of the business of LeRan, a
supplier of copper tubing, brass fittings and other related products was sold to
Barnett for $3.2 million in cash and 24,730 shares of Barnett Common Stock, with
a value of $0.6 million at the time of the transaction.

         In May 1997, the Company commenced an offer to repurchase (the
"Purchase Offer"), at par, $12.0 million of its 11 1/8% Senior Notes due 2001
(the "Senior Notes"). In July 1997, the Purchase Offer expired with $2.5 million
principal amount of Senior Notes tendered. Upon the expiration of the Purchase
Offer, the Company called for the redemption of $9.5 million principal amount of
Senior Notes that had not been tendered in the Purchase Offer and completed the
redemption of these notes in August 1997.

         The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
During fiscal 1998, the Company began to implement plans at certain of its
operations to ensure those systems continue to meet its internal and external
requirements. During fiscal 1998, the Company's largest division, Consumer
Products, completed the modifications and testing of its information systems and
is Year 2000 compliant. Consumer Products utilizes an IBM AS400 system, along
with the latest version of Year 2000 compliant J.D. Edwards software. The
Company's Corporate office is in the process of converting to this J.D. Edwards
package and should complete the conversion in the fourth quarter of calendar
1998. Currently, U.S. Lock contracts with Barnett for its information system,
accounting and certain other administrative functions. In July 1998, U.S. Lock
hired a Vice President of MIS and engaged third party vendors to customize a
Year 2000 compliant software package designed for distributors. The system,
which will operate on a Windows NT platform, will be operational before June 30,
1999. The cost of the hardware, software and customization of approximately
$650,000, is expected to be financed through a lease. In August 1998, WAMI's
PC-based Year 2000 software upgrade was installed and is being tested. Based on
information from software vendors, the PC-based information systems at TWI and
CWI will require the installation of a minor upgrade to be Year 2000 compliant.
These modifications are expected to be completed in fiscal 1999 and financed
through working capital with minimal cost. The Company's operations have
developed questionnaires and contacted key suppliers and customers regarding
their Year 2000 compliance to determine any impact on its operations. In
general, the suppliers and customers have developed or are in the process of
developing plans to address Year 2000 issues. The Company will continue to
monitor and evaluate the progress of its suppliers and customers on this
critical matter. The Company is also reviewing its non-information technology
systems to determine the extent of any changes that may be necessary and
believes that there will be minimal changes necessary for compliance.

         Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.

RESULTS OF OPERATIONS

         The following table sets forth certain items reflected in the Company's
Consolidated Statements of Operations as a percentage of net sales:

<TABLE>
<CAPTION>

                                                                         Fiscal Year Ended June 30,
                                                                        --------------------------

                                                                     1998          1997          1996
                                                                     ----          ----          ----
<S>                                                                  <C>           <C>           <C>   
Net sales                                                            100.0%        100.0%        100.0%

Cost of sales                                                         65.7%         72.0%         68.3%

Gross profit                                                          34.3%         28.0%         31.7%

Selling, general and administrative
  expenses                                                            25.3%         25.5%         28.2%

Corporate charge                                                       3.1%          3.2%          1.8%

</TABLE>

                                       13
<PAGE>   14
 
<TABLE>

<S>                                                                  <C>               <C>                <C>
Restructuring and other non-recurring charges
                                                                      0.0%               0.6%                8.3%

Operating income (loss)                                               5.9%              (1.3%)              (6.6%)

Gain on sale of Barnett stock                                          --               13.9%               28.0%

Equity earnings of Barnett                                            6.0%               4.8%                 --

Interest expense, net of interest income                              5.3%               5.9%                6.9%

Income from continuing operations before
income taxes, minority interest,
discontinued operation, extraordinary  loss
and cumulative effect of change in accounting                         6.6%              11.5%               14.5%


Provision for income taxes                                            2.5%               3.9%                7.3%

Income from continuing operations before
minority interest, discontinued operation,
extraordinary loss and cumulative effect of
change in accounting                                                  4.1%               7.6%                7.2%

Minority interest in consolidated affiliate                            --                 --                 0.4%

Reversal of loss on disposal of business, net of tax                   --                 --                 2.8%

Income before extraordinary loss and
cumulative effect of change  in accounting                            4.1%               7.6%                9.6%

Extraordinary loss, net of tax benefit                                0.1%                --                 1.6%

Cumulative effect of change in
accounting, net of tax                                                 --                 --                 2.1%

Net income                                                            4.0%               7.6%                5.9%
</TABLE>



YEAR ENDED JUNE 30, 1998 VS. YEAR ENDED JUNE 30, 1997

NET SALES

        Net sales of the Company's wholly-owned operations for fiscal 1998 of
$105.7 million increased by $4.4 million or 4.3% in comparison to fiscal 1997,
excluding the disposed operations of Madison and LeRan. The increase in fiscal
1998 net sales is attributable to an increase of 21.5% at U.S. Lock and 22.4% at
the Company's foreign sourcing and manufacturing operations. Increases from
these operations were partially offset by a 5.2% decrease at Consumer Products.
Net sales for fiscal 1997, including $18.8 million in sales from the disposed
operations, amounted to $120.1 million. Madison was sold in April 1997, while
substantially all of LeRan's gas products business was sold to Barnett on July
1, 1997. LeRan's malleable fitting business was transferred to WAMI's sales
division as a result of this sale.

         The growth at U.S. Lock is the result of an increase in the size of its
professional telesales staff, additional sales from its monthly promotional
flyer program, an increase in new products and the success of its Rx "Dealer
Only" (TM) restricted keyway program. In the fourth quarter of fiscal 1998, U.S.
Lock also moved a distribution center from Sacramento to Ontario, California,
near Los Angeles, which is expected to be a stronger market for its products. In
addition, U.S. Lock's fiscal 1998 net sales increase benefited from a full year
of operations of its fifth warehouse, which was opened in Charlotte, North
Carolina, in March 1997. The increase in sales at the Company's foreign sourcing
operations is primarily the result of an increase in sales to Barnett. However,
the foreign operation supplying pipe nipples to Barnett experienced a reduction
in sales for the second half of the fiscal year due to the 

                                       14
<PAGE>   15

loss of one of Barnett's pipe nipple customers. Until those pipe nipple sales
are replaced by sales to other customers, the Company expects its WAMI operation
to have approximately $1.5 million less in annual sales. Sales for the Company's
Consumer Products operation decreased $3.0 million in fiscal 1998, primarily due
to the closing of select stores by Hechinger / Builders Square, the inclusion of
$1.1 million in fiscal 1997 sales to Ernst, which was lost as a customer due to
its bankruptcy and a reduction in purchases by Kmart due to its inventory
management program. In August 1998, Consumer Products was informed that it would
only retain the bulk plumbing portion of its business with Hechinger / Builders
Square.

        The trend in the retail market is to develop direct relationships with
foreign sources, including foreign sourcing operations similar to those owned by
the Company. The Company will utilize its foreign sourcing operations to obtain
new business when our domestic operation is unable to compete, and therefore,
has placed an emphasis on developing business outside of the intercompany and
affiliated company arrangements for the foreign sourcing operations. This effort
is expected to be of increasing importance in future results as more retailers
emphasize direct import relationships. The Company believes sales from its
foreign sourcing operations will continue to increase to both Barnett, due to
its growth, and through direct sales to non-affiliated operations.

  GROSS PROFIT

        Gross profit for the Company's wholly-owned operations amounted to $36.2
million in fiscal 1998, an increase of $2.5 million over the $33.7 million for
fiscal 1997. The gross profit margin for the wholly-owned operations increased
to 34.3% in fiscal 1998 from 28.0% for the wholly-owned operations in fiscal
1997. The relatively low gross profit margin in fiscal 1997 was due to $4.3
million of charges, including $4.2 million at Consumer Products, related to the
decision to augment certain existing product lines, streamline its packaged
plumbing product line, enhance and redesign its existing plumbing product
packaging, undertake certain customer retention and development programs and
establish inventory reserves which were necessary, in part, for the reduction in
the buying patterns of Builders Square and Kmart. In addition, the gross profit
margin in fiscal 1997 was lower due to the inclusion of LeRan and Madison, which
were lower margin businesses. Excluding the disposed operations, gross profit
margin for fiscal 1997 would have been 28.7%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Selling, general and administrative ("SG&A") expenses of the
wholly-owned operations decreased by $3.9 million, or 12.9%, to $26.7 million in
fiscal 1998 from $30.6 million in fiscal 1997. The fiscal 1997 SG&A expenses
included $3.9 million of SG&A expenses from the disposed operations and $1.8
million of year end adjustments. As a percentage of net sales, SG&A expenses
were 25.3% in fiscal 1998 compared to 25.5% for the wholly-owned operations in
fiscal 1997. The fiscal 1997 percentage, excluding the disposed operations,
would have been 26.3%.

CORPORATE CHARGE

        Corporate charge decreased to $3.3 million, or 3.1% of net sales for the
wholly-owned operations in fiscal 1998 compared to $3.9 million, or 3.2% of net
sales for the wholly-owned operations in fiscal 1997. Corporate charges are
allocations to the Company of expenses that Waxman Industries incurs to support
its corporate activities.

INTEREST EXPENSE

        Interest expense decreased slightly to $5.6 million for fiscal 1998 from
$7.1 million in the prior year. Average borrowings decreased to $49.1 million in
fiscal 1998 from $62.8 million in fiscal 1997 and the weighted average interest
rate decreased from 10.9% to 10.7% during the same period. The decrease in
average borrowings is due to the repayment of indebtedness with a portion of the
net proceeds from the Barnett Secondary Offering, which caused an improvement
for most of the fiscal 1998 period. The weighted average interest rate decreased
due to the retirement of 11 1/8% Senior Notes, which have a higher interest rate
than the average rate of the remaining debt.

OPERATING INCOME AND INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

        Operating income for fiscal 1998 improved to $6.2 million, from the loss
of $1.6 million in fiscal 1997. Fiscal 1997 results included approximately $6.4
million in year end adjustments, described in Note 3 to the Consolidated
Financial Statements. Excluding the year end adjustments in fiscal 1997,
operating income improved by 29.2% in fiscal 1998 over the prior year. Consumer
Products, U.S. Lock and the foreign sourcing operations contributed to the
improvement. The continued growth of U.S. Lock, which has been a consistent
contributor to operating income over the past three years, has resulted in an
improvement in the operating income of the Company. The Company's foreign
sourcing operations have benefited from the growth of Barnett, which accounts
for


                                       15
<PAGE>   16
 
nearly all of their external sales. An additional factor in the improvement of
the foreign sourcing operations has been the foreign currency devaluation. Since
the foreign operations contract their sales in U.S. dollars, they have benefited
by using less dollars to purchase goods and pay for labor in local currencies.

        Pre-tax results decreased from income of $13.8 million in fiscal 1997 to
income of $7.0 million in fiscal 1998, primarily due to the net pre-tax gain of
$16.7 million from the Barnett Secondary Offering completed in April 1997.
Excluding the $16.7 million gain on the sale of Barnett Common Stock and the
$6.4 million in year end adjustments in fiscal 1997, the comparable pre-tax
income would have been $3.5 million for fiscal 1997. The pre-tax results for
fiscal 1998 and 1997 included $6.3 million and $5.8 million of equity income
from the Company's investment in Barnett, respectively.

INCOME TAXES

        The provision for income taxes was $2.7 million in fiscal 1998 as
compared to $4.7 million in fiscal 1997. The effective tax rate in fiscal 1998
was 38.2% as compared to 33.8% in fiscal 1997. Differences between the effective
tax rate and the statutory rate are primarily the result of state and foreign
taxes and goodwill amortization, which is not deductible for tax purposes.

YEAR ENDED JUNE 30, 1997 VS. YEAR ENDED JUNE 30, 1996

NET SALES

        The net sales of the Company's wholly-owned operations increased $12.4
million to $120.1 million in fiscal 1997 from $107.7 million in the prior year.
The increase in fiscal 1997 net sales was attributable to a 21.9% increase at
U.S. Lock and net sales of $13.7 million from the Company's foreign sourcing
operations to Barnett, which were no longer eliminated as intercompany sales.
Excluding the foreign sourcing sales to Barnett, net sales for the Company's
other wholly-owned operations decreased $1.3 million, primarily due to a
decrease at Consumer Products which more than offset the net sales increase at
U.S. Lock. Fiscal 1996 consolidated net sales, which included Barnett, were
$235.1 million.

        Fiscal 1997 net sales for Consumer Products of $58.2 million decreased
approximately 5.7% from the $61.7 million in fiscal 1996 due to the elimination
of the electrical product line, the loss of Ernst as a customer due to its
bankruptcy in July 1996, the decision by Sears to discontinue carrying packaged
plumbing at its mall locations and reductions in the buying patterns of Builders
Square and Kmart. These reductions were partially offset by increases from
existing customers, including several smaller customers, and the expansion of
business late in fiscal 1997 with WalMart for a portion of its packaged plumbing
business.

        WOC's net sales decreased $0.1 million, or 0.2%, to $43.5 million in
fiscal 1997 from $43.6 million in the prior year. The decrease at WOC was
primarily due to lower sales at LeRan and the sale of Madison. U.S. Lock
reported improved results with net sales in fiscal 1997 of $18.7 million, a
21.9% increase over fiscal 1996. U.S. Lock's improvement was primarily due to
the increase in its telesales effort, new product offerings, expanded mailings
of its catalog and promotional flyers and the introduction of its Rx "Dealer
Only"(TM) program. The opening of U.S. Lock's fifth warehouse in March 1997 was
not a significant factor in the fiscal 1997 sales growth. WOC's net sales
decrease was primarily due to decreases in comparison to the prior year at
Madison, which was sold in April 1997, with sales for the first nine months in
fiscal 1997 of $5.0 million as compared to $6.0 for the full year in fiscal
1996. WOC's sales also decreased due to lower sales at LeRan, with sales of
approximately $13.8 million in fiscal 1997 as compared to $16.3 million in the
prior year. Substantially all of LeRan's gas products business was sold to
Barnett on July 1, 1997, with LeRan's malleable fitting business being
transferred to another of the Company's divisions.

        Net sales for the foreign sourcing operations in fiscal 1997 amounted to
$18.4 million, of which $13.7 million represented sales to Barnett. In prior
years, sales to Barnett were eliminated as intercompany sales.

GROSS PROFIT

        The gross profit of the wholly-owned operations decreased to 28.0% in
fiscal 1997 from 29.6% for the wholly-owned operations only in fiscal 1996, due
to $4.3 million of charges in fiscal 1997, including $4.2 million at Consumer
Products relating to the decision to augment certain existing product lines,
streamline its packaged plumbing product line, enhance and redesign its existing
plumbing product packaging, undertake certain customer retention and development
programs and establish inventory reserves which were necessary, in part, for the
reduction in the buying patterns of Builders Square and Kmart. The fiscal 1996
gross profit included charges of $6.9 million to cost of goods sold for certain
inventory carrying costs as a result of management's strategic review of
Consumer Products' business. Barnett's gross profit margins were higher than
those of the Company's wholly-owned operations and were 34.2% and 33.5% in
fiscal 1997 and 1996, respectively. The gross profit margins of WOC's operations
improved to 28.5% from 26.4%, primarily due to U.S. Lock representing a larger
portion of WOC's sales. The gross margin for the foreign 


                                       16
<PAGE>   17
 
sourcing operations is not a valuable measurement tool because a significant
portion of their sales are made to intercompany operations and eliminated in
consolidation.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        SG&A expenses of the wholly-owned operations decreased by $9.0 million,
or 22.6%, to $30.6 million in fiscal 1997 from $39.6 million in fiscal 1996. The
fiscal 1997 SG&A expenses included $1.8 million of year end adjustments. As a
percentage of net sales, these expenses represented 25.5% in fiscal 1997
compared to 36.7% for the wholly-owned operations in fiscal 1996. The prior year
percentage would have been 29.4%, excluding charges due to management's
strategic review of its wholly-owned operations which resulted in charges at
Consumer Products of $5.0 million and $2.9 million at the Company's other
wholly-owned operations. Fiscal 1996 SG&A expenses also increased at Consumer
Products as a result of recording additional bad debt expense primarily due to
the weakening retail environment, which the Company expected would make
collection of certain accounts receivable balances questionable with specific
customers undertaking Chapter 11 proceedings. Excluding the charges for
management's strategic review in fiscal 1996, SG&A expenses in fiscal 1997
decreased by $1.1 million.

CORPORATE CHARGE

        Corporate charge decreased to $3.9 million, or 3.2% of net sales for the
wholly-owned operations in fiscal 1997 compared to $4.2 million, or 3.9% of net
sales for the wholly-owned operations in fiscal 1996. Corporate charges are
allocations to the Company of expenses that Waxman Industries incurs to support
its corporate activities. The percentage decrease between years was a result of
the increase in net sales of the wholly-owned operations.

INTEREST EXPENSE

        Interest expense decreased to $7.1 million for fiscal 1997 from $16.3
million in the prior year. Average borrowings decreased from $126.5 million to
$62.8 million between years and the weighted average interest rate decreased
from 11.7% to 10.9% during the same period. The decrease in average borrowings
was due to the repayment of indebtedness with a portion of the net proceeds from
the Barnett Initial Public Offering, which caused an improvement for the entire
fiscal 1997 period. The Barnett Secondary Offering in April 1997 and the
subsequent purchase and redemption of a portion of the Senior Notes, as well as
the sale of Madison, primarily impacted fiscal 1998 results because the Senior
Notes were not redeemed until after June 30, 1997. However, the Company
benefited from lower interest from the reduction in its borrowings under the
bank credit facility and from interest income of $0.1 million from excess
proceeds invested during the fourth quarter of fiscal 1997.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

        Pre-tax income decreased to $13.8 million in fiscal 1997 from $34.0
million in fiscal 1996. In fiscal 1997, the Company recorded a net pre-tax gain
of $16.7 million from the Barnett Secondary Offering completed in April 1997, in
comparison to the $65.9 million net pre-tax gain on the sale of Barnett Common
Stock in the Barnett Initial Public Offering in April 1996. Fiscal 1997 results
also included $5.8 million of equity income from the Company's investment in
Barnett, whose results were consolidated in the previous year. The fiscal 1996
pre-tax gain on the sale of Barnett Common Stock was partially offset by the
restructuring and asset impairment loss and other charges recorded by the
Company's operations. Pre-tax results included foreign operations income of $1.4
million in fiscal 1997 and a loss of $1.3 million in fiscal 1996. The
improvement in foreign operations' results between years was primarily the
result of a $1.1 million restructuring charge in fiscal 1996 for the write-down
of buildings and equipment due to excess capacity, and the increase in sales to
non-affiliated companies at a higher margin.

INCOME TAXES

        The provision for income taxes was $4.7 million in fiscal 1997 as
compared to $17.0 million in fiscal 1996. The effective tax rate in fiscal 1997
was 33.8% as compared to 50.0% in fiscal 1996. Differences between the effective
tax rate and the statutory rate were primarily the result of state and foreign
taxes and goodwill amortization, which was not deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

         In April 1997, the Company completed a secondary public offering of 1.3
million shares of Barnett Common Stock, including shares sold pursuant to the
underwriter's overallotment option, raising $21.6 million, net of underwriters'
fees and expenses. In May 1997, the Company commenced the Purchase Offer for
$12.0 million of its Senior Notes, at par. In July 1997, the Purchase Offer
expired with $2.5 million principal amount of Senior Notes tendered. Upon the
expiration of the Purchase Offer, the Company called for redemption of the $9.5
million principal amount of Senior Notes that had not been tendered in the
Purchase Offer and completed the redemption of these notes in August 1997.
Pending the application of these funds, the Company had reinvested the 

                                       17
<PAGE>   18
 
funds in its businesses, thereby effectively reducing borrowings under its
working capital line of credit and, at June 30, 1997, had $8.9 million invested
in short-term liquid investments. The Company's business strategy includes the
reduction of its interest expense and its leverage by the sale of selected
assets and the refinancing of its remaining indebtedness whenever possible. To
that end, the Company sold Madison for $2.0 million in April 1997 and LeRan for
$3.8 million in July 1997.

         On April 3, 1996, the Company consummated an offer to exchange (the
"Private Exchange Offer") $48.7 million principal amount of Senior Notes for a
like amount of Waxman Industries' outstanding 13 3/4% Senior Subordinated Notes
due June 1, 1999 (the "Senior Subordinated Notes") and, in connection therewith,
solicited consents to certain amendments to the indenture pursuant to which the
Senior Subordinated Notes were issued. Approximately $43.0 million of Senior
Subordinated Notes were exchanged in fiscal 1996. The amendments to the Senior
Subordinated Notes indenture eliminated virtually all of the restrictive
covenants and events of defaults previously contained in such indenture. In
January 1997, the Company exchanged an additional $4.8 million of Senior Notes
for a like amount of Senior Subordinated Notes, leaving $0.9 million of the
Senior Subordinated Notes outstanding. The Senior Subordinated Note exchange
offers decreased the Company's cash interest burden and extended the maturity of
the Senior Subordinated Notes exchanged by two years.

         The Company entered into the Credit Agreement in June 1996. The Credit
Agreement provides for, among other things, revolving credit advances of up to
$30.0 million and term loans of up to $5.0 million (the "Term Loans"). As of
June 30, 1998, the Company had $9.8 million in borrowings under the revolving
credit line of the credit facility and had approximately $11.3 million available
under such facility. At June 30, 1998, there were $5.0 million of Term Loans
outstanding. The Credit Agreement and Term Loans, which were to expire on May
31, 1999, have been extended by BankAmerica until July 15, 1999.

         The Credit Agreement provides for revolving credit advances of (a) up
to 85.0% of the amount of eligible accounts receivable and (b) up to the lesser
of (i) $16.0 million or (ii) 60% of the amount of eligible raw and finished
goods inventory. Revolving credit advances bear interest at a rate equal to (a)
BankAmerica's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The Credit
Agreement includes a letter of credit subfacility of $2.0 million, of which $0.4
million was outstanding at June 30, 1998. The Term Loans bear interest at a rate
per annum equal to .25% over the interest rate applicable to revolving credit
advances under the Credit Agreement. Borrowings under the Credit Agreement are
secured by the accounts receivable, inventories, certain general intangibles and
unencumbered fixed assets of Consumer Products and WOC (the "Borrowers"). In
addition, the Term Loans are also secured by a pledge of 500,000 shares of
Barnett Common Stock owned by the Company (constituting approximately 3.1% of
all outstanding Barnett Common Stock). The Credit Agreement requires the
Borrowers to maintain cash collateral accounts into which all available funds
are deposited and applied to service the facility on a daily basis. The Credit
Agreement prevents dividends and distributions by the Borrowers except in
certain limited instances including, so long as there is no default or event of
default and the Borrowers are in compliance with certain financial covenants,
the payment of interest on the Senior Subordinated Notes and the Waxman
Industries, Inc. 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the
"Deferred Coupon Notes"), and contains customary negative, affirmative and
financial covenants and conditions. The Company was in compliance with or had
obtained a waiver for all loan covenants at June 30, 1998. As a result of the
inclusion of a material adverse effect clause as an event of default and the
requirement to maintain cash collateral accounts, the borrowings under the
Credit Agreement and Term Loans have been classified as current liabilities.

                  Since the consummation of the Barnett Initial Public Offering,
the cash flow generated by Barnett is no longer available to the Company. The
Company relies primarily on Consumer Products and U.S. Lock for cash flow.
Consumer Products' customers include D-I-Y warehouse home centers, home
improvement centers, mass merchandisers and hardware stores. Consumer Products
may be adversely affected by prolonged economic downturns or significant
declines in consumer spending. There can be no assurance that any such prolonged
economic downturn or significant decline in consumer spending will not have a
material adverse impact on the Consumer Products' business and its ability to
generate cash flow. Furthermore, Consumer Products has a high proportion of its
sales with a concentrated number of customers. One of Consumer Products' largest
customers, Kmart, accounted for approximately 18.2% and 16.5% of net sales for
Consumer Products in fiscal 1998 and fiscal 1997, respectively. During fiscal
1997, the Company was advised by Kmart that, after it had completed a vendor
review, Consumer Products had successfully retained the supply arrangements for
plumbing and hardware products. In July 1997, Kmart agreed to sell its Builders
Square chain to Leonard Green & Partners, a merchant-banking firm. Leonard Green
also acquired another home improvement retailer, Hechinger Co., and has combined
the two companies to form the nation's third largest home improvement chain. In
fiscal 1997, Builders Square accounted for 21.9% of Consumer Products' net
sales. The combined operations of Hechinger / Builders Square is Consumer
Products' largest customer, accounting for approximately $11.7 million, or
21.1%, of its net sales in fiscal 1998. Net sales to the combined operations
declined during fiscal 1998, with $5.1 million being sold in the last six
months. In August 1998, Consumer Products was informed that the Hechinger /
Builders Square operations were consolidating their supplier relationships and
Consumer Products would retain only the bulk plumbing business of approximately
$2.3 million annually. The supplier relationship is expected to change late in
the second quarter of fiscal 1999. Due to the loss of this revenue base,
Consumer Products has developed plans to reduce its cost structure to be more in
line with its revenue base. The Company expects the impact to operating income
to be approximately $0.8 million in fiscal 1999. In the event Consumer Products
were to lose any additional large retail accounts as a customer or one of its
largest 

                                       18
<PAGE>   19

accounts were to significantly curtail its purchases from Consumer Products,
there would be additional material short-term adverse effects until the Company
could further modify Consumer Products' cost structure to be more in line with
its anticipated revenue base. Consumer Products would likely incur significant
charges if additional materially adverse changes in its customer relationships
were to occur.

         The Company paid no federal taxes for the year ended June 30, 1998, due
to Waxman Industries' net loss for the year.

         The Company does not have any commitments to make substantial capital
expenditures; however, it plans to spend approximately $2.0 million in capital
expenditures in fiscal 1999. The Company utilizes management information systems
and software technology that may be affected by Year 2000 issues throughout its
businesses. During fiscal 1998, the Company began to implement plans at certain
of its operations to ensure those systems continue to meet its internal and
external requirements. During fiscal 1998, the Company's largest division,
Consumer Products, completed the modifications and testing of its information
systems and is Year 2000 compliant. Consumer Products utilizes an IBM AS400
system, along with the latest version of Year 2000 compliant J.D. Edwards
software. The Company's Corporate office is in the process of converting to this
J.D. Edwards package and should complete the conversion in the fourth quarter of
calendar 1998. Currently, U.S. Lock contracts with Barnett for its information
system, accounting and certain other administrative functions. In July 1998,
U.S. Lock hired a Vice President of MIS and engaged third party vendors to
customize a Year 2000 compliant software package designed for distributors. The
system, which will operate on a Windows NT platform, will be operational before
June 30, 1999. The cost of the hardware, software and customization of
approximately $650,000 is expected to be financed through a lease. In August
1998, WAMI's PC-based Year 2000 software upgrade was installed and is being
tested. Based on information from software vendors, the PC-based information
systems at TWI and CWI will require the installation of a minor upgrade to be
Year 2000 compliant. These modifications are expected to be completed in fiscal
1999 and financed through working capital with minimal cost.

         In addition to the above mentioned capital expenditure at U.S. Lock for
an information system, U.S. Lock also expects to open an additional distribution
facility and expand and improve its existing headquarters, warehouse and office.
Fiscal 1999 capital expenditures for Consumer Products include expenditures to
improve the efficiencies of its operations, provide new data technology and to
move to a more efficient and modern facility. Also included in the capital
expenditure budget are certain expansion plans for the Company's foreign
operations.

         The Company believes that the funds generated from operations along
with the funds available under the Credit Agreement will be sufficient to
satisfy the Company's liquidity requirements until the maturity of the Credit
Agreement on July 15, 1999, or December 1, 1999 (the date the first semi-annual
cash interest payment of approximately $6 million becomes payable by Waxman
Industries under the Deferred Coupon Notes). The Company and Waxman Industries'
management's current projections indicate that there will not be sufficient cash
flow from operations to make the above payments. The Company believes that a
replacement facility for the Credit Agreement will be arranged prior to July 15,
1999. Waxman Industries also intends to refinance all or a part of the Deferred
Coupon Notes at or prior to maturity and/or to pursue a sale of assets or other
capital raising transaction to satisfy such cash requirement. However, there can
be no assurance that any such refinancing or capital raising transaction will be
consummated.

DISCUSSION OF CASH FLOWS

         Net cash used for operations was $9.1 million in fiscal 1998 due to an
increase in trade receivables and inventories and a reduction in accrued
liabilities. Also affecting net cash used for operations was the $6.3 million in
equity earnings of Barnett. Excluding this item, the net cash used for
operations was $2.8 million. Cash flow provided by investments totaled $0.1
million, reflecting capital expenditures of $3.1 million, which were offset by
proceeds from the sale of LeRan to Barnett for $3.2 million in cash. Cash flow
used for financing activities totaled $0.3 million, primarily due to the
repurchase of $12.0 million of Senior Notes in July and August 1997.

         At June 30, 1998, the Company had working capital of $17.3 million and
a current ratio of 1.6 to 1.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                    Not Applicable.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                       19
<PAGE>   20

                           (Begins on Following Page)



                                       20
<PAGE>   21





                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholder and Board of Directors of Waxman USA Inc.:

         We have audited the accompanying consolidated balance sheets of Waxman
USA Inc. (a Delaware corporation) and Subsidiaries (the Company) as of June 30,
1998 and 1997, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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.

         As discussed in Note 6 to the consolidated financial statements, the
Senior Subordinated Notes mature on June 1, 1999 and the BankAmerica Credit
Agreement and Term Loans will expire on July 15, 1999. In addition, cash
interest on Waxman Industries, Inc.'s (the Company's parent) Senior Secured
Deferred Coupon Notes becomes payable in semi-annual installments beginning on
December 1, 1999. Current projections by the Company and Waxman Industries,
Inc.'s managements indicate that there will not be sufficient cash flow from
operations to fund these obligations. The managements are currently developing a
plan to enable the Companies to continue to meet their obligations as they
become due.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Waxman USA Inc. and
Subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.

         As explained in Notes 3 and 5 to the consolidated financial statements,
in fiscal 1996, the Company changed its method of accounting for long-lived
assets and procurement costs.

                                                           Arthur Andersen LLP

Cleveland, Ohio,
August 21, 1998.



                                       21
<PAGE>   22






                        WAXMAN USA INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 1998 AND 1997
                                 (IN THOUSANDS)
                                        
                                     ASSETS
<TABLE>
<CAPTION>
                                                                                   1998            1997
                                                                                   ----            ----


CURRENT ASSETS:
<S>                                                                             <C>           <C>     
  Cash and cash equivalents                                                     $     73      $  9,326
  Trade receivables, net                                                          15,503        13,617
  Other receivables                                                                3,055         2,828
  Inventories                                                                     26,162        24,411
  Prepaid expenses                                                                 3,026         2,143
  Net assets held for sale                                                          --           3,945
                                                                                --------      --------      
      Total current assets                                                        47,819        56,270
                                                                                --------      --------      

INVESTMENT IN BARNETT                                                             29,641        22,700
                                                                                --------      --------

PROPERTY AND EQUIPMENT:
  Land                                                                               413           482
  Buildings                                                                        4,111         4,009
  Equipment                                                                       12,348        10,917
                                                                                --------      --------      
                                                                                  16,872        15,408
Less accumulated
depreciation and amortization                                                     (7,106)       (7,065)
                                                                                --------      --------

Property and equipment, net                                                        9,766         8,343
                                                                                --------      --------      

COST OF BUSINESSES IN EXCESS OF NET ASSETS
ACQUIRED, NET                                                                      8,189         8,771

UNAMORTIZED DEBT ISSUANCE COSTS, NET                                                 564         1,043

OTHER ASSETS                                                                         753           817
                                                                                --------      --------      

                                                                                $ 96,732      $ 97,944
                                                                                ========      ========
</TABLE>







       The accompanying Notes to Consolidated Financial Statements are an
                       integral part of these statements.



                                       22
<PAGE>   23


<TABLE>
<CAPTION>




                                                  WAXMAN USA INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                       JUNE 30, 1998 AND 1997
                                                (IN THOUSANDS. EXCEPT PER SHARE DATA)
                                                LIABILITIES AND STOCKHOLDER'S EQUITY

                                                                                      1998               1997
                                                                                      ----               ----


CURRENT LIABILITIES:
<S>                                                                                 <C>                <C>     
  Current portion of long-term debt                                                 $ 15,750            $  5,920
  Accounts payable                                                                     7,932               8,615
  Accrued liabilities                                                                  5,203               8,570
  Accrued income taxes payable                                                           250                  46
  Accrued interest                                                                     1,339               1,807
                                                                                    --------            --------
      Total current liabilities                                                       30,474              24,958
                                                                                    --------            --------

OTHER LONG-TERM DEBT, NET OF CURRENT PORTION                                             589                 307

SENIOR NOTES                                                                          35,855              47,855

SENIOR SUBORDINATED NOTES                                                               --                   895

COMMITMENTS AND CONTINGENCIES

STOCKHOLDER'S EQUITY:
Preferred stock, $0.10 par value per share:
authorized and unissued 1,000 shares                                                    --                  --
Common stock, $0.01 par value per share:
9,000 shares authorized; 100
shares issued and outstanding                                                           --                  --
Paid-in capital                                                                       21,462              21,462
Retained earnings                                                                     20,906              16,711
Advances to Waxman Industries, Inc.                                                  (11,391)            (13,903)
                                                                                    --------            --------

                                                                                      30,977              24,270
  Cumulative currency translation adjustment                                          (1,163)               (341)
                                                                                    --------            --------

      Total stockholder's equity                                                      29,814              23,929
                                                                                    --------            --------

                                                                                    $ 96,732            $ 97,944
                                                                                    ========            ========
</TABLE>



       The accompanying Notes to Consolidated Financial Statements are an
                       integral part of these statements.



                                       23
<PAGE>   24


<TABLE>
<CAPTION>

                                          WAXMAN USA INC. AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                                   (IN THOUSANDS)

                                                                                   Fiscal Year Ended June 30,
                                                                                   --------------------------

                                                                       1998                1997                 1996
                                                                       ----                ----                 ----

<S>                                                               <C>                 <C>                  <C>      
Net sales                                                         $ 105,662           $ 120,081            $ 235,067
Cost of sales                                                        69,429              86,425              160,556
                                                                  ---------           ---------            ---------
Gross profit                                                         36,233              33,656               74,511
Selling, general and administrative expenses                         26,661              30,604               66,433
Corporate charge                                                      3,306               3,872                4,195
Restructuring and other non-recurring charges                            24                 746               19,507
                                                                  ---------           ---------            ---------
Operating income (loss)                                               6,242              (1,566)             (15,624)
Gain on sale of Barnett stock                                            --              16,693               65,917
Equity earnings of Barnett                                            6,341               5,843                   --
Interest expense, net of interest income                              5,614               7,144               16,263
                                                                  ---------           ---------            ---------

Income from continuing operations before income
taxes, minority interest,
discontinued operation,
extraordinary loss and cumulative
effect of change in accounting                                        6,969              13,826               34,030
Provision for income taxes                                            2,659               4,671               17,019
                                                                  ---------           ---------            ---------
Income from continuing operations before minority
interest, discontinued operation,
extraordinary loss and cumulative effect of
change in accounting                                                  4,310               9,155               17,011

Minority interest in consolidated affiliate                              --                  --                  975

Discontinued operation:
Reversal of loss on disposal of  business, net of
tax                                                                      --                  --                6,600
                                                                  ---------           ---------            ---------
Income before extraordinary loss and
cumulative effect of change in accounting                             4,310               9,155               22,636

Extraordinary loss, net of tax benefit                                  115                  --                3,750

Cumulative effect of change in accounting, net of
tax benefit                                                              --                  --                4,928
                                                                  ---------           ---------            ---------
Net income                                                        $   4,195           $   9,155            $  13,958
                                                                  =========           =========            =========


Pro forma effect assuming the change in
accounting principle is applied
retroactively:

Income (loss) before extraordinary loss                                                                    $  22,636
                                                                                                           =========
Net income (loss)                                                                                          $  18,886
                                                                                                           =========

</TABLE>

       The accompanying Notes to Consolidated Financial Statements are an
                       integral part of these statements.



                                       24
<PAGE>   25

<TABLE>
<CAPTION>


                                                  WAXMAN USA INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                                           (IN THOUSANDS)

                                                                                                          Cumulative
                                                                                 Retained     Advances    Adjustment      Total
                                            Preferred     Common      Paid-in    Earnings    to Waxman     Currency   Stockholder's
                                              Stock       Stock      Capital     (Deficit)   Industries  Translation     Equity
                                              -----       -----      -------     ---------   ----------  -----------     ------

<S>                                         <C>         <C>         <C>         <C>         <C>         <C>         <C>      
Balance June 30, 1995                        $   --      $   --      $ 21,462    $(13,893)   $(27,453)   $   (141)   $(20,025)

    Net income                                                                     13,958                              13,958
    Capital contribution from
    parent, net                                                                     7,491                               7,491
                                                                                    
    Advances from parent, net                                                                  10,540                  10,540
    Currency translation adjustment                                                                          (147)       (147)
                                             --------    --------    --------    --------    --------    --------    --------

Balance June 30, 1996                            --          --        21,462       7,556     (16,913)       (288)     11,817

     Net income                                                                     9,155                               9,155
     Advances from parent, net                                                                  3,010                   3,010

     Currency translation adjustment                                                                          (53)        (53)
                                             --------    --------    --------    --------    --------    --------    --------


Balance June 30, 1997                            --          --        21,462      16,711     (13,903)       (341)     23,929

     Net Income                                                                     4,195                               4,195
     Advances from parent, net                                                                  2,512                   2,512

     Currency translation adjustment                                                                         (822)       (822)
                                             --------    --------    --------    --------    --------    --------    --------

Balance June 30, 1998                        $   --      $   --      $ 21,462    $ 20,906    $(11,391)   $ (1,163)   $ 29,814
                                             ========    ========    ========    ========    ========    ========    ========
                                                                                                                   

</TABLE>


       The accompanying Notes to Consolidated Financial Statements are an
                       integral part of these statements.



                                       25
<PAGE>   26



                        WAXMAN USA INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                            Fiscal Year Ended June 30,
                                                                            --------------------------

Cash From (Used For):                                            1998                1997                  1996
                                                                 ----                ----                  ----
Operations:
<S>                                                           <C>                  <C>                  <C>     
   Net income                                                 $  4,195             $  9,155             $ 13,958

   Adjustments to reconcile net income to net
cash used for operations:

   Cumulative effect of change in accounting                        --                   --                8,213
   Extraordinary loss                                              115                   --                6,251
   Restructuring and other non-recurring charges                    --                  746               19,507
   Gain on sale of Barnett stock                                    --              (16,693)             (65,917)
   Other non-cash charges                                           --                4,173                7,096
   Reversal of loss on disposal of business                         --                   --              (11,000)
   Minority interest in consolidated affiliate                      --                   --                  975
     Equity earnings of Barnett                                 (6,341)              (5,843)                  --
   Depreciation and amortization                                 2,266                1,999                7,612
     Deferred income taxes                                          --                   --                 (500)
   Bad debt provision                                              282                  565                4,325
   Changes in assets and liabilities:

            Trade and other receivables                         (2,395)              (1,112)              (6,131)
            Inventories                                         (1,751)               1,835               (2,718)
            Prepaid expenses and other                            (360)              (3,412)                 796
            Accounts payable                                      (683)              (3,724)               4,722
            Accrued liabilities                                 (3,631)                 586                1,077
            Other, net                                            (822)                 (53)                (147)
                                                              --------             --------             --------
         Net cash used for operations                           (9,125)             (11,778)             (11,881)
                                                              --------             --------             --------
Investments:
     Capital expenditures, net                                  (3,124)              (1,768)              (5,166)
     Change in other assets                                         64                 (537)              (2,832)
     Net proceeds from sale of businesses                        3,203               23,613               92,636
                                                              --------             --------             --------
         Net cash provided by investments                          143               21,308               84,638
                                                              --------             --------             --------


</TABLE>

                                       26
<PAGE>   27




<TABLE>
<S>                                                                                <C>               <C>                 <C>
Financing:

   Borrowings under credit agreements                                                 104,515            115,977            209,182
   Payments under credit agreements                                                   (95,298)          (121,388)          (248,941)
   Borrowings under term loan                                                              --                 --              5,000
   Repayments under term loan                                                              --                 --            (14,000)
   Debt issuance costs                                                                     --               (256)            (1,488)
   Retirement of Senior Notes                                                         (12,000)                --                 --
   Retirement of Senior Secured Notes                                                      --                 --            (39,150)
   Premium on early retirement of Senior Secured Notes                                     --                 --             (1,000)
   Advances from Waxman Industries, Inc., net                                           2,512              3,010             10,540
   Capital contribution from parent, net                                                   --                 --              7,491
                                                                                    ---------          ---------          ---------
         Net cash used for financing                                                     (271)            (2,657)           (72,366)
                                                                                    ---------          ---------          ---------
Net (decrease) increase in cash and cash equivalents                                   (9,253)             6,873                391
Balance, beginning of period                                                            9,326              2,453              2,062
                                                                                    ---------          ---------          ---------
Balance, end of period                                                              $      73          $   9,326          $   2,453
                                                                                    =========          =========          =========
</TABLE>

       The accompanying Notes to Consolidated Financial Statements are an
                       integral part of these statements.



                                       27
<PAGE>   28



                        WAXMAN USA INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A.       BASIS OF CONSOLIDATION AND DESCRIPTION OF THE COMPANY

         The accompanying consolidated financial statements include the accounts
of Waxman USA Inc. ("Waxman USA") and its wholly-owned subsidiaries
(collectively, the "Company"). As of June 30, 1998, the Company owned 44.4% of
the common stock of Barnett Inc. ("Barnett Common Stock") and accounts for
Barnett Inc. ("Barnett") under the equity method of accounting. The Company
consolidated the results of Barnett prior to the completion of the secondary
offering of Barnett Common Stock in April 1997 (the "Barnett Secondary
Offering") because, prior to such offering, the Company owned approximately
49.9% of the voting capital stock of Barnett and, together with convertible
non-voting preferred stock of Barnett owned by the Company, approximately 54% of
the capital stock of Barnett. All significant intercompany transactions and
balances are eliminated in consolidation.

               The Company is a wholly-owned subsidiary of Waxman Industries,
Inc. ("Waxman Industries") and is a supplier of specialty plumbing, security
hardware and other products to the repair and remodeling market in the United
States. The Company distributes its products to approximately 7,600 customers,
including a wide variety of large national and regional retailers, professional
security installers and independent retail customers. The Company conducts its
business primarily through its wholly-owned subsidiaries, Waxman Consumer
Products Group Inc. ("Consumer Products"), WOC Inc. ("WOC") and TWI
International, Inc. ("TWI"). WOC is comprised of two divisions, U.S. Lock ("U.S.
Lock"), a distributor of a full line of security hardware products, and Medal
Distributing, a supplier of hardware products. TWI includes the Company's
foreign sourcing operations, including manufacturing, packaging and sourcing
operations in China and Taiwan, and an operation in Mexico that threads
galvanized, black, brass, and chrome pipe nipples and imports malleable
fittings. Consumer Products, WOC and Barnett utilize the Company's and
non-affiliated foreign sourcing suppliers.

         B.       CASH AND CASH EQUIVALENTS

         In accordance with the terms of the Credit Agreement (as defined in
Note 6), all restricted cash balances have been excluded from cash and have been
applied against outstanding borrowings under the Credit Agreement. Cash balances
include certain unrestricted operating accounts and accounts of foreign
operations. The Company considers all highly liquid temporary cash investments
with original maturities of less than three months to be cash equivalents. Cash
investments are valued at cost plus accrued interest, which approximates market
value. At June 30, 1997, the Company's temporary cash investments amounted to
$8.9 million, which were used to redeem $12.0 million of the Company's 11 1/8%
Senior Notes due September 1, 2001 in July and August 1997.

         C.       TRADE RECEIVABLES

         Trade receivables are presented net of allowances for doubtful accounts
of $1.1 million and $1.2 million at June 30, 1998 and 1997, respectively. Bad
debt expense totaled $0.3 million in fiscal 1998, $0.6 million in fiscal 1997
and $4.3 million in fiscal 1996.

         The Company sells plumbing and hardware products throughout the United
States to do-it-yourself ("D-I-Y") retailers, mass merchandisers and smaller
independent retailers. The Company performs ongoing credit evaluations of its
customers' financial conditions. As a percentage of the Company's net sales, the
largest customer of Consumer Products, Hechinger / Builders Square, accounted
for 11.0%, 10.6% and 6.5%, while the second largest customer, Kmart accounted
for 9.5%, 8.0% and 4.6% in fiscal 1998, 1997 and 1996, respectively. As a
percentage of Consumer Products' net sales, Hechinger / Builders Square
accounted for 21.1%, 21.9% and 24.7%, while Kmart accounted for 18.2%, 16.5% and
17.6%, for the same periods, respectively. During the same periods, the
Company's ten largest customers accounted for approximately 42.7%, 36.5% and
23.0% of net sales and approximately 42.3% and 53.7% of accounts receivable at
June 30, 1998 and 1997, respectively. See Item 1, Business - Consumer Products
for the discussion on the reduction in business with Hechinger / Builders
Square.

         D.       INVENTORIES


                                       28
<PAGE>   29

         At June 30, 1998 and 1997, inventories, consisting primarily of
finished goods, are carried at the lower of first-in, first-out (FIFO) cost or
market. The Company regularly evaluates its inventory carrying value, with
appropriate consideration given to any excess, slow-moving and/or nonsalable
inventories. In fiscal 1998 and 1997, the Company recorded charges of $0.5
million and $2.1 million, respectively, in connection with its evaluation of its
inventory carrying value.

         E.       PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. For financial reporting
purposes, buildings and equipment are depreciated on a straight-line basis over
the estimated useful lives of the related assets. Depreciable lives are 15 to 40
years for buildings and 3 to 15 years for equipment. Leasehold improvements are
amortized on a straight-line basis over the term of the lease or the useful life
of the asset, whichever is shorter. For income tax purposes, accelerated methods
of depreciation are used. Depreciation expense totaled $1.4 million in fiscal
1998, $1.3 million in fiscal 1997 and $3.2 million in fiscal 1996.

         F.       COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED

         Cost of businesses in excess of net assets acquired is being amortized
primarily over 40 years using the straight-line method. Management has evaluated
its accounting for goodwill in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of," on an originating entity basis
considering future undiscounted operating cash flows and believes that the net
asset is realizable and the amortization period is appropriate. During fiscal
1996, the Company determined that $9.8 million of goodwill was impaired at U.S.
Lock (See Note 3B). Management continues to evaluate the realizability of this
asset. Goodwill amortization expense totaled $0.3 million in fiscal 1998, $0.3
million in fiscal 1997 and $0.7 million in fiscal 1996. Accumulated amortization
totaled $14.8 million and $14.7 million at June 30, 1998 and 1997, respectively.

         G.       UNAMORTIZED DEBT ISSUANCE COSTS

         Unamortized debt issuance costs relate to the Company's long-term and
short-term debt (See Note 6) and are amortized over the life of the related
debt. Amortization expense totaled $0.3 million in fiscal 1998 and $0.3 million
in fiscal 1997, and is included in interest expense in the accompanying
consolidated statements of operations. The Company incurred an extraordinary
charge in fiscal 1998 and 1996 related to the accelerated amortization of
unamortized debt issuance costs. (See Note 2).

         H.       FOREIGN CURRENCY TRANSLATION

         All balance sheet accounts of foreign subsidiaries are translated at
the exchange rate as of the end of the fiscal year. Income statement items are
translated at the average currency exchange rates during the fiscal year. The
resulting translation adjustment is recorded as a component of stockholder's
equity. Foreign currency transaction gains or losses are included in the
consolidated statements of operations as incurred.

         I.       FINANCIAL STATEMENT 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

         J.       EARNINGS PER SHARE

         Earnings per share data is not presented and is not meaningful, as the
Company is a wholly-owned subsidiary of Waxman Industries.

         K.       NEW ACCOUNTING STANDARD

         In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130") to be effective for financial statements issued for periods
beginning after December 15, 1997. SFAS 130 requires companies to display the
components of comprehensive income with the same prominence as the other
financial statements for all 


                                       29
<PAGE>   30

periods presented. The Company will begin to report its currency translation
adjustment as a component of comprehensive income upon adoption of this
accounting standard.

2.       BARNETT PUBLIC OFFERINGS AND EXTRAORDINARY CHARGE

         In fiscal 1997, the Company completed a secondary offering of 1.3
million shares of the Barnett Common Stock at a per share price of $17.50,
before the underwriters' discount. Barnett participated in the Barnett Secondary
Offering and sold 425,000 of its own shares. The Company received net proceeds,
after the underwriters' discount, of $21.6 million, and recorded a $16.7 million
pre-tax gain. The Company converted the remaining convertible non-voting
preferred stock of Barnett it owned to Barnett Common Stock. In July 1997, as a
result of the sale of a substantial portion of the business of LeRan Gas
Products ("LeRan"), one of WOC's operations, to Barnett, the Company received
cash and an additional 24,730 shares of Barnett Common Stock. As a result of
these transactions, at June 30, 1998, the Company owned 7,186,530 shares, or
44.4%, of the outstanding shares of Barnett Common Stock. This investment is
accounted for under the equity method of accounting in fiscal 1998 and 1997.

         In fiscal 1996, 7.2 million shares of Barnett Common Stock, or
approximately 55.1%, were sold in the aggregate by Barnett and the Company at an
initial public offering price per share of $14.00 (the "Barnett Initial Public
Offering"). The Company recorded a $65.9 million pre-tax gain from the sale of
Barnett Common Stock in the Barnett Initial Public Offering. At June 30, 1996,
as a result of the Company's conversion of a portion of the convertible
non-voting preferred stock of Barnett, which was owned solely by the Company, to
Barnett Common Stock during the fourth quarter of fiscal 1996, the Company owned
approximately 49.9% of the Barnett Common Stock and a 54% economic interest in
the capital stock of Barnett. Since the consummation of the Barnett Initial
Public Offering, the cash flow generated by such operation is no longer
available to the Company other than the amounts paid to the Company pursuant to
an intercorporate agreement (discussed in Note 10) or the pro rata amounts, if
any, distributed by Barnett in the form of a common stock dividend.

         Net proceeds received by the Company from both the Barnett Initial
Public Offering and Barnett Secondary Offering (the "Barnett Public Offerings")
were used primarily to repay outstanding indebtedness.

         The Company recorded an extraordinary charge of approximately $0.1
million and $3.8 million, net of applicable tax benefit of $0.1 million and $2.5
million in fiscal 1998 and 1996, respectively, relating to a premium paid on the
retirement of certain indebtedness and the accelerated amortization of the
related unamortized debt discount and debt issuance costs attributed to
indebtedness repaid from the net proceeds of the Barnett Public Offerings (See
Note 6).

         The following table presents summary financial data for Barnett at June
30, 1998 and for the year then ended (in thousands of dollars):
<TABLE>
<CAPTION>

         Statement of income data:                              Balance sheet data:

<S>                                      <C>                    <C>                           <C>        
         Net sales                       $199,578               Working capital               $    52,614
         Operating income                  23,382               Total assets                       95,419
         Net income                        14,277               Stockholders' equity               76,099
</TABLE>


3.       MANAGEMENT'S REVIEW OF WHOLLY-OWNED OPERATIONS

FISCAL 1997 --

         In fiscal 1997, the Company recorded charges totaling $6.4 million,
including adjustments to cost of sales of $4.3 million, selling, general and
administrative ("SG&A") expenses of $1.8 million and $0.3 million to sales
allowances. The largest portion of the adjustments were made at Consumer
Products, with charges of $4.2 million, $1.1 million and $0.3 million to cost of
sales, SG&A expenses and sales, respectively, related to the decision to augment
certain existing product lines, streamline its packaged plumbing product line,
enhance and redesign its existing plumbing product packaging, undertake certain
customer retention and development programs and establish inventory reserves
which were necessary, in part, for the reduction in the buying patterns of
Builders Square and Kmart. In addition, the Company recorded $0.1 million and
$0.7 million in additional cost of sales and SG&A expenses, respectively, in
total at its remaining operations, primarily related to inventory adjustments
and charges for valuation reserves. The Company also recorded a loss of $0.7
million on the disposal of Madison in the fourth quarter of fiscal 1997
(described in Note 4).

                                       30
<PAGE>   31

FISCAL 1996 --

         A.       DISCONTINUED OPERATION

         In August 1995, the Company announced its decision to sell the Consumer
Products business and began reporting Consumer Products as a discontinued
operation as of June 30, 1995. An estimated loss on disposal of $11.0 million
was recorded, before tax benefit, representing the difference between the net
book value of the assets to be sold at June 30, 1995 and the expected net
proceeds from the sale.

         Upon the consummation of the Barnett Initial Public Offering, described
in Note 2, the Company ceased its efforts to sell Consumer Products and
continues to operate Consumer Products. Prior periods have been restated to
present Consumer Products as a continuing operation and the $11.0 million loss
on disposal, before taxes, recorded at June 30, 1995 was reversed in fiscal
1996.

         B.       STRATEGIC REVIEW OF OPERATIONS

         In fiscal 1996, in connection with the likely completion of the Barnett
Initial Public Offering and the consequent retention of the Consumer Products
business, the Company embarked upon a strategic review of Consumer Products and
its other wholly-owned operations, taking into account the difficulties
encountered during the sale process of Consumer Products, as well as certain
weaknesses in the industry in which the Company competed. As a result of
management's review and refocus on Consumer Products as a continuing operation
and consistent with its strategic direction, an $11.9 million charge, primarily
for a reduction in the carrying value of day-to-day operating assets and
liabilities, was recorded by Consumer Products in operating results, which
represented an increase of $6.9 million to cost of goods sold and $5.0 million
to SG&A expenses. Such charge included $5.1 million for the impairment and
write-down of inventory, $2.7 million for certain accounts receivable balances,
$2.0 million representing a portion of the costs of developing a management
information system, $0.5 million of abandoned product development costs, and
$1.6 million for various liabilities.

         The traditional customers of certain of WOC's operations, smaller
retail establishments, have been adversely affected by the movement by large
national retailers to expand in more rural locations and compete with such
smaller retail establishments. In addition, the market has been increasingly
impacted by the availability of lower cost foreign sourcing to both domestic and
foreign competitors. In connection with management's strategic review of its
other wholly-owned operations and as a result of business factors affecting
these other operations, including competition from multi-category retailers and
competitive pricing from overseas competitors, the effect of which was
exacerbated by excess manufacturing capacity at the Company's foreign
facilities, the Company recorded an additional charge of $2.9 million in the
fiscal 1996 fourth quarter operating results primarily for a reduction in the
carrying value of day-to-day operating assets and liabilities. Such charge
included $1.7 million to reduce the carrying value of inventory and other assets
at WOC and TWI, $0.4 million of accelerated depreciation as a result of a change
in the estimated useful lives of certain property and equipment and $0.8 million
for various liabilities.

         In addition, during the fourth quarter of fiscal 1996, the Company
recorded a $19.5 million pre-tax restructuring and asset impairment charge.
Below is a summary of the components of the charge (in millions of dollars):
<TABLE>
<S>                                                             <C>  
         Exiting product lines                                   $ 4.1
         Warehouse closure costs                                   1.3
         Reduction of excess capacity                              1.1
         Other                                                     0.9
         Asset impairment                                         12.1
                                                                 -----
                  Total                                          $19.5
                                                                 =====
</TABLE>

         EXITING PRODUCT LINES: In furtherance of its efforts to strengthen the
         Consumer Products business, the Company decided to eliminate its
         electrical product line and reduce the number of individual products
         offered in its plumbing and floor care product lines. These actions
         enabled Consumer Products to reduce fixed costs as well as optimize and
         focus its product offerings to its major retail customers. With the
         exception of one small account, Consumer Products no longer services
         the electrical product line and reduced the number of products offered
         in its plumbing and floor care product lines and did not incur cash
         outlays for these reductions. The $4.1 million charge in fiscal 1996
         was primarily for the write-down of related inventory, which was
         disposed of prior to June 30, 1997.

                                       31
<PAGE>   32

         WAREHOUSE CLOSURE COSTS: During the fourth quarter of fiscal 1996, the
         Company downsized Consumer Products' distribution network from three
         locations to two and, as a result, incurred warehouse closure costs of
         $1.3 million. In fiscal 1997, the Company recorded an additional $0.2
         million for additional costs associated with the remaining lease term
         of the warehouse. There is no remaining accrual at June 30, 1998. The
         warehouse closure costs included costs associated with the remaining
         noncancellable term of an operating lease of $0.5 million, incremental
         employee salaries and benefits associated with closing the warehouse of
         $0.5 million, loss on fixed assets of $0.2 million and other
         miscellaneous expenses associated with the closing of $0.3 million.

         REDUCTION OF EXCESS CAPACITY: With the discontinuance and downsizing of
         Consumer Products' product lines, the foreign operations which support
         Consumer Products identified excess capacity in both buildings and
         equipment. As a result, a $1.1 million charge was recorded to reduce
         the net book value of buildings by $0.8 million and equipment by $0.3
         million.

         OTHER: In connection with the strategic review of the Company, a
         division of WOC discontinued certain product offerings, which resulted
         primarily in a write-down of inventory and excess equipment.

         ASSET IMPAIRMENT: The asset impairment charge of $12.1 million related
         to the Company's U.S. Lock division. Due to the continued decline in
         the locksmith industry brought about by the competitive nature of the
         D-I-Y retail market, as required by SFAS No. 121, "Accounting for the
         Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
         Of," the Company expensed $9.8 million of goodwill and $2.3 million of
         property and equipment, as the carrying value for the division exceeded
         its fair value. Fair value was determined based on a multiple of cash
         flows.

4.       SALE OF DIVISIONS

         A. SALE OF LERAN GAS PRODUCTS

         Effective July 1, 1997, the Company sold the gas products business of
LeRan to Barnett for $3.2 million in cash and 24,730 shares of Barnett Common
Stock, with a value of $0.6 million at the time of the transaction. For fiscal
1997 and 1996, LeRan reported approximately $13.8 million and $16.3 million in
net sales and operating income of approximately $0.4 million and $28,000,
respectively. In the first quarter of fiscal 1998, the Company recorded an
estimated loss on the sale of LeRan of $133,000, including certain costs
associated with disposing of assets not included in the transaction and the sale
and closing of certain warehouses. The estimated loss was adjusted in the fourth
quarter of fiscal 1998 to an actual loss of $24,000.

         B. SALE OF MADISON EQUIPMENT COMPANY

         In April 1997, the Company sold Madison Equipment Company ("Madison"),
a division of WOC for $2.0 million in cash. The loss of $0.7 million from the
sale of Madison is included as a non-recurring charge in the accompanying
consolidated statements of operations. Madison's net sales, which are included
in prior fiscal years, amounted to $5.0 million and $6.0 million and operating
income amounted to $0.2 million and $0.1 million for fiscal 1997 and 1996,
respectively. The net proceeds were reinvested in the continuing businesses of
the Company, thereby effectively reducing borrowings under the Credit Agreement
(as defined in Note 6).

5.       CHANGE IN ACCOUNTING

         Effective July 1, 1995, the Company changed its method of accounting
for procurement costs. Procurement costs represent the amount paid in connection
with a customer's commitment to purchase products from the Company for a
specified period. The amount capitalized is the consideration paid by the
Company to the new or existing customer (i) for the right to supply such
customer for a specified period and (ii) to purchase competitor's merchandise
that the customer has on hand when it changes suppliers, less the salvage value
received by the Company. The Company believes that amortization in the fiscal
year incurred for such costs is consistent with the Company's strategic review
of Consumer Products and is preferable due to the uncertainty of today's
competitive retail environment. Previously, the Company amortized these costs
over the period deemed to be benefited. The cumulative effect of this change on
prior years of $4.9 million, net of applicable tax benefit of $3.3 million, is
reported separately in the fiscal 1996 consolidated statements of operations.
The additional effect of the change in fiscal 1996 was to decrease the operating
loss by $2.1 million. 


                                       32
<PAGE>   33

Amortization expense for procurement costs totaled $1.5 million in fiscal 1997,
$2.2 million in fiscal 1996 and $2.8 million in fiscal 1995.

6.       DEBT

         A.       LONG-TERM DEBT

         Total other long-term debt consists of the following (in thousands of
dollars)
<TABLE>
<CAPTION>

                                                                                                June 30,
                                                                                                --------
                                                                                          1998            1997
                                                                                          ----            ----

<S>                                                                                   <C>              <C>     
BankAmerica Credit Agreement                                                          $  9,804         $     54
BankAmerica Term Loans                                                                   5,000            5,000
Senior Subordinated Notes (1)                                                              895               --

Other notes, maturing through 2007, bearing interest at rates
ranging from 7.4 % to 9.0%, secured by the land, building
and equipment of TWI.                                                                      640            1,173
                                                                                      --------         --------

                                                                                        16,339            6,227

Less:  current portion                                                                 (15,750)          (5,920)
                                                                                      --------         --------
         Long-term debt, net of current portion                                       $    589         $    307
                                                                                      ========         ========

<FN>

(1)  The Senior Subordinated Notes were included in long-term debt at June 30,
     1997. At June 30, 1998, they are included in the current portion of debt
     since they mature on June 1, 1999.
</TABLE>



         On June 28, 1996, Consumer Products and WOC (collectively, the
"Borrowers") entered into a credit facility (the "Credit Agreement") provided by
BankAmerica Business Credit, Inc ("BankAmerica"). The Credit Agreement provides
for, among other things, revolving credit advances of up to $30.0 million and
term loans of up to $5.0 million (the "Term Loans"). The Credit Agreement and
Term Loans have been extended by the Company until July 15, 1999.

         The Credit Agreement provides for revolving credit advances of (a) up
to 85% of the amount of eligible accounts receivable and (b) up to the lesser of
(i) $16.0 million or (ii) 60% of the amount of eligible raw and finished goods
inventory. Revolving credit advances bear interest at a rate equal to (a)
BankAmerica's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The weighted
average interest rate on borrowings outstanding under the Credit Agreement was
9.68% in fiscal 1998. The Company is required to pay a commitment fee of 0.5%
per annum on the unused commitment. The Credit Agreement includes a letter of
credit subfacility of $2.0 million, of which $0.4 million was outstanding at
June 30, 1998. Term Loans bear interest at a rate per annum equal to .25% over
the interest rate applicable to revolving credit advances under the Credit
Agreement. Borrowings under the Credit Agreement are secured by the accounts
receivable, inventories, certain general intangibles and unencumbered fixed
assets of the Borrowers. In addition, the Term Loans are also secured by a
pledge of 500,000 shares of Barnett Common Stock owned by the Company
(constituting approximately 3.1% of all outstanding Barnett Common Stock). The
Credit Agreement requires the Borrowers to maintain cash collateral accounts
into which all available funds are deposited and applied to service the facility
on a daily basis. The Credit Agreement prevents dividends and distributions by
the Borrowers except in certain limited instances including, so long as there is
no default or event of default and the Borrowers are in compliance with certain
financial covenants, the payment of interest on the Senior Subordinated Notes
(as hereinafter defined) and Deferred Coupon Notes (as hereinafter defined) of
Waxman Industries, and contains customary negative, affirmative and financial
covenants and conditions such as minimum net income and fixed charge coverages.
The Company was in compliance with or had obtained a waiver for all loan
covenants at June 30, 1998. As a result of the inclusion of a material adverse
effect clause as an event of default and the requirement to maintain cash
collateral accounts, the borrowings under the Credit Agreement and Term Loans
have been classified as current liabilities. As of June 30, 1998, availability
under the Credit Agreement totaled approximately $11.3 million.

                                       33
<PAGE>   34

         B.       SENIOR NOTES

         On April 3, 1996, the Company consummated an offer to exchange $48.8
million principal amount of its 11 1/8% Senior Notes due September 1, 2001 
("Senior Notes") for a like amount of Waxman Industries' outstanding 13 3/4%
Senior Subordinated Notes due June 1, 1999 ("Senior Subordinated Notes"), and in
connection therewith solicited consents to certain amendments to the indenture
pursuant to which the Senior Subordinated Notes were issued. Approximately $43.0
million of Senior Subordinated Notes were exchanged in fiscal 1996. In fiscal
1997, the Company initiated a similar exchange offer and exchanged an additional
$4.8 million of Senior Subordinated Notes, bringing the total amount exchanged
to $47.9 million.

         In May 1997, the Company commenced an offer to purchase $12.0 million
principal amount of Senior Notes at par (the "Purchase Offer"). The offer
expired on July 2, 1997 with $2.5 million of the notes being purchased. On July
3, 1997, the Company called for the redemption of $9.5 million of Senior Notes
that had not been tendered in the Purchase Offer, and on August 4, 1997, the
Company completed the note redemption. The Company used a portion of the net
proceeds from the Barnett Secondary Offering to purchase the Senior Notes. The
Company recorded an extraordinary charge of $0.1 million, net of applicable tax
benefit of $0.1 million, in the first quarter of fiscal 1998 related to the
write-off of unamortized deferred financing costs associated with the purchase
and redemption of these Senior Notes.

         The Senior Notes are general unsecured obligations of the Company
ranking pari passu in right of payment to any future indebtedness of the Company
that is not subordinated in right of payment to the Senior Notes and senior in
right of payment to any future indebtedness of the Company that is subordinated
in right of payment to the Senior Notes. The Senior Notes are structurally
subordinated to the Credit Agreement and any refinancing thereof. The indenture
under which the Senior Notes were issued (the "Senior Note Indenture") contains
certain covenants that, among other things, limit the ability of the Company and
its subsidiaries to incur additional indebtedness, transfer or sell assets, pay
dividends, make certain other restricted payments or investments, create liens
or enter into sale lease-back transactions, transactions with affiliates and
mergers. The Company was in compliance with all covenants at June 30, 1998.

         In the event of a Change of Control, as defined in the Senior Note
Indenture, the Company is obligated to make an offer to purchase all outstanding
Senior Notes at 101% of the principal amount thereof plus accrued and unpaid
interest, if any. The Company is obligated in certain circumstances to make an
offer to purchase Senior Notes at a redemption price plus unpaid interest, if
any, with the net cash proceeds of certain sales or other dispositions of
assets.

         C.       SENIOR SUBORDINATED NOTES

         In June 1989, Waxman Industries issued $100 million principal amount of
Senior Subordinated Notes. During 1994, Waxman Industries exchanged $50 million
principal amount of the Senior Subordinated Notes for a like amount of Waxman
Industries' 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred
Coupon Notes"). As discussed above, the Company issued Senior Notes in exchange
for $43.0 million principal amount of Senior Subordinated Notes in fiscal 1996
and an additional $4.8 million in fiscal 1997. At June 30, 1998, approximately
$0.9 million of Senior Subordinated Notes are outstanding and mature on June 1,
1999. The Senior Subordinated Notes can be redeemed at the principal amount of
the note, are no longer entitled to the benefits of restrictive covenants and
virtually all events of default have been eliminated.

         D.       MISCELLANEOUS

         The Company believes that the funds generated from operations along
with the funds available under the Credit Agreement will be sufficient to
satisfy the Company's liquidity requirements until the maturity of the Credit
Agreement on July 15, 1999, or December 1, 1999 (the date the first semi-annual
cash interest payment of approximately $6 million becomes payable by Waxman
Industries under the Deferred Coupon Notes). The Company and Waxman Industries'
management's current projections indicate that there will not be sufficient cash
flow from operations to make the above payments. The Company believes that a
replacement facility for the Credit Agreement will be arranged prior to July 15,
1999. Waxman Industries also intends to refinance all or a part of the Deferred
Coupon Notes at or prior to maturity and/or to pursue a sale of assets or other
capital raising transaction to satisfy such cash requirement. However, there can
be no assurance that any such refinancing or capital raising transaction will be
consummated.

         The Company made cash interest payments of $5.8 million in fiscal 1998,
$6.5 million in fiscal 1997 and $15.6 million in fiscal 1996. Interest income
was $0.1 million in fiscal 1998 and 1997. The Company also has a significant
amount

                                       34
<PAGE>   35

of non-cash interest and interest cost from the amortization of deferred
financing costs, which makes up the balance of the interest expense presented in
the accompanying consolidated statements of operations.

         Management believes the carrying values of its bank loans approximate
their fair values as they bear interest based upon the banks' prime lending
rates. The fair values, determined using quoted market prices for the Senior
Notes and Senior Subordinated Notes, approximated their carrying amounts.

7.       INCOME TAXES

         The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes an asset
and liability approach and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of the enacted tax laws.

         The Company participates in the consolidated tax group of which Waxman
Industries is the common parent. Commencing July 1, 1994, the Company began
participating in a new tax sharing agreement with Waxman Industries. Under this
agreement, the Company's federal tax liability is equal to the lesser of (i) the
federal tax liability calculated on a stand-alone basis or (ii) Waxman
Industries' federal tax liability. Waxman Industries had approximately $52.7
million of available domestic net operating loss carryforwards for income tax
purposes at June 30, 1998, which expire 2008 through 2013. Upon consummation of
the initial public offering, Barnett is no longer included in the consolidated
tax group. The Company's liability for taxes at June 30, 1998 and June 30, 1997
includes state and various foreign taxes. The Company files separate income tax
returns in certain states based on the results of operations within the
applicable states.

         The components of income (loss) from continuing operations before
income taxes, minority interest, discontinued operation, extraordinary loss and
cumulative effect of change in accounting are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>

                                                 Fiscal Year Ended June 30,
                                                 --------------------------

                                                 1998       1997       1996
                                                 ----       ----       ----

<S>                                          <C>        <C>        <C>     
Domestic                                     $  5,443   $ 12,422   $ 35,280

Foreign                                         1,526      1,404     (1,250)
                                             --------   --------   --------

Total                                        $  6,969   $ 13,826   $ 34,030
                                             ========   ========   ========
</TABLE>


         The components of the provision for income taxes, calculated on a
stand-alone basis are (in thousands of dollars):

<TABLE>
<CAPTION>

                                                 Fiscal Year Ended June 30,
                                                 --------------------------

                                                 1998       1997       1996
                                             --------   --------   --------
<S>                                          <C>        <C>        <C>     
U.S. Federal                                 $  2,146   $  4,500   $ 14,869

Foreign and other                                 513        171      2,150
                                             --------   --------   --------
     Total                                   $  2,659   $  4,671   $ 17,019
                                             ========   ========   ========
</TABLE>

         Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws. The deferred tax assets and
liabilities relate primarily to the basis in Barnett stock, depreciation of the
Company's property and equipment, certain accrued liabilities and inventory.

         Deferred taxes and amounts payable to Waxman Industries are included in
Advances to Waxman Industries, Inc. in the accompanying consolidated balance
sheets.

         The following table reconciles the U.S. statutory rate to the Company's
effective tax rate:

                                       35
<PAGE>   36
<TABLE>
<CAPTION>

                                                                                    Fiscal Year Ended June 30,
                                                                                    --------------------------

                                                                                     1998        1997        1996
                                                                                     ----        ----        ----

<S>                                                                                  <C>        <C>          <C>  
U.S. statutory rate                                                                  35.0%      35.0%        35.0%

State and foreign taxes, net                                                          2.2       (2.6)         4.0

Goodwill amortization and write-off                                                   0.6        0.9         10.5

Other, net                                                                            0.4        0.5          0.5
                                                                                 --------    -------      -------
     Effective tax rate                                                              38.2%      33.8%        50.0%
                                                                                 ========    ========     =======
</TABLE>

         The Company made income tax payments of $0.3 million in fiscal 1998,
$1.3 million in fiscal 1997 and $1.0 million in fiscal 1996.

8.       LEASE COMMITMENTS

         The Company leases certain warehouse and office facilities and
equipment under operating lease agreements, which expire at various dates
through 2003.

         Future minimum rental payments are as follows (in thousands of 
dollars):
<TABLE>
           <S>                                   <C>
           1999                                  $2,235

           2000                                   1,552

           2001                                     521

           2002                                     443

           2003                                      72

           Thereafter                                --
                                                 ------- 
                                                 $4,823
                                                 ======
</TABLE>

         Total rent expense charged to operations was $2.6 million in fiscal
1998, $1.7 million in fiscal 1997 and $4.2 million in fiscal 1996. Consumer
Products leases certain warehouse space from related parties. Related parties
rent expense totaled $0.3 million in fiscal 1998, $0.5 million in fiscal 1997
and $0.5 million in fiscal 1996.

9.       PROFIT SHARING AND 401(k) PLAN

         The eligible employees of certain subsidiaries of the Company
participate in Waxman Industries' trusteed, profit sharing and 401(k) retirement
plan. Contributions are discretionary and are determined by Waxman Industries'
Board of Directors. There were no profit sharing contributions in fiscal 1998,
1997 or 1996; however, the Company contributed a 50% match of up to the first 4%
of salary deferral by employees, which amounted to $0.1 million in both fiscal
1998 and fiscal 1997. The Company currently offers no other retirement,
post-retirement or post-employment benefits.

10.      RELATED-PARTY TRANSACTIONS

         The Company engages in certain business transactions with Waxman
Industries and affiliates. Sales to and purchases from Waxman Industries'
affiliates in fiscal 1998, 1997 and 1996 were immaterial.

         Management fees charged to the Company by Waxman Industries are
presented in the accompanying consolidated statements of operations as the
corporate charge. In accordance with the Intercorporate Agreement, the
management fees charged to the Company are the lesser of (a) 4% of net sales or
(b) the actual cost of providing services to the Company and its wholly-owned
subsidiaries.

                                       36
<PAGE>   37

         The Company's wholly-owned subsidiaries engage in business transactions
with Barnett. Products sold to Barnett for resale totaled $16.2 million in
fiscal 1998, $13.7 million in fiscal 1997 and $12.2 million in fiscal 1996.
There were no purchases from Barnett in fiscal 1998, $0.1 million in fiscal 1997
and $0.2 million in fiscal 1996.

         The Company and Barnett provide to and receive from each other certain
selling, general and administrative services and reimburse each other for
out-of-pocket disbursements related to those services. In connection with the
Barnett Initial Public Offering, the Company and Barnett, among others, entered
into an Intercorporate Agreement (the "New Intercorporate Agreement"). Pursuant
to the New Intercorporate Agreement, the Company provides certain managerial,
administrative and financial services to Barnett and is paid by Barnett for the
allocable cost of the salaries and expenses of the Company's employees while
they are rendering such services. Barnett also reimburses the Company for actual
out-of-pocket disbursements to third parties by the Company required for the
provision of such services by the Company. In addition to the services provided
by the Company to Barnett pursuant to the New Intercorporate Agreement, Barnett
also provided certain services to U.S. Lock, and, until their sale, LeRan and
Madison. These services include the utilization of Barnett's management
information systems, financial accounting, order processing and billing and
collection services. The Company pays Barnett the allocable cost of the salaries
and expenses of Barnett's employees while they are performing such services. The
Company also reimburses Barnett for all actual out-of-pocket disbursements to
third parties by Barnett required for the provision of such services. The net
effect of these charges is not material. The arrangements provided in the New
Intercorporate Agreement may be modified and additional arrangements may be
entered into pursuant to a written agreement between the Company and Barnett.

         All amounts incurred by the Company on behalf of Barnett, have been
reimbursed by Barnett. All amounts incurred by Barnett on behalf of the Company,
have been reimbursed by the Company and are reflected in SG&A expenses in the
accompanying statements of operations

11.      CONTINGENCIES

  The Company is subject to various legal proceedings and claims that arise in
  the ordinary course of business. In the opinion of management, the amount of
  any ultimate liability with respect to these actions will not materially
  affect the Company's consolidated financial statements or results of
  operations.

12.      SEGMENT INFORMATION

         The Company classifies its businesses into two business segments: (i)
distribution of plumbing, security hardware and other products, which includes
the operations of Consumer Products and WOC; and (ii) foreign sourcing
operations, which includes the Company's sourcing and packaging operations in
Taiwan and China, and Western American Manufacturing, Inc. ("WAMI"), an
operation in Mexico that provides galvanized, black, brass and chrome pipe
nipples and imports malleable fittings. These products are sold primarily to
D-I-Y home centers and retailers in the United States. Sales outside of the
United States are insignificant. In addition, nearly all of the products from
the foreign sourcing operations are sold to the Company's wholly-owned
operations and Barnett. Set forth below is certain financial data relating to
the Company's business segments (in thousands of dollars).
<TABLE>
<CAPTION>

                                                    Foreign
                                  Distribution      Sourcing              Other        Elimination        Total
                                  ------------      --------              -----        -----------        -----

Reported net sales
<S>                                 <C>             <C>                  <C>         <C>               <C>       
1998                                $  83,147       $  39,208                 --     $ (16,693)        $  105,662
1997                                  101,684          33,683                 --       (15,286)           120,081
1996                                  232,766          29,156                 --       (26,855)           235,067
Operating income (loss)

1998                                $   7,511       $   2,037            $ (3,306)          --         $    6,242
1997                                    1,562             744              (3,872)          --             (1,566)
1996                                  (10,450)           (979)             (4,195)          --            (15,624)
Identifiable assets
1998                                $  48,489       $  18,042            $ 30,201           --         $   96,732
1997                                   48,836          16,449              32,659           --             97,944
1996                                  100,901          14,659              17,503           --            133,063
</TABLE>



                       SUPPLEMENTARY FINANCIAL INFORMATION

                                       37
<PAGE>   38

         Quarterly Results of Operations:

         Presented below is a summary of the unaudited quarterly results of
  operations for the fiscal years ended June 30, 1998 and 1997 (in thousands).

<TABLE>
<CAPTION>

FISCAL 1998                                                                1ST QTR.       2ND QTR.        3RD QTR.       4TH QTR.
-----------                                                                --------       --------        --------       --------
<S>                                                                        <C>            <C>            <C>            <C>     
Net sales                                                                  $ 28,157       $ 26,808       $ 24,444       $ 26,253
Gross profit                                                                  9,501          9,364          8,544          8,824
Restructuring and other non-recurring charges (income)                          133           --             --             (109)
Operating income                                                              2,005          1,872          1,163          1,202
Income from continuing  operations  before                        
provision for income taxes and extraordinary loss                             2,128          2,233          1,178          1,430
Extraordinary loss, net of tax benefit                                          115           --             --             --
Net Income                                                                 $  1,198       $  1,383       $    729       $    885
                                                                  
                                                                  
<CAPTION>                                                         
                                                                  
                                                                  
                                                                  
FISCAL 1997                                                                1ST QTR.       2ND QTR.       3RD QTR.       4TH QTR.
-----------                                                                --------       --------       --------       --------
<S>                                                                        <C>            <C>            <C>            <C>     
Net sales                                                                  $ 33,266       $ 31,311       $ 28,422       $ 27,082
Gross profit                                                                 10,530         10,251          9,273          3,602
Restructuring and other non-recurring charges                                  --             --             --              746
Operating income (loss)                                                       2,174          1,945            997         (6,682)
Gain on sale of Barnett stock                                                  --             --             --           16,693
Income from continuing  operations before                         
provision for income taxes                                                    1,912          1,674            598          9,642
Net income                                                                 $  1,660       $  1,460       $    378       $  5,657
</TABLE>


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE

                  Not Applicable.

                                    PART III

         Items 10, 11, 12 and 13 omitted pursuant to General Instruction (I)
(2)(c) of Form 10-K.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

     (a)      (1)     The following consolidated financial statements are 
                      included in Part II, Item 8:

                      Report of Independent Public Accountants

                      Balance Sheets--June 30, 1998 and 1997

                      Statements of Operations--For the Years Ended June 30,
                      1998, 1997 and 1996

                      Statements of Stockholder's Equity--For the Years Ended
                      June 30, 1998, 1997 and 1996.

                      Statements of Cash Flows--For the Years Ended June 30,
                      1998, 1997 and 1996.

                      Notes to Financial Statements For the Years Ended June 30,
                      1998, 1997 and 1996.

                                       38
<PAGE>   39

                      Supplementary Financial Information

     (a)      (2)     All schedules have been omitted because the required
                      information is not present or not present in amounts
                      sufficient to require submission of the schedule, or
                      because the information required is included in the
                      consolidated financial statements including notes thereto.

     (a)      (3)     Exhibits

     3.1*             Certificate of Incorporation of Waxman USA Inc. (Exhibit
                      3.1 to the Waxman USA Inc.'s Registration Statement on
                      Form S-4, Registration Number 333-3689, incorporated
                      herein by reference).

     3.2*             By-laws of Waxman USA Inc. (Exhibit 3.2 to the Waxman
                      USA Inc.'s Registration Statement on Form S-4,
                      Registration Number 333-3689, incorporated herein by
                      reference).

     4.1*             Indenture dated as of April 3, 1996 by and between
                      Waxman USA Inc. and the United States Trust Company of
                      New York, as Trustee, with respect to the 11 1/8% Senior
                      Notes due 2001 of Waxman USA Inc., including the form of
                      Senior Notes (Exhibit 10.14 to Waxman Industries, Inc.'s
                      Amendment No. 8 to Registration Statement on Form S-2
                      filed April 15, 1996, Registration No. 33-54211,
                      incorporated herein by reference).

     4.2*             Registration Rights Agreement dated as of April 3, 1996 by
                      and between Waxman USA Inc. and the United States Trust
                      Company of New York (Exhibit 10.15 to Waxman Industries,
                      Inc.'s Amendment No. 8 to Registration Statement on Form
                      S-2 filed April 15, 1996, Registration No. 33-54211,
                      incorporated herein by reference).

     4.3*             Amended and Restated Credit Agreement dated as of April 3,
                      1996 among Waxman USA Inc., Waxman Consumer Products Group
                      Inc. and WOC Inc., the Lenders and Issuers party thereto
                      and Citibank, N.A., as Agent (Exhibit 10.12 to Waxman
                      Industries, Inc.'s Amendment No. 8 to Registration
                      Statement on Form S-2 filed April 15, 1996, Registration
                      No. 33-54211, incorporated herein by reference).

     10.1*            Tax Sharing Agreement dated May 20, 1994 among Waxman
                      Industries, Waxman USA, Barnett Inc., Waxman Consumer
                      Products Group Inc., WOC Inc. and Western American
                      Manufacturing, Inc. (Exhibit 10.6 to Waxman Industries,
                      Inc.'s Form S-4 filed June 20, 1994, incorporated herein
                      by reference).

     10.2*            Intercorporate Agreement dated May 20, 1994 among Waxman
                      Industries, Waxman USA, Barnett Inc., Waxman Consumer
                      Products Group Inc., WOC Inc. and Western American
                      Manufacturing, Inc. (Exhibit 10.7 to Waxman Industries, 
                      Inc.'s Form S-4).

     10.3*            Intercorporate Agreement dated March 28, 1996 among Waxman
                      Industries, Inc., Waxman USA Inc., Barnett Inc., Waxman
                      Consumer Products Group Inc., WOC Inc. and TWI,
                      International, Inc. (Exhibit 10.8 to Waxman Industries,
                      Inc.'s Amendment No. 8 to Registration Statement on Form
                      S-2 filed April 15, 1996, Registration No. 33-54211,
                      incorporated herein by reference).

     10.4*            Credit Agreement dated as of May 20, 1994 among Waxman
                      USA, Inc., Barnett Inc., Waxman Consumer Products Group
                      Inc. and WOC Inc., the Lenders and Issuers party thereto
                      and Citicorp USA, Inc., as Agent and certain exhibits
                      thereto (Exhibit 10.8 to Waxman Industries, Inc.'s Form
                      S-4 filed June 20, 1994, incorporated herein by
                      reference).

     10.5*            Term Loan Credit Agreement dated as of May 20, 1994
                      among Waxman USA, Inc., Barnett Inc., Waxman Consumer
                      Products Group, Inc. and WOC Inc., the Lenders and
                      Issuers party thereto and Citibank, N.A., as Agent
                      (Exhibit 10.9 to Waxman Industries, Inc.'s Form S-4
                      filed June 20, 1994, incorporated herein by reference.).

     10.6*            Amendment No. 2 to the Term Loan Agreement and Amendment
                      No. 1 to the Revolving Credit Agreement among Waxman USA
                      Inc., Barnett Inc., Waxman Consumer Products Group Inc.
                      and 


                                       39
<PAGE>   40

                      WOC Inc., the Lenders and Issuers party thereto and
                      Citibank, N.A., as Agent (Exhibit 10.11 to Waxman
                      Industries, Inc.'s Amendment No. 4 to Registration
                      Statement on Form S-2 filed October 10, 1995,
                      Registration No. 33-54211, incorporated herein by
                      reference).

     10.7*            Loan and Security Agreement dated as of June 28, 1996
                      among the Financial Institutions named therein and
                      BankAmerica Business Credit, Inc., as the Agent, Waxman
                      Consumer Products Group Inc. and WOC Inc., including
                      certain exhibits thereto (Exhibit No. 4.33 to Waxman
                      Industries, Inc. Annual Report on Form 10-K for the year
                      ended June 30, 1996, File No. 0-05888, incorporated herein
                      by reference).

     10.8*            Employment Agreement dated November 1, 1994 between
                      Waxman Consumer Products Group Inc. and Laurence Waxman
                      (Exhibit 10.5 to Waxman Industries, Inc.'s Amendment No.
                      4 to Registration Statement on Form S-2 filed October
                      10, 1995, Registration No. 33-54211, incorporated herein
                      by reference).

     12.1*            Statement re: computation of ratios (Exhibit 12.1 to
                      Waxman USA Inc.'s Registration Statement on Form S-4,
                      Registration No. 333-3689, incorporated herein by
                      reference).

     21.1*            Subsidiaries. (Exhibit 21.1 to Waxman USA Inc.'s
                      Registration Statement on Form S-4, Registration No.
                      333-3689, incorporated herein by reference).

     23.1             Consent of Arthur Andersen LLP

     27.1             Financial Data Schedule

*    Incorporated herein by reference as indicated.

     (b)      REPORTS ON FORM 8-K

              None



                                       40
<PAGE>   41



                                   SIGNATURES

         Pursuant to the requirements of Section 13 of 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.

                                                   WAXMAN USA, INC.
                                                   ----------------

September 2, 1997                       By:      /s/  Armond Waxman
                                                 --------------------------
                                                 Armond Waxman
                                                 President,
                                                 Co-Chief Executive Officer
                                                 and Director

         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.

September 2, 1997                                /s/  Melvin Waxman
                                                 --------------------------
                                                 Melvin Waxman
                                                 Chairman of the Board,
                                                 Co-Chief Executive Officer
                                                 and Director

September 2, 1997                                /s/  Armond Waxman
                                                 --------------------------
                                                 Armond Waxman
                                                 President,
                                                 Co-Chief Executive Officer
                                                 and Director

September 2, 1997                                /s/  Mark W. Wester
                                                 -------------------
                                                 Mark W. Wester
                                                 Chief Financial Officer
                                                 and Vice-President - Finance
                                                 (principal accounting officer)

September 2, 1997                                /s/  William R. Pray
                                                 --------------------
                                                 William R. Pray, Director

September 2, 1997                                /s/  Samuel J. Krasney
                                                 ----------------------
                                                 Samuel J. Krasney, Director

September 2, 1997                                /s/  Judy Robins
                                                 ---------------------
                                                 Judy Robins, Director

September 2, 1997                                /s/  Irving Z. Friedman
                                                 -----------------------
                                                 Irving Z. Friedman, Director

September 2, 1997                                /s/  Laurence S. Waxman
                                                 -----------------------
                                                 Laurence S. Waxman, Director