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                                  UNITED STATES
                       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 0-21728

                                  BARNETT INC.
                                  ------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                                 59-1380437
                 --------                                 ----------
     (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

  3333 LENOX AVENUE, JACKSONVILLE, FLORIDA                  32254
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

   REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:       (904) 384-6530

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

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

                          Common Stock, $.01 par value
                          ----------------------------
                              (TITLE OF EACH CLASS)
                              ---------------------

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  X
                             ---

         Aggregate market value of voting stock held by non-affiliates of the
Registrant based on the closing price at which such stock was sold on the NASDAQ
National Market on September 18, 1998: $97,666,072

         Number of shares of Common Stock outstanding as of September 18, 1998:
16,211,891


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                       DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's Proxy Statement in connection with its 1998 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Annual Report on
Form 10-K from the date such document is filed.

                                     PART I


CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
This Annual Report on Form 10-K contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1996 that
are based on the beliefs of the Company and its management, as well as
assumptions made by and information currently available to 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 growth
strategy in the intended manner, price competition, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from these
described herein as anticipated, believed, estimated, expected or intended.


ITEM 1. BUSINESS

         On April 3, 1996, Barnett Inc.(the "Company") consummated an initial
public offering(the "Initial Public Offering") whereby 7,207,000 shares of
common stock, $.01 par value (the "Common Stock"), of the Company, representing
approximately 55.1% of the outstanding shares of Common Stock, were sold by the
Company and its former parent, Waxman USA Inc ("Waxman USA"). On April 18, 1997,
the Company consummated a secondary offering whereby 1,725,000 shares of Common
Stock were sold by it and Waxman USA.

         On July 1, 1997, the Company acquired certain of the assets of LeRan
Gas Products, an operating unit of Waxman Industries, Inc.("Waxman Industries").
The acquisition price was $3.8 million, of which $3.2 million was paid in cash
and the remainder was paid by the issuance to Waxman Industries of 25,000 shares
of common stock of the Company. The operations related to these assets are not
material to the Company's financial statements.

OVERVIEW

         The Company 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. The Company offers approximately 11,900
name brand and private label products through its industry-recognized Barnett(R)
catalogs and telesales operations. The Company markets its products through five
distinct, comprehensive catalogs that target professional contractors,
independent hardware stores, maintenance managers and liquid propane gas ("LP
Gas") dealers. The Company'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, the Company 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 the Company's orders are shipped 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 the Company's local distribution centers.
The Company's strategy of being a low-cost, competitively priced supplier is
facilitated by

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its volume of purchases and offshore sourcing of a significant portion of its
private label products. Products are purchased from over 500 domestic and
foreign suppliers.

         The Company 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. The Company'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. The Company
provides an updated version of its catalogs to its customers an average of three
times a year. To attract new customers and offer special promotions to existing
customers, the Company supplements its catalogs with monthly promotional flyers.
The Company mailed approximately 5.5 million promotional flyers during fiscal
1998 compared to approximately 4.3 million promotional flyers during fiscal
1997. The Company's experienced and knowledgeable inbound telesales staff,
located at the Company's centralized headquarters in Jacksonville, Florida, uses
the Company's proprietary information systems to take customer orders as well as
offer technical advice. The Company'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. The Company's high in-stock
position and extensive 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, the
Company'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.

         The Company has actively pursued increased sales of its private label
products sourced primarily from foreign suppliers. During the fiscal year ended
June 30, 1998, approximately 27.5% of the Company's net sales were attributable
to sales of private label products. Many of the Company's private label products
provide the customer with lower cost, high quality alternatives to brand name
products, as well as providing the Company with higher profit margins. The
Company's private label products are sold under brand names such as Premier(R),
ProPlus(R), Barnett(R), Legend(TM), Electracraft(R) and Lumina(TM).

INDUSTRY OVERVIEW

         The Company competes in a large and highly fragmented industry. The
Company broadly defines its industry as the sale of plumbing, electrical and
hardware products primarily to plumbing and electrical repair and remodeling
contractors, maintenance managers, independent hardware stores and LP Gas
dealers. Plumbing and electrical contractors are primarily responsible for
making repairs on a daily basis and generally do not have time to shop with
multiple vendors. Plumbing and electrical contractors, therefore, value
extensive product selection, convenient ordering, reliable, rapid delivery and
other value-added services. In addition, such contractors typically operate with
limited working capital, making competitive pricing important. Plumbing,
electrical and hardware contractors have traditionally purchased supplies
through a variety of distribution channels including:

         Local or Regional Broad-Line Suppliers. There are numerous broad-line
suppliers offering product categories similar to those found in the Company's
catalogs. Most of these suppliers are local or regional in scope. Although these
competitors typically use a direct sales force, often supported by a
manufacturer's catalog, they are smaller and therefore tend to offer brand name
products only, and fewer services than offered by the Company. However, many of
these suppliers offer a greater breadth of products than the Company.

         Specialty Suppliers. Specialty suppliers focus on a single product
category, such as plumbing or electrical supplies, and often offer a greater
number of products within their product categories. Specialty suppliers are
typically local or regional in scope and cannot provide the one-stop shopping
sought by many of the Company's customers.


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         Industrial Suppliers. There are a few industrial suppliers that include
a limited selection of plumbing, electrical and hardware products in their
merchandise mix but do not focus on the Company's target markets.

         Mail Order Distributors. There are several mail order catalog
distributors that offer a broad selection of repair and maintenance products,
have multiple distribution centers and offer rapid delivery services. However,
these companies generally do not have a significant telesales staff or the
Company's geographic scope and typically focus on fewer customer segments.

BUSINESS STRENGTHS

         The Company's strategy is to continue to be a high-volume, cost
efficient direct marketer of competitively priced plumbing, electrical and
hardware products, providing superior customer service. The Company believes
that the following business strengths are the key elements of this strategy:

         Direct Marketing Sales Approach. The Company displays and promotes its
products through five comprehensive professional contractor, hardware,
maintenance, LP Gas and Caribbean catalogs targeted, respectively, to such major
customer groups as professional plumbing and electrical repair and remodeling
contractors, hardware stores, maintenance managers and LP Gas dealers. The
Company mailed its first catalog in 1958 and currently mails its principal
catalog to the 65,000 active customers on its proprietary mailing list. These
mailings are supplemented with direct mail promotional flyers to existing and
potential customers on a monthly basis. Typical catalogs mailed by the Company
contain over 11,900 items and are approximately 900 pages in length. The
Company's objective is to leverage its direct sales experience to sell a broader
array of products to a larger number of customers. The Company's comprehensive
catalogs provide its customers with the opportunity to purchase a substantial
portion of their plumbing, electrical and hardware supplies from a single
vendor.

         Sophisticated Data Based Telesales. During fiscal 1998, approximately
73.7% of the Company's net sales were generated through the Company's 101
outbound and inbound telesalespersons. Outbound telesalespersons are assigned
account management responsibilities for existing customers with an emphasis on
customer service, new product introductions and new product lines. Inbound
telesalespersons are trained to quickly process orders from existing customers.
All telesalespersons are highly knowledgeable and are required to go through
extensive product and sales training before they begin to work with customers.
The Company's proprietary telesales software provides the telesales staff with
detailed customer profiles and information about products, pricing, promotions
and competition. This data enables the Company to segment its customer base,
analyze mailing effectiveness on a weekly basis, closely track and manage
inventory on a real-time basis and quickly react to, and capitalize on, business
opportunities.

         National Network of Distribution Centers. To provide more rapid
delivery and a strong local presence, the Company has established a network of
32 distribution centers strategically located in 32 major metropolitan areas
throughout the United States and Puerto Rico. The distribution centers enable
the Company to be closer to many of its customers for faster product delivery
and to generate incremental over-the-counter sales. The Company's experience
indicates that many of its customers prefer to purchase from local suppliers and
often choose to pick up their orders in person. Approximately 30% of the
Company's orders are picked up by the customer at one of the Company's local
distribution centers.

         Superior Customer Service. As a result of its large in-stock inventory,
the Company is typically able to fulfill approximately 94% of the items included
in each customer order, and, in almost all cases, ships the order within the
same day of receipt of the order. In addition, as a result of its large number
of distribution centers, the Company is able to provide its customers with more
rapid delivery to markets within the continental United States. In an effort to
maximize sales and increase customer retention, the Company has structured its
telesales staff to create regular contact between the Company's telesales
personnel and each active customer. The Company's

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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.

         Competitive Pricing and Private Label Products. Due to the Company's
size, volume of purchases, substantial vendor base and offshore sourcing
capabilities, the Company is frequently able to obtain purchase terms that the
Company believes are more favorable than those available to its competition.
This enables the Company to offer prices that are generally lower than those
available from its competitors. Many of the Company's private label products
provide the customer with lower-cost, high quality alternatives to name brand
products, as well as providing the Company with higher profit margins. During
fiscal 1998, approximately 27.5% of the Company's net sales were attributable to
sales of private label products.

         Centralized Management Information Systems. The Company's proprietary
integrated centralized management information systems provide the Company with
real-time information for managing telesales, distribution, customer service,
inventory control and financial controls. The management information systems
also enable the Company to effectively coordinate its purchasing, marketing,
outbound telesales, order entry, shipping and billing. The current system has
enabled the Company to enhance its levels of customer service and increase the
productivity and profitability of its telesales operations, as well as enabling
management to make well informed business decisions. The system can be easily
and cost-effectively upgraded as the Company grows.

MARKETING AND DISTRIBUTION

         The Company markets its products nationwide to existing and potential
customers through regular catalog and promotional mailings, supported by a
telesales operation. Products are shipped from a network of 32 distribution
centers allowing for shipment to and pick up by customers generally the same day
the order is received. The outbound telesales operation is utilized to make
telephonic sales presentations to existing and potential customers that have
received written promotional materials. The Company's inbound telesalespersons
provide customer assistance and take customer orders. The Company's outbound and
inbound telesales operations are centralized in Jacksonville, Florida.

  Catalogs

         The Company's five approximately 900-page catalogs containing
approximately 11,900 plumbing, electrical and hardware products are mailed to
its approximately 65,000 active customers. These catalogs are supplemented by
monthly promotional flyers, approximately 5.5 million of which were mailed in
fiscal 1998. The Company's targeted customers include professional contractors,
independent hardware stores, maintenance managers and LP Gas dealers. The
Company has been distributing its principal catalog since 1958 and believes that
the Barnett(R) name has achieved a very high degree of recognition among the
Company's customers and suppliers.

         The Company makes its initial contact with potential customers
primarily through promotional flyers. The Company obtains the names of
prospective customers through the rental of mailing lists from outside marketing
information services and other sources. Sophisticated proprietary information
systems are used to analyze the results of individual catalog and promotional
flyer mailings. The information derived from these mailings, as well as
information obtained from the Company's telesales operations, is used to create
and/or supplement individual customer profiles and to target future mailings.
The Company updates its mailing lists frequently to delete inactive customers.

         The Company has over 600,000 prospective domestic customers in its
current target markets, only approximately 65,000 of which are active customers.
The Company believes that due, in part, to the continuing expansion of its
product offerings in conjunction with continuing its expanded promotional flyer
campaigns, it has the opportunity to market its products to attract new
customers. In fiscal 1998, approximately 14,000 net new customers contributed
approximately $19.8 million to net sales.


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         The Company's in-house art department produces the design and layout
for its catalogs and promotional mailings. The catalogs are indexed and
illustrated, provide simplified pricing and highlight new product offerings.

  Telesales

         During fiscal 1998, approximately 73.7% of the Company's net sales were
generated through the Company's telesales operation. The Company's telesales
operation has been designed to make ordering its products as convenient and
efficient as possible, thereby enabling the Company to provide superior customer
service. The Company offers its customers a nationwide toll-free telephone
number that currently is staffed by approximately 101 telesales, customer
service and technical support personnel who utilize the Company's proprietary,
on-line order processing system. This sophisticated software provides the
telesales staff with detailed customer profiles and information about products,
pricing, promotions and competition. This data enables the Company to segment
its customer base, analyze mailing effectiveness on a weekly basis, closely
track and manage inventory on a real-time basis and quickly react to and
capitalize on market opportunities.

         The Company divides its telesales staff into outbound and inbound
groups. The Company's experience indicates that customer loyalty is bolstered by
the ability of the telesales staff to develop an ongoing personal relationship
with their customers. The Company's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations and
encourages additional purchases. Inbound telesalespersons are trained to quickly
process orders from existing customers, provide technical support, expedite and
process new customer applications as well as handle all customer service. They
endeavor to increase sales by informing customers of price breaks for larger
orders, companion items and replacement items with higher margins. Outbound
telesales persons are also utilized to make telephonic sales presentations to
both potential and existing customers. Also, for several months prior to the
opening of new distribution centers, the Company utilizes its telesales
operation to generate awareness of the Company, its product offerings and the
upcoming opening of new distribution centers located near the target customers.

         The Company conducts a customized, in-depth six week training course
for new telesales employees. Training includes the use of role playing and
videotape analysis. Upon satisfactory completion of their training, new
telesales personnel are provided with a dedicated, experienced telesales
employee who serves as a "coach" for the next year. In order to better assure
high telesales service levels, telesales supervisors regularly monitor telesales
calls.

         During the last quarter of fiscal 1998, the Company conducted a
strategic assessment of its sales and marketing tools and processes, with a
focus on integration across major sales channels. The Company realigned the
responsibilities of the telesales personnel by using a systematic customer
grading and matrix system to effect the utilization of multiple selling
channels. The result of this assessment was an implementation of complementary
direct marketing and direct selling programs. The Company developed a teamwork
concept whereby an outbound (or group of outbound) telesalespersonnel are
combined with an outside field salesperson to better service its existing and
potential customers. These united sales teams are best suited to servicing
medium and large size customers as it provides the larger customer with a
greater amount of personalized attention.

The direct marketing channel primarily uses product catalogs and promotional
materials to target small to mid-size customers. Barnett markets its full line
catalogs to its existing customer base and mails flyers and other promotional
material to prospective customers and as supplemental mailings to existing
customers.

This new focus on integrated account management actually has the result of
slowing down the telesales hiring process. It also reduces the number of
mailings of catalogs and promotional materials, as a very small customer will
not receive the frequency of mailings as a very large customer. The Company
expects this marketing approach to complement its growth in new and existing
markets while contributing to expense leverage in the near future.


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  Export business

         The Company believes that many opportunities for direct marketing to
the Company's existing target markets exist in foreign locations including South
America, the Caribbean and Europe. In October 1997, the Company opened its first
offshore distribution center in Puerto Rico. Although the Company does not
intend to commit material resources to international expansion during the next
few years, the Company has begun to, and intends to continue to, access these
markets through its existing telesales operations and increased mailings of its
promotional flyers. The Company believes that customers in these international
areas are receptive to mail order purchasing and that potential customers would
be attracted to the breadth of the Company's product lines and its competitive
pricing.

  Distribution Center Network

         The Company has established a network of 32 local distribution centers
strategically located in 32 major metropolitan areas throughout the United
States and Puerto Rico. This network enables the Company to provide rapid and
complete product delivery and provides a strong local presence.

         The Company's distribution centers range in size from approximately
12,000 square feet to 60,000 square feet. Distribution centers are typically
maintained under operating leases in commercial or industrial centers.
Distribution centers primarily consist of warehouse and shipping facilities, but
also include "city sales counters," typically occupying approximately 900 square
feet, where customers can pick up orders or browse through a limited selection
of promotional items. The Company is often able to generate incremental sales
from customers who pick up their orders. The Company has initiated a program to
enlarge product displays in the counter area to better promote the breadth of
its product lines and to increase impulse purchases.

         Over the next few years, the Company plans to add two to four new
distribution centers in major metropolitan areas and has identified ten to
twelve potential locations. The Company opened new distribution centers in
Milwaukee, Wisconsin in July 1997, Bayamon, Puerto Rico in October 1997 and
Nashville, Tennessee in December, 1997 and is expected to open in Birmingham,
Alabama in September 1998. The addition of new distribution centers in new
geographic areas, as well as in geographic areas in which the Company has
existing distribution centers, has increased, and is expected to continue to
increase, the Company's overall level of business. New distribution centers
enhance marketing efforts, heighten the Company's name recognition, generate new
over-the-counter business and allow for faster product delivery.

         The factors considered in site selection include the number of
prospective customers in the local target area, the existing sales volume in
such area and the availability and cost of warehouse space, as well as other
demographic information. The Company has substantial expertise in distribution
center site selection, negotiating leases, reconfiguring space to suit its
needs, and stocking and opening new distribution centers. The average investment
required to open a distribution center is approximately $1,000,000, including
approximately $600,000 for inventory.

PRODUCTS

         The Company markets an extensive line of approximately 11,900 plumbing,
electrical and hardware products, many of which are sold under its proprietary
trade names and trademarks. This extensive line of products allows the Company
to serve as a single source supplier for many of its customers. Many of these
products are higher margin products bearing the Company's proprietary trade
names and trademarks. In addition, proprietary products are often the customers'
higher margin product offerings.

         The Company tracks sales of new products the first year they are
offered, and new products that fail to meet specified sales criteria are
discontinued. The Company believes that its customers respond favorably to the
introduction of new product lines in areas that allow the customers to realize
additional cost savings and to utilize the Company's catalogs as a means of
one-stop shopping for many of their needs.


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         The Company plans to increase its net new product offerings by 750 to
1,000 items per year over the next three years, which will deepen the Company's
existing product lines and establish new product categories. The Company's name
and reputation have enabled the Company to successfully market a trusted line of
private label products, and accordingly, a significant portion of new product
additions will be private label products. Private label products offer customers
high quality, lower-cost alternatives to the brand name products the Company
sells. The Company's catalogs and monthly promotional flyers emphasize the
comparative value of the Company's private label products. During fiscal 1998,
approximately 27.5% of the Company's net sales were generated by the sale of the
Company's private label products. The Company believes that the introduction of
new product lines will expand the Company's total potential target market.
Examples of new product lines recently introduced include, liquid propane gas
products (as a result of the LeRan Gas Products acquisition), Euro-line faucets,
gate hardware and safety equipment. The Company's products are generally covered
by a one year warranty, and returns, which require prior authorization from the
Company, have historically been immaterial in amount.

         The following is a discussion of the Company's principal product
groups:

         Plumbing Products. The Company sells branded products of leading
plumbing supply manufacturers including Delta(R), Moen(R) and Price Pfister(R).
The Company's private label plumbing products are also sold under its
Barnett(R), Premier(R) and ProPlus(R) trademarks. In fiscal 1998, plumbing
products accounted for 72.9% of net sales.

         Electrical Products. The Company sells branded products of leading
electrical supply manufacturers including Philips(R), Westinghouse(R),
Honeywell(R) and General Electric(R). Certain of the Company's private label
electrical products are sold under its own proprietary trademarks including
Barnett(R), Premier(R), Electracraft(R) and Lumina(R). In fiscal 1998,
electrical products accounted for 14.9% of net sales.

         Hardware Products. The Company sells hardware products of leading
hardware product manufacturers including Kwikset(R) security hardware products
and Milwaukee(R) power tools. Certain of the Company's hardware products are
also sold under its own proprietary Legend(TM) trademark. In fiscal 1998,
hardware products accounted for 8.8% of net sales.

         HVAC/R Products. The Company began selling a limited number of brand
name HVAC/R products in July 1997 and intends to continue expanding this product
line. In fiscal 1998, HVAC/R products accounted for 3.4% of net sales.


SOURCING

         The products sold by the Company are purchased from approximately 460
domestic and 60 foreign suppliers. Domestically manufactured products are
shipped directly to the Company's 32 distribution centers. Products manufactured
abroad are initially shipped to the Company's 5 regional distribution centers
and subsequently redistributed to each of the remaining local distribution
centers. The Company is not dependent upon any single supplier for any of its
requirements. Due to the volume of the Company's purchases and its utilization
of over 500 vendors, it is able to obtain purchase terms it believes to be more
favorable than those available to most local suppliers of plumbing, electrical
and hardware products. Approximately 74% of the Company's purchases for the year
ended June 30, 1998 were from domestic manufacturers and 26% were from foreign
manufacturers, primarily located in Asia. During fiscal 1998, the Company
purchased approximately 11.6% of its products through Waxman Industries
entities, both domestic and foreign. Although the Company intends to continue to
purchase products through Waxman Industries entities in the future, the Company
is not committed to purchase any products from Waxman Industries.


MANAGEMENT INFORMATION SYSTEMS

         The Company has integrated all of its operating units into its
state-of-the-art management information system. This system encompasses all of
the Company's major

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business functions and was designed to enable the Company to receive and process
orders, manage inventory, verify credit and payment history, invoice customers,
receive payments and manage the Company's proprietary mail order customer lists.
In addition, all of the Company's local distribution centers are linked to the
Company's computer system to provide real-time access to all necessary
information, including inventory availability, order tracking, and customer
creditworthiness. The system can be easily and cost-effectively upgraded as the
Company grows. The Company has adopted procedures to protect the data in its
computer systems and to provide for recovery in the event of equipment failures.
All data systems are backed up to tape daily with backup tapes stored off-site.
End of month tapes, tape archives and production software kept on-site are
stored in a fire-proof safe. Additionally, the Company maintains a
geographically remote "hot site" computer system that is able to communicate
with all of the Company's distribution centers in the event of a failure of the
Company's primary system.

         The Company's customers can place orders directly via mail, facsimile,
telephone or through an electronic data interchange ("EDI") transmission.
Utilizing EDI, the Company's customers can send electronic purchase orders
directly to the Company's order entry systems. The Company makes this ordering
process simple for its customers by providing well-developed computer media
containing the Company's product information including item number, product
description, price, package quantity and UPC codes to be loaded directly into
the customer's purchasing system. The Company automatically edits and processes
EDI orders and sends the majority of EDI orders received directly to shipping.
The few EDI orders that need editing are sent immediately to a sales
representative for review. Through EDI, the Company can provide faster order
turnaround, thereby further fostering customer satisfaction.

         The Barnett Ordering Service System or BOSS(TM) is the Company's
proprietary software ordering program. BOSS(TM) is provided free to all Company
customers and allows customers to browse through the Company's electronic
catalog to create and transmit orders. BOSS(TM) is simple, easy to use and
provides customers with their purchasing history to assist the customer in
projecting future supply requirements.

         To address the Year 2000 ("Y2K") issues, the Company has identified all
computer-based systems and applications (including embedded systems) that are
not Year 2000 compliant and has determined what revisions, replacements or
updates are needed to achieve compliance. Management believes that most of the
systems are compliant currently and expects the remainder to be compliant by the
end of fiscal 1999.

         Any costs associated with bringing the systems into compliance have
been immaterial, as the Company has not incorporated material revisions or
updates to the current systems to bring them into Y2K compliance. The Company
has budgeted approximately $20,000 to bring the remainder of the systems into
Y2K compliance.


         As part of the Y2K review, the Company is examining its relationship
with certain key vendors and others with whom it has significant business
relationships to determine to the extent practical the degree of such parties'
Y2K compliance and their effect on the Company's operations. The Company does
not have a relationship with any third party vendor which is material to the
operations of the Company, and thus believes that the failure of any such party
to be Y2K compliant would not have a material adverse effect on the Company.

         To date, the Company has not established a formal contingency plan for
dealing with a failure by either the Company or its third party vendors to
achieve Y2K compliance.

 COMPETITION

         The market in which the Company competes is highly fragmented
consisting of many regional and local distributors of plumbing, electrical and
hardware products. The Company believes that competition is primarily based on
price, product quality and selection, as well as service, which includes rapid
order turnaround. The Company believes that its operating strategy positions it
to be an effective competitor in its markets. The Company's major competitors
include local and regional broad line


                                        8

<PAGE>   10



suppliers, specialty suppliers, industrial suppliers, direct mail distributors
and warehouse home centers.

SEASONALITY

         The Company's sales are generally consistent throughout the year.

ENVIRONMENTAL REGULATIONS

         The Company's facilities are subject to certain federal, state and
local environmental laws and regulations. The Company believes that it is in
compliance with all environmental laws and regulations applicable to it.

EMPLOYEES

         As of June 30, 1998, the Company employed 657 individuals, 165 of whom
were clerical and administrative personnel, 131 of whom were telesales and sales
representatives and 361 of whom were either production or warehouse personnel.
The Company's employees are not unionized. The Company considers its relations
with its employees to be good.


ITEM 2.  PROPERTIES

       The Company's headquarters and largest distribution center are located at
3333 Lenox Avenue, Jacksonville, Florida. The building in which the headquarters
are located is leased by the Company through October 31, 2003, and contains
approximately 47,000 square feet of warehouse space and 19,000 square feet of
offices. The Company has built a new 38,000 square foot telesales center in
Jacksonville, Florida, which it occupied in May 1998. This new telesales center
will enable the Company to continue expanding its telesales staff, and has
enabled the Company to either terminate or consolidate existing leased spaces.

       The Company's 32 distribution centers utilize leased space ranging from
12,000 to 60,000 square feet and are all located in the United States and Puerto
Rico. The leases expire at various dates from September 1998 to April 2007. The
Company believes that its distribution facilities are adequate for its current
needs and does not anticipate that it will have any problem leasing additional
space when needed. The Company shares one of its facilities with U.S. Lock, an
operating division of WOC Inc.("WOC"), which is a wholly owned subsidiary of
Waxman Industries. The Company is charged for the portion of the rent relating
to the space occupied by it.

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 have a material
impact on the financial position, liquidity or results of operations of the
Company.


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

       No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.




                                        9

<PAGE>   11



ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

        The following sets forth the names, ages, positions and offices with the
Company held by the present executive officers of the Company.

<TABLE>
<CAPTION>
         NAME                           AGE        POSITION AND OFFICE PRESENTLY HELD
         ----                           ---        ----------------------------------

<S>                                     <C>        <C>
William R. Pray                         51         President, Chief Executive Officer and
                                                   Director

Andrea M. Luiga                         41         Vice President--Finance, Chief Financial
                                                   Officer

Alfred C. Poindexter                    46         Vice President--Operations

Melvin Waxman                           64         Chairman of the Board and Director

Armond Waxman                           59         Vice-Chairman of the Board and Director
</TABLE>

         Mr. William R. Pray was elected President, Chief Executive Officer and
a Director of the Company in February 1993. Mr. Pray was elected President and
Chief Operating Officer of Waxman Industries in June 1995, and resigned these
positions in April 1996, upon consummation of the Initial Public Offering. From
February 1991 to February 1993, Mr. Pray was Senior Vice President--President of
Waxman Industries' U.S. Operations, after serving as President of the Mail
Order/Telesales Group (which included the Company) since 1989. He joined the
Company in 1978 as Regional Sales Manager, became Vice President of Sales and
Marketing in 1984 and was promoted to President in 1987.
Mr. Pray is a Director of Waxman Industries.

         Ms. Andrea M. Luiga was elected Vice President--Finance, Chief
Financial Officer of the Company in February 1993. Ms. Luiga was elected Vice
President and Chief Financial Officer of Waxman Industries in August 1995, and
resigned these positions in April 1996 upon consummation of the Initial Public
Offering. From September 1991 to February 1993, Ms. Luiga was Vice
President--Group Controller of the Mail Order Group of Waxman Industries (which
included the Company) after serving as Group Controller of the Mail Order Group
since October 1989. Ms. Luiga joined the Company in March 1988 as Controller.

         Mr. Alfred C. Poindexter was elected Vice President--Operations of the
Company in February 1993. From September 1988 to February 1993, Mr. Poindexter
served as Vice President--Operations of the Company after serving as Director of
Operations of the Company since 1987. He joined the Company in 1983 as
Purchasing Manager.

         Mr. Melvin Waxman was elected Chairman of the Board and Director of the
Company in December 1995. Mr. Waxman was elected Co-Chief Executive Officer of
Waxman Industries in May 1988, Co-Chairman of the Board of Waxman Industries in
June 1996 and Chairman of the Board of Waxman Industries in April 1996. Mr.
Waxman has been the Chief Executive Officer of Waxman Industries for over 20
years and has been a director of Waxman Industries since 1962. Mr. Waxman has
been either Chairman or Co-Chairman of the Board of Waxman Industries since
August 1976. Mr. Waxman has been a director of the Company since its acquisition
by Waxman Industries in 1984. Mr. Waxman was a director of Ideal Plumbing Group
Inc., a Canadian subsidiary of Waxman Industries, that was involuntarily
liquidated in 1994. Mr. Waxman is the brother of Armond Waxman.

         Mr. Armond Waxman was elected Vice-Chairman of the Board and Director
in December 1995. Mr. Waxman was elected Co-Chief Executive Officer of Waxman
Industries in May 1988 and was Co-Chairman of the Board of Waxman Industries
from June 1995 until April 1996. Mr. Waxman had been the President of Waxman
Industries from August 1976 until June 1995, and was re-appointed to the
position in April 1996. Mr. Waxman has been a director of Waxman Industries
since 1962 and was Chief Operating Officer of Waxman Industries from August 1976
to May 1988. Mr. Waxman has been a director of the Company since its acquisition
by Waxman Industries in 1984. Mr. Waxman was a director of Ideal Plumbing Group
Inc., a Canadian subsidiary of Waxman Industries, that was involuntarily
liquidated in 1994. Mr. Waxman is the brother of Melvin Waxman.




                                       10

<PAGE>   12



                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
         SECURITY HOLDER MATTERS

PRICE RANGE OF COMMON STOCK

         The Company's common stock is traded on the NASDAQ National Market
under the symbol "BNTT". The following table sets forth the high and low sales
prices for the Common Stock for each quarter during the past two fiscal years,
as reported by NASDAQ.


<TABLE>
<CAPTION>
                                          High              Low
                                          ----              ---
<S>                                     <C>               <C>    
Fiscal 1998
   First Quarter                        $ 26.25           $ 19.25
   Second Quarter                         22.75             17.25
   Third Quarter                          25.25             21.50
   Fourth Quarter                         22.50             16.50

Fiscal 1997
   First Quarter                        $ 27.75           $ 19.00
   Second Quarter                         27.25             21.00
   Third Quarter                          27.00             19.75
   Fourth Quarter                         27.00             17.50
</TABLE>




HOLDERS OF RECORD

       As of September 18, 1998, there were approximately 243 holders of record
of the Common Stock.


DIVIDENDS

       The Company presently retains all of its earnings to finance the
expansion of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. Any determination to pay cash dividends
in the future will be at the discretion of the Board of Directors after taking
into account various factors, including the Company's financial condition,
results of operations, current and anticipated cash needs and plans for
expansion. In addition, the Company's current credit facility limits the amount
of cash dividends payable on the Common Stock in any one year to the Company's
net income for such year.

SALE OF UNREGISTERED SECURITIES

On July 1, 1997, the Company acquired certain of the assets of LeRan Gas
Products, an operating unit of Waxman Industries. The acquisition price was $3.8
million, of which $3.2 million was paid in cash and the remainder was paid by
the issuance of 25,000 shares of the common stock of the Company. The issuance
of shares to the Company's former parent Corporation, Waxman Industries, Inc.,
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933 as a transaction not involving a public offering.


                                       11

<PAGE>   13



ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial information for the last five fiscal years
through 1998 has been derived from the financial statements of the Company for
such years, which have been audited by Arthur Andersen LLP, independent
certified public accountants, whose report is included elsewhere herein. All
such information is qualified by reference to the Financial Statements included
elsewhere herein.


<TABLE>
<CAPTION>
                                                                               Fiscal Years Ended June 30,
                                                                    ( Amounts in Thousands, except per share amounts )
                                                            1998           1997             1996             1995            1994
                                                            ----           ----             ----             ----            ----
<S>                                                       <C>            <C>              <C>              <C>             <C>    
Income Statement Data:
Net sales (1)                                             $199,578       $160,068         $127,395         $109,107        $95,225
Cost of sales                                              132,135        105,376           84,748           71,815         62,623
                                                          --------       --------         --------         --------        -------
 Gross Profit                                               67,443         54,692           42,647          37,292          32,602
Selling, general and administrative
 expenses                                                   44,061         35,068           26,877          23,772          21,048
Corporate charge (2)                                          --            --               1,342           1,862           1,918
                                                          --------      ---------         --------        --------         -------
Operating income                                            23,382         19,624           14,428          11,658           9,636
Interest expense (2)                                           157             59            1,921           2,139           1,518
                                                          --------       --------         --------        --------         -------
Income before income taxes
   and extraordinary item                                   23,225         19,565           12,507           9,519           8,118
Provision for income taxes                                   8,948          7,530            4,625           3,500           2,900
                                                          --------       --------         --------        --------         -------
Income before extraordinary item                            14,277         12,035            7,882           6,019           5,218
Extraordinary loss on early
  retirement of debt, net of
  tax benefit (3)                                               --             --              724              --              --
                                                             -----          -----           ------           -----           -----
Net income                                                 $14,277        $12,035           $7,158          $6,019          $5,218
                                                          ========       ========          =======        ========         =======
Earnings per common share:
  Basic                                                      $0.88          $0.76
  Diluted                                                    $0.87          $0.75
Weighted average shares outstanding:
  Basic                                                     16,179         15,785
  Diluted                                                   16,341         15,987
Unaudited Pro Forma Information:
Pro forma net income (3)                                                                    $9,841          $8,392          $7,154
Pro forma diluted earnings per share                                                         $0.62           $0.53           $0.45
Pro forma weighted average shares
  outstanding                                                                               15,929          15,929          15,929
</TABLE>



                                       12

<PAGE>   14





<TABLE>
<CAPTION>
                                                   Fiscal Years Ended June 30,
                                      ( Amounts in Thousands, except per share amounts )

                                      1998        1997       1996         1995        1994
                                      ----        ----       ----         ----        ----
<S>                                 <C>         <C>         <C>         <C>         <C>    
Balance Sheet Data:
Working Capital                     $52,431     $44,867     $30,744     $29,171     $31,253
Total Assets                         95,784      77,015      58,300      52,413      50,885
Total long-term debt, excluding
  Push-down bank debt                     0           0           0      18,126      16,215
Push-down bank debt (4)                   0           0           0       4,874       6,785
Stockholders' equity                 76,161      60,611      41,324      17,428      19,131
</TABLE>



(1)      Prior to July 1, 1995, the Company recorded shipments delivered
         directly to the customer from certain suppliers as contributed margin
         (net reduction of cost of goods sold). Beginning on July 1, 1995, the
         Company began to record these shipments as net sales resulting in an
         increase in net sales of $2,979 for the fiscal year ended June 30,
         1996.

(2)      Unaudited pro forma net income reflects the elimination of interest
         expense resulting from the application of net proceeds from the Initial
         Public Offering as discussed in Note 2 to the Financial Statements, and
         the elimination of corporate charge, as discussed in Note 10 to the
         Financial Statements, net of additional costs incurred as a public
         company.

(3)      The Company incurred a one-time, non-cash extraordinary charge of $724
         (net of applicable tax benefit of $426) which was a result of the
         write-off of unamortized debt issuance costs incurred in connection
         with the Company prepaying its borrowings under a secured revolving
         credit facility, which indebtedness included push-down bank
         indebtedness from Waxman USA as discussed in Note 3 to the Financial
         Statements. This charge was recorded in the quarter ended June 30,
         1996.

(4)      Pursuant to certain Securities and Exchange Commission rules, the
         Company's historic financial statements for periods prior to the
         Initial Public Offering have been adjusted to reflect the push-down of
         certain bank indebtedness from Waxman USA that was secured by the
         accounts receivable, inventory, certain general intangibles and
         unencumbered fixed assets of the Company, WOC and Waxman Consumer
         Products Group Inc. ("Consumer Products"), a wholly owned indirect
         subsidiary of Waxman Industries. The push-down bank debt was retired
         upon the consummation of the Initial Public Offering and the
         application of the net proceeds therefrom as described in Note 2 to the
         Financial Statements.


                                       13

<PAGE>   15



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


OVERVIEW
--------

         The Company, and Waxman USA as a selling shareholder, successfully
completed the Initial Public Offering on April 3, 1996 resulting in net proceeds
of approximately $47.7 million to the Company. The proceeds were used to repay
approximately $23.0 million of outstanding indebtedness borrowed by it under a
secured credit facility (the "Operating Companies Revolving Credit Facility"),
among Citicorp USA, as agent, the Company, Consumer Products and WOC, to pay a
$22.0 million dividend evidenced by a note payable to Waxman USA, and to fund
approximately $2.7 million in working capital. On April 18, 1997, the Company
and Waxman USA completed a secondary stock offering resulting in net proceeds of
approximately $6.7 million to the Company. The proceeds were used by the Company
to repay indebtedness under the revolving credit facility and for general
corporate purposes. See Note 2 to the Financial Statements for a further
discussion of the Initial Public Offering and the secondary stock offering.

         The financial statements have been adjusted to reflect push-down
adjustments from Waxman USA. See Note 5 to the Financial Statements for a
further discussion of the push-down adjustments. The push-down bank indebtedness
consisted of $4.9 million for the year ended June 30, 1995, and creates the
appearance of greater indebtedness than was actually borrowed directly by the
Company. Related interest expense and debt issue costs have also been pushed
down having the effect of creating higher interest expense than was actually
paid by the Company during those periods. Interest expense, including
amortization of debt issue costs, totaled $0.2 million, $0.1 million and $1.9
million for the years ended June 30, 1998, 1997 and 1996, respectively.

         The Company's net income for fiscal 1996 includes the effect of a
one-time, non-cash extraordinary charge of $0.7 million (net of applicable tax
benefit of $0.4 million), or $.06 per share, which was incurred as a result of
the write-off of unamortized debt issuance costs incurred in connection with the
Company prepaying its borrowings under the Operating Companies Revolving Credit
Facility, which indebtedness included push-down bank indebtedness from Waxman
USA. The Company recorded this charge in the quarter ended June 30, 1996.

         Management fees charged to the Company by Waxman Industries are
included as "corporate charge" in the Financial Statements. Since July 1, 1994,
in accordance with the prior Intercorporate Agreement among the Company, Waxman
Industries and certain of its subsidiaries (the "Intercorporate Agreement"), the
management fees charged to the Company were the lesser of 2% of net sales or the
cost of providing services to the Company. In connection with the Initial Public
Offering, the prior Intercorporate Agreement was, with respect to the Company,
replaced by a new Intercorporate Agreement (the "New Intercorporate Agreement")
under which Waxman Industries provides certain managerial, administrative and
financial services to the Company, for which the Company pays Waxman Industries
the allocable costs of the salaries and expenses of Waxman Industries' employees
rendering such services. The Company also reimburses Waxman Industries for
actual out-of-pocket disbursements to third parties by Waxman Industries
required for the provision of such services. Subsequent to March 31, 1996, such
payments to Waxman Industries are included in the Financial Statements as a
component of selling, general and administrative expenses. Pursuant to the New
Intercorporate Agreement, the Company will continue to provide certain services
to the operating divisions of WOC. Waxman Industries will pay to the Company the
allocable costs of the salaries and expenses of the Company's employees
rendering such services. Waxman Industries will also reimburse the Company for
all actual out-of-pocket disbursements to third parties by the Company required
for the provision of such services.





                                       14

<PAGE>   16



RESULTS OF OPERATIONS

The following table shows the percentage relationship to net sales of items
derived from the Statements of Income.

<TABLE>
<CAPTION>
                                                                      Percentage of
                                                                        Net Sales
                                                               Fiscal years ended June 30,

                                                      1998                  1997                 1996
                                                      ----                  ----                 ----
<S>                                                  <C>                   <C>                  <C>   
Net sales                                            100.0%                100.0%               100.0%
Cost of sales                                         66.2                  65.8                 66.5
                                                     ------                ------               -----
   Gross Profit                                       33.8                  34.2                 33.5

Selling, general and
  administrative expense                              22.1                  21.9                 21.1

Corporate Charge                                       --                    --                   1.1
                                                      ----                  ----                 ----

   Operating income                                   11.7                  12.3                 11.3
Interest expense                                       0.1                   0.1                  1.5
                                                     -----                  -----                ----

Income before income
  taxes and extraordinary item                        11.6                  12.2                  9.8
Provision for income taxes                             4.4                   4.7                  3.6
                                                     -----                  -----                ----

Income before extraordinary
  item                                                 7.2                   7.5                  6.2
Extraordinary item - net of
 income tax                                            --                    --                   0.6
                                                      ----                  ----                 ----
Net Income                                             7.2%                  7.5%                 5.6%
                                                     ======                ======                =====
</TABLE>



FISCAL 1998 VERSUS FISCAL 1997

  NET SALES

    The Company's net sales for fiscal 1998 totaled $199.6 million compared with
$160.1 million in fiscal 1997, an increase of 24.7%. Approximately 73.2% of the
increase in the Company's net sales was derived from the Company's telesales
operations, primarily resulting from increased sales by existing
telesalespersons and the addition of 7 telesalespersons compared to the prior
year. The remainder of the net sales increase was attributable to the outside
sales force, the Company's export division and the acquisition of LeRan Gas
Products. Contributing to the overall increase in net sales was a net increase
of 1,680 in the total number of products offered by the Company over the past
twelve months which contributed approximately $15.6 million to the net sales
increase during the year. Additionally, as a result of an expanded promotional
flyer campaign, the number of active customers increased to 65,000 from 51,000
in the prior year, and these new customers contributed approximately $19.8
million to the net sales increase during the year.

    As noted above, contributing to the Company's net sales increase was a 51.3%
increase in export sales, representing a net sales increase of approximately
$4.2 million for the year. This increase in international sales, which currently
represents approximately 6.2% of net sales, was primarily attributable to the
Company's establishment of a small, dedicated international telesales staff in
the prior year to complement the Company's international promotional flyer
mailings. Also, the Company opened its first off-shore distribution center in
Puerto Rico in October 1997 which significantly contributed to the export sales
increase in fiscal 1998. Puerto Rico represented the Company's 31st distribution
center; the Company opened its 30th Distribution center in Milwaukee, Wisconsin
in July, 1997 and its 32nd distribution center in Nashville, Tennessee in
December, 1997. These three new distribution centers averaged a 48.8% sales
increase over the base business transferred to them.



                                       15

<PAGE>   17





 GROSS PROFIT

    Gross profit increased 23.3% to $67.4 million in fiscal 1998 from $54.7
million in fiscal 1997. Gross profit margins decreased to 33.8% in fiscal 1998
from 34.2% in fiscal 1997 primarily as a result of the acquisition of LeRan Gas
Products, whose historical margins have been lower due to product mix.

  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative ("SG&A") expenses increased by $9.0
million, or 25.6%, to $44.1 million for fiscal 1998 from $35.1 million for
fiscal 1997. The increase was primarily due to the increased sales volume which
required additional staffing and support. Increased promotional flyer mailings
during the year, as well as increased freight and delivery costs associated with
the United Parcel Service strike in the first quarter of the fiscal year, also
played contributing roles to the overall expense increase. Occupancy costs
associated with the expansion of several distribution centers in the prior year
combined with occupancy costs and start up costs related to the three new
distribution centers this fiscal year are also primary reasons for the increased
expense level. SG&A expenses represented 22.1% of net sales in fiscal 1998
compared to 21.9% of net sales in fiscal 1997.

  CORPORATE CHARGE

    Corporate charges were allocations of expenses to the Company by the
Company's former parent to support its corporate activities. These allocations
are no longer charged to the Company. As of March 31, 1996, Waxman USA and the
Company entered into the New Intercorporate Agreement for services pursuant to
which charges allocated to the Company only include those expenses incurred by
Waxman Industries with respect to the Company. These expenses are included as a
component of SG&A expenses and are not material. See Note 10 to the Financial
Statements.

  PROVISION FOR INCOME TAXES

    The provision for income taxes increased $1.4 million or 18.8% to $8.9
million for fiscal 1998 from $7.5 million for fiscal 1997. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 38.5% for fiscal 1998 and fiscal 1997.

FISCAL 1997 VERSUS FISCAL 1996

  NET SALES

  The Company's net sales for fiscal 1997 totaled $160.1 million compared with
$127.4 million in fiscal 1996, an increase of 25.6%. Approximately 78.6% of the
increase in the Company's net sales was derived from the Company's telesales
operations, primarily resulting from increased sales by existing
telesalespersons and the addition of 10 telesalespersons compared to the prior
year. The remainder of the net sales increase was attributable to the outside
sales force and the Company's export division. Contributing to the overall
increase in net sales was a net increase of 1,720 in the total number of
products offered by the Company over the past twelve months which contributed
approximately $15.3 million to the net sales increase during the year.
Additionally, as a result of an expanded promotional flyer campaign, the number
of active customers increased to 51,000 from 42,000 in the prior year, and these
new customers contributed approximately $16.9 million to the net sales increase
during the year.

    As noted above, contributing to the Company's net sales increase was a 69.8%
increase in export sales representing a net sales increase of approximately $2.9
million for the year. This increase in international sales, which currently
represents approximately 6% of net sales, was primarily attributable to the
Company's establishment of a small, dedicated international telesales staff to
complement the Company's international promotional flyer mailings. Additionally,
the Company opened its twenty-ninth distribution center in Kansas City, Kansas
on November 1, 1996 which achieved a 47.1% sales increase over the base business
transferred to it.

 GROSS PROFIT

    Gross profit increased 28.2% to $54.7 million in fiscal 1997 from $42.6
million in fiscal 1996. Gross profit margins increased to 34.2% in fiscal 1997
compared to 33.5% in fiscal 1996 as a result of favorable vendor programs
implemented during the current year.

                                       16

<PAGE>   18



  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative ("SG&A") expenses increased by $8.2
million, or 30.5%, to $35.1 million for fiscal 1997 from $26.9 million for
fiscal 1996. The increase was primarily due to increased variable selling
expenses associated with the increase in the number of telesalespersons
mentioned above, together with the expansion of the marketing staff and
increased promotional flyer mailings. Also contributing to increased variable
selling expenses were increased freight and delivery costs resulting from the
Company's determination to reduce its customers' prepaid freight minimums and
the establishment of a same day shipping policy. In addition to expenses
incurred as a result of becoming an independent public company, the Company
instituted new, and enhanced existing, employee benefit programs to allow it to
become more competitive in its compensation and benefit programs. SG&A expenses
represented 21.9% of net sales in fiscal 1997 compared to 21.1% of net sales in
fiscal 1996.

  CORPORATE CHARGE

    Corporate charges were allocations of expenses to the Company by the
Company's former parent to support its corporate activities. These allocations
are no longer charged to the Company. As of March 31, 1996, Waxman USA and the
Company entered into the New Intercorporate Agreement for services pursuant to
which charges allocated to the Company only include those expenses incurred by
Waxman Industries with respect to the Company. These expenses are included as a
component of SG&A expenses beginning April 1, 1996 and are not material. See
Note 10 to the Financial Statements.

  PROVISION FOR INCOME TAXES

    The provision for income taxes increased $2.9 million or 62.8% to $7.5
million for fiscal 1997 from $4.6 million for fiscal 1996. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 38.5% for fiscal 1997 and approximately 37.0% for
fiscal 1996.

  EXTRAORDINARY CHARGE

    The June 30, 1996 year end results included the effect of a one-time,
non-cash extraordinary charge of $0.7 million (net of applicable tax benefit of
$0.4 million), or $.06 per share, which was a result of the write-off of
unamortized debt issuance costs incurred in connection with the Company
prepaying its borrowings under the Operating Companies Revolving Credit Facility
with proceeds of its Initial Public Offering, which indebtedness included push-
down debt from the Company's former parent company.






                                       17

<PAGE>   19



LIQUIDITY AND CAPITAL RESOURCES
-------------------------------


         At June 30, 1998, the Company had working capital of $52.4 million and
a current ratio of 3.7 to 1.

         Net cash provided by operating activities totaled $7.6 million for the
year ended June 30, 1998 compared to $1.8 million for the year ended June 30,
1997.

         Net cash used in investing activities totaled $13.0 million for the
year ended June 30, 1998 compared to $6.3 million for the year ended June 30,
1997. These investments related primarily to capital expenditures for the
construction of a 38,000 square foot telesales center, improved management
information systems and expansion and/or relocation of several of the Company's
distribution centers to accommodate new product offerings.

         Net cash provided by financing activities was $1.4 million for the year
ended June 30, 1998 compared to $7.3 million for the year ended June 30, 1997.
Net cash provided by financing activities in fiscal 1997 represents cash
received in connection with the secondary stock offering on April 18, 1997.

         In connection with the Initial Public Offering, the Company entered
into a revolving credit agreement with First Union National Bank of Florida for
an unsecured three-year credit facility providing for borrowings of up to $15.0
million including a letter of credit subfacility of $4.0 million. Borrowings
under this facility bear interest, at the Company's option, at the prime rate
minus 75 basis points or LIBOR plus 100 basis points. The credit facility
provides funds for working capital and general corporate purposes. At June 30,
1998, there were $714 of borrowings under the credit agreement and there were
$3.4 million of letters of credit outstanding. The credit facility contains
customary affirmative and negative covenants, including certain covenants
requiring the Company to maintain debt to net worth, interest coverage and
current ratios, as well as a minimum net worth test. The credit facility also
restricts the amount of dividends payable by the Company. The Company was in
compliance with all covenants at June 30, 1998. This credit agreement expires in
April 1999 and management expects the agreement to be renewed.

         Generally, cash flow from operations has been sufficient to fund the
Company's growth. The Company believes that funds generated from operations,
together with funds available under the credit facility discussed above, will be
sufficient to fund the Company's current and foreseeable operational needs and
growth strategy. The Company has budgeted capital expenditures in fiscal 1999 of
approximately $8.0 million, which the Company expects to fund out of cash flow
from operations. These capital expenditures are primarily for (i) expansion and
reprofiling of several of the Company's existing distribution centers and (ii)
enhancements to management information systems.

         The Company does not believe inflation has had a material impact on
earnings during the past several years. Although substantial increases in
product costs, labor, and other operating expenses could adversely affect the
operations of the Company and the home repair and remodeling supply market,
management believes it can recover such increases by increasing prices.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Financial Statements are listed in Item 14(a) and are included herein.

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

       None







                                       18

<PAGE>   20



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information called for by Items 10, 11, 12 and 13 will be contained
in the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended June 30, 1998
and such information is incorporated herein by reference. Certain information
concerning the executive officers of the Company is set forth in Part I under
the caption "Executive Officers of the Registrant."









                                       19

<PAGE>   21



                                     PART IV

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

(a)      Financial Statements

         The following financial statements and schedules of the Company are
included as Part II, Item 8 of this Form 10-K:


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
(1)      Financial Statements                                            Page
         --------------------                                            ----
-----------------------------------------------------------------------------------
<S>                                                                   <C>
     Report of Independent Certified                                      F-1
     Public Accountants
-----------------------------------------------------------------------------------
     Balance Sheets - June 30, 1998 and                               F-2 to F-3
     June 30, 1997
-----------------------------------------------------------------------------------
     Statements of Income for the years                                   F-4
     ended June 30, 1998, 1997 and 1996
-----------------------------------------------------------------------------------
     Statements of Stockholders' Equity
     for the years ended June 30, 1998,
     1997 and 1996                                                        F-5
-----------------------------------------------------------------------------------
     Statements of Cash Flows for the
     years ended June 30, 1998, 1997 and
     1996                                                                 F-6
-----------------------------------------------------------------------------------
     Notes to Financial Statements                                    F-7 to F-14
-----------------------------------------------------------------------------------

-----------------------------------------------------------------------------------
(2)      Supplementary Financial                                          F-15
         -----------------------
         Information
         -----------
-----------------------------------------------------------------------------------
</TABLE>

(b) Financial Statement Schedule II, Valuation and Qualifying Accounts and
Reserves for each of the three years ended June 30, 1998.

(c)      Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number                                      Exhibits
------                                      --------
<S>                        <C>
3.1(1)                     Certificate of Incorporation of Barnett Inc.
3.2(2)                     Amended and Restated Certificate of Incorporation of Barnett Inc.
3.3(1)                     (Reserved)
3.4(3)                     Amended and Restated By-Laws of Barnett Inc.
10.1(1)                    Tax sharing agreement dated May 20, 1994 among Barnett Inc., Waxman USA Inc.,
                           Waxman Industries, Inc., each member of the Waxman Group (as defined therein) and
                           each member of the Waxman USA Group (as defined therein).
10.2                       [Reserved]
10.3(4)                    Intercorporate Agreement dated March 28, 1996 among
                           Barnett Inc., Waxman Industries Inc., Waxman Consumer
                           Products Group Inc., WOC Inc. and TWI, International,
                           Inc.
10.4(4)                    Registration Rights Agreement dated March 28, 1996 by and between Barnett
                           Inc. and Waxman Industries, Inc.
10.5(1)                    Trademark License Agreement dated May 20, 1994 by and between Barnett Inc.
                           and Waxman Consumer Products Group Inc.
10.6(1)                    (Reserved)
*10.7(3)                   Amended and Restated Employment Agreement dated March 8, 1996 between
                           Barnett Inc. and William R. Pray.
*10.8(2)                   Omnibus Incentive Plan of Barnett Inc.
*10.9(2)                   Stock Purchase Plan of Barnett Inc.
10.10(4)                   Revolving Credit Agreement dated April 3, 1996 between Barnett Inc. and
                           First Union National Bank of Florida.
*10.11(5)                  1996 Stock Option Plan for Non-Employee Directors of Barnett Inc.
10.12(4)                   Standstill Agreement dated March 28, 1996, between Waxman Industries, Inc.,
                           and Barnett Inc.
*10.13(6)                  Barnett Inc. Profit Sharing and 401(K) Retirement Plan.
23.1                       Consent of Arthur Andersen LLP
27.1                       Financial Data Schedule
</TABLE>


                                       20

<PAGE>   22




1        Incorporated by reference to the exhibit of the same number contained
         in the Company's Registration Statement on Form S-1 (the "Registration
         Statement"), Registration No. 333- 829, filed with Securities and
         Exchange Commission (the "SEC") on February 1, 1996.
2        Incorporated by reference to the exhibit of the same number contained
         in Amendment No. 1 to the Company's Registration Statement,
         Registration No. 333-829, filed with SEC on March 5, 1996.
3        Incorporated by reference to the exhibit of the same number contained
         in Amendment No. 3 to the Company's Registration Statement,
         Registration No. 333-829, filed with the SEC on March 25, 1996.

4        Incorporated by reference to the exhibit of the same number contained
         in the Company's Annual Report on Form 10-K for the year ended June 30,
         1997.
5        Incorporated by reference to the exhibit of the same number contained
         in the Company's Registration Statement on Form S-1, Registration No.
         333-22453, filed with the SEC on February 27, 1997.
6        Incorporated by reference to Exhibit 4.1 contained in the Company's
         Registration Statement on Form S-8, Registration No. 333-30485, filed
         with the SEC on June 30, 1997.

*        Management contract or compensatory plan or arrangement.

(d)      Reports on Form 8-K

         None



                                       21

<PAGE>   23



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          BARNETT INC.


                                          By  /s/ WILLIAM R. PRAY
                                             -----------------------------------

                                                  William R. Pray
Dated:  September 24, 1998                President and Chief Executive Officer

         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.


<TABLE>
<CAPTION>
                 NAME                                            TITLE                                       DATE
                 ----                                            -----                                       ----
<S>                                    <C>                                                        <C>
 /s/    WILLIAM  R.  PRAY              President, Chief Executive Officer and Director            September 24, 1998
--------------------------------               (Principal Executive Officer)
        William R. Pray     

/s/    ANDREA M.  LUIGA                Vice President - Finance and Chief Financial               September 24, 1998
--------------------------------                Officer (Principal Financial and Accounting
       Andrea M. Luiga                          Officer)
                                
/s/    MELVIN WAXMAN                   Chairman of the Board and Director                         September 24, 1998
--------------------------------
       Melvin Waxman

/s/    ARMOND WAXMAN                   Vice-Chairman of the Board and Director                    September 24, 1998
--------------------------------
       Armond Waxman

/s/    SHELDON ADELMAN                 Director                                                   September 24, 1998
--------------------------------
       Sheldon Adelman


 /s/   MORRY WEISS                     Director                                                   September 24, 1998
--------------------------------
       Morry Weiss
</TABLE>








                                       22

<PAGE>   24



                                  BARNETT INC.

            VALUATION AND QUALIFYING ACCOUNT AND RESERVES (RESTATED)
                                   SCHEDULE II
                                 (IN THOUSANDS)





<TABLE>
<CAPTION>
                                                                                    Additions
                                                        Additions                  Charged to     Balance
                                        Balance at      Charged to                    Other       at End of
                                       Beginning of     Costs and    Deductions      Accounts      Period
                                          Period         Expenses       (A)            (B)

<S>                                       <C>              <C>          <C>             <C>        <C>   
Allowance for Doubtful Accounts:
   Fiscal Year Ended June 30, 1998        $  864           616          (668)           419        $1,231
   Fiscal Year Ended June 30, 1997        $  722           621          (479)             0        $  864
   Fiscal Year Ended June 30, 1996        $1,121           375          (774)             0        $  722
</TABLE>



(A) Uncollectible accounts written off, net of recoveries

(B) Allowance for doubtful accounts resulting from the acquisition of LeRan Gas
    Products in fiscal 1998.



                                       23

<PAGE>   25



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To Barnett Inc.:

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

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

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



ARTHUR ANDERSEN LLP

Jacksonville, Florida
August 14, 1998.



                                       F-1

<PAGE>   26



                                  BARNETT INC.

                                 BALANCE SHEETS

                             JUNE 30, 1998 AND 1997
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


                                     ASSETS



<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                                       --------
                                                                               1998               1997
                                                                               ----               ----


<S>                                                                         <C>                 <C>    
Current Assets:
   Cash                                                                         $450             $4,429
   Accounts receivable, net                                                   28,866             21,734
   Inventories                                                                40,599             33,772
   Prepaid expenses                                                            2,139              1,336
                                                                              ------             ------
         Total current assets                                                 72,054             61,271
                                                                              ------             ------
Property and Equipment:
   Machinery and equipment                                                    15,252             11,222
   Furniture and fixtures                                                      3,378              2,450
   Leasehold improvements                                                      6,620              4,961
   Building and improvements                                                   3,668                  0
   Construction in progress                                                        0                444
                                                                             -------             ------
                                                                              28,918             19,077
Less accumulated depreciation
   and amortization                                                         (11,876)             (8,692)
                                                                            --------            -------
                                                                              17,042             10,385
                                                                             -------            -------
Cost of Business in Excess of Net
   Assets Acquired, net                                                        4,815              3,452
Deferred Tax Assets, net                                                         716                351
Other Assets                                                                   1,157              1,556
                                                                               -----            -------
                                                                             $95,784            $77,015
                                                                             =======            =======
</TABLE>



              The accompanying notes to financial statements are an
                     integral part of these balance sheets.


                                       F-2

<PAGE>   27



                                  BARNETT INC.

                                 BALANCE SHEETS

                             JUNE 30, 1998 AND 1997

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                      LIABILITIES AND STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                                     June 30,
                                                                                     --------
                                                                               1998              1997
                                                                               ----              ----


<S>                                                                          <C>                <C>    
Current Liabilities:
   Accounts payable                                                          $16,247            $13,557
   Accrued liabilities                                                         2,297              2,366
   Accrued income taxes                                                          365                481
   Short - term debt                                                             714                  0
                                                                             -------            -------
         Total current liabilities                                            19,623             16,404
                                                                             -------            -------

Commitments and Contingencies (Notes 7,8,9,10
and 11)

Stockholders' Equity:
   Serial preferred stock, $ 0.10 par value, 
      10,000 shares authorized, 0 shares
      issued and outstanding at June 30, 1998
      and 1997                                                                    --                 --
   Common stock, $ 0.01 par value,
     40,000 shares authorized, 16,194 and
     16,142 issued and outstanding at
     June 30, 1998 and 1997, respectively                                        161                160
   Paid-in capital                                                            47,743             46,471
   Retained earnings                                                          28,257             13,980
                                                                             -------            -------
                                                                              76,161             60,611
                                                                             -------            -------
                                                                             $95,784            $77,015
                                                                             =======            =======
</TABLE>








              The accompanying notes to financial statements are an
                     integral part of these balance sheets.

                                       F-3

<PAGE>   28



                                  BARNETT INC.

                              STATEMENTS OF INCOME

                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)








<TABLE>
<CAPTION>
                                                  1998              1997             1996
                                                  ----              ----             ----
<S>                                             <C>              <C>              <C>      
Net sales                                       $ 199,578        $ 160,068        $ 127,395
Cost of sales                                     132,135          105,376           84,748
                                                ---------        ---------        ---------
   Gross profit                                    67,443           54,692           42,647
Selling, general and administrative
  expenses                                         44,061           35,068           26,877
Corporate charge                                       --               --            1,342
                                                ---------        ---------        ---------
Operating income                                   23,382           19,624           14,428
Interest expense, net                                 157               59            1,921
                                                ---------        ---------        ---------
   Income before provision for
     income taxes and extraordinary item           23,225           19,565           12,507
Provision for income taxes                          8,948            7,530            4,625
                                                ---------        ---------        ---------
   Income before extraordinary item                14,277           12,035            7,882
Extraordinary item - loss on early
retirement of debt (net of income tax
benefit of $ 426)                                      --               --              724
                                                ---------        ---------        ---------
Net income                                      $  14,277        $  12,035        $   7,158
                                                =========        =========        =========

Earnings per common share:
Basic:
   Before extraordinary item                    $    0.88        $    0.76        $    0.61
   Extraordinary item                                  --               --            (0.06)
                                                ---------        ---------        ---------
Total                                           $    0.88        $    0.76        $    0.55
                                                =========        =========        =========

Diluted:
   Before extraordinary item                    $    0.87        $    0.75        $    0.61
   Extraordinary item                                  --               --            (0.06)
                                                ---------        ---------        ---------
Total                                           $    0.87        $    0.75        $    0.55
                                                =========        =========        =========

Weighted average shares used:
Basic                                              16,179           15,785           12,849
Diluted                                            16,341           15,987           12,901

Pro forma adjustments for Initial

Public Offering (Unaudited):
Income before income taxes
                                                                                  $  12,507
and extraordinary charge
Add: Corporate charge                                                                 1,342
     Interest expense                                                                 1,921
Less: Public company costs                                                              150
                                                                                  ---------
Pro forma pretax income                                                              15,620
Income taxes                                                                          5,779
                                                                                  ---------
Pro forma net income                                                              $   9,841
                                                                                  =========
Pro forma diluted earnings per share
(before extraordinary item)                                                       $    0.62
Assumed shares outstanding                                                           15,876
</TABLE>


              The accompanying notes to financial statements are an
                  integral part of these financial statements.


                                       F-4

<PAGE>   29



                                  BARNETT INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                                    TOTAL
                                     SERIAL                                                    ADVANCES TO         STOCK-
                                    PREFERRED        COMMON       PAID-IN        RETAINED        WAXMAN           HOLDERS'
                                      STOCK          STOCK        CAPITAL        EARNINGS      INDUSTRIES          EQUITY
                                      -----          -----        -------        --------      ----------          ------
<S>                                      <C>            <C>         <C>           <C>            <C>               <C>    
Balance, June 30, 1995                   $259           $93         $8,068        $20,054        $ (11,046)        $17,428
Net income                                                                          7,158                            7,158
Capital contribution from
   Waxman Industries, net                                                           3,572                            3,572
Dividend to Waxman USA                                                            (22,000)                         (22,000)
Net advances to Waxman
   Industries                                                                                      (12,587)        (12,587)
Elimination of advances to
   Waxman Industries                                               (16,794)        (6,839)          23,633             ---
Net proceeds from issuance
   of common stock                                       37         47,716                                          47,753
Conversion of 1,320 shares
   of preferred stock to
   common stock                         (132)            13            119                                             ---
                                     --------         -----         ------         ------           ------          ------
Balance June 30, 1996                     127           143         39,109          1,945              ---          41,324
Net income                                                                         12,035                           12,035
Net proceeds from issuance
   of common stock                                        4          6,649                                           6,653
Conversion of 1,271 shares
   of preferred stock to
   common stock                         (127)            13            114                                             ---
Common stock issued for:
   Exercise of options                                                 184                                             184
   Employee stock plans                                                415                                             415
                                       ------        ------         ------         ------           ------          ------
Balance June 30, 1997                       0           160         46,471         13,980              ---          60,611
Net income                                                                         14,277                           14,277
Common stock issued for:
   Acquisition of LeRan Gas                                            600                                             600
   Products
   Exercise of options                                    1            415                                             416
   Employee stock plans                                                195                                             195
Tax benefits related to
   stock option plans                                                   62                                              62
                                     --------       -------        -------       --------         --------         -------
Balance June 30, 1998                      $0          $161        $47,743        $28,257              ---         $76,161
                                     ========       =======        =======       ========         ========         =======
</TABLE>




              The accompanying notes to financial statements are an
                  integral part of these financial statements.


                                       F-5

<PAGE>   30



                                  BARNETT INC.

                            STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                                 (IN THOUSANDS)



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

<S>                                                                     <C>               <C>               <C>      
CASH PROVIDED BY ( USED FOR )
OPERATING:
   Net income                                                           $  14,277         $  12,035         $   7,158
   Adjustments to reconcile net income
    to net cash provided by operations:
       Depreciation and amortization                                        3,813             2,406             2,053
       Extraordinary charge                                                    --                --             1,150
       Deferred taxes                                                        (365)              149              (500)
   Changes in assets and liabilities 
    (net of business acquired):
       Accounts receivable, net                                            (6,186)           (4,157)           (3,096)
       Inventories                                                         (4,840)           (6,410)           (2,847)
       Prepaid expenses                                                      (753)             (262)

                                                                                                                  (69)
       Other assets                                                          (295)           (1,373)              (15)
       Accounts payable                                                     2,258              (574)            3,366
       Accrued liabilities                                                   (292)                2             1,625
                                                                        ---------         ---------         ---------

        Net cash provided by operations                                     7,617             1,816             8,825
                                                                        ---------         ---------         ---------

INVESTING:
    Capital expenditures, net                                              (9,783)           (6,346)           (2,011)
    Acquisition of LeRan Gas Products                                      (3,200)               --                --
                                                                        ---------         ---------         ---------

         Net cash used for investments                                    (12,983)           (6,346)           (2,011)
                                                                        ---------         ---------         ---------

FINANCING:
    Net proceeds from issuance of Common Stock                                673             7,252            47,753
    Borrowings under credit agreement                                      39,414            30,592            97,682
    Payments under credit agreement                                       (38,700)          (30,592)         (115,808)
    Push-down debt                                                             --                --            (4,874)
    Advances from Waxman Industries                                            --                --           (12,587)
    Capital contribution from Waxman Industries                                --                --             3,572
    Dividend to Waxman Industries                                              --                --           (22,000)
                                                                        ---------         ---------         ---------

          Net cash provided by (used for)
             financing                                                      1,387             7,252            (6,262)
                                                                        ---------         ---------         ---------

Net (decrease) increase in cash                                            (3,979)            2,722               552
Balance, beginning of period                                                4,429             1,707             1,155
                                                                        ---------         ---------         ---------
Balance, end of period                                                  $     450         $   4,429         $   1,707
                                                                        =========         =========         =========
</TABLE>







              The accompanying notes to financial statements are an
                  integral part of these financial statements.





                                       F-6

<PAGE>   31



                                  BARNETT INC.

                          NOTES TO FINANCIAL STATEMENTS

                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)




1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
         ----------------------------------------------------------------------

         A.  Business

         Barnett Inc.(the "Company"), a Delaware corporation, operates in a
         single business segment -- the distribution of plumbing, electrical and
         hardware products, utilizing mail order catalogs and a telesales
         program.

         B.  Accounts Receivable

         Accounts receivable are presented net of allowances for doubtful
         accounts of $1,231 and $864 for June 30, 1998 and 1997, respectively.
         Bad debt expense totaled $616 in fiscal 1998, $621 in fiscal 1997 and
         $375 in fiscal 1996.

         C.  Inventories

         At June 30, 1998 and 1997, inventories are stated 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 and/or slow-moving inventories.

         D.  Property and Equipment

         Property and equipment are stated at cost. For financial reporting
         purposes, machinery and equipment and furniture and fixtures are
         depreciated on a straight-line basis over their estimated useful lives
         of 5 to 7 years. Leasehold improvements are amortized over the life of
         the improvement or remaining period of the lease, whichever is shorter.
         Building and improvements are depreciated on a straight-line basis over
         their estimated useful life of 39 years. Expenditures for maintenance
         and repairs are charged against income as incurred. Betterments which
         increase the value or materially extend the life of the assets are
         capitalized and amortized over the period which the life is extended.
         For income tax purposes, accelerated methods are used. Depreciation
         expense totaled $3,183 in fiscal 1998, $2,278 in fiscal 1997 and $1,726
         in fiscal 1996.

         E.  Cost of Business in Excess of Net Assets Acquired

         Cost of business in excess of net assets acquired is being amortized
         over 40 years, using the straight-line method. Management has evaluated
         its accounting for goodwill, considering such factors as historical
         profitability and future undiscounted operating cash flows, and
         believes that the asset is realizable and the amortization period is
         appropriate. Goodwill amortization expense totaled $173 in fiscal 1998,
         and $128 for each of fiscal 1997 and fiscal 1996. The accumulated
         amortization of goodwill at June 30, 1998 and 1997 was $1,713 and
         $1,540, respectively.

         F.  Deferred Advertising

         Costs of producing and distributing sales catalogs and promotional
         flyers are capitalized and charged to expense in the periods in which
         the related sales occur. Total advertising expenses were $2,313, $1,214
         and $1,410 in fiscal years 1998, 1997 and 1996, respectively.

         G. Revenue Recognition

         The Company records sales as orders are shipped to or picked up by the
         customer.

         H.  Earnings Per Share

         In February, 1997, the Financial Accounting Standards Board ("FASB")
         issued Statement of Accounting Standard ("SFAS") No. 128 "Earnings Per
         Share". SFAS 128 replaces the presentation of primary and fully diluted
         earnings per share with a presentation of basic and diluted earnings
         per share. The Company adopted SFAS No. 128 in its quarterly reports as
         of the quarter ended December 31, 1997. Basic earnings per share is
         calculated based on weighted average number of shares of common stock
         outstanding. Diluted earnings per share is calculated based on the


                                       F-7

<PAGE>   32
         weighted average number of shares of common stock outstanding and
         common stock equivalents, consisting of outstanding stock options.
         Common stock equivalents are determined using the treasury method for
         diluted shares outstanding. The weighted average common shares
         outstanding used in the computation of basic earnings per share were
         16.2 million, 15.8 million, and 12.8 million in 1998, 1997 and 1996,
         respectively. The weighted average common and common equivalent diluted
         shares outstanding used in the computation of diluted earnings per
         share were 16.3 million, 16.0 million, and 12.9 million in 1998, 1997
         and 1996, respectively. The difference between diluted and basic shares
         outstanding are common stock equivalents from stock options outstanding
         in the years ended June 30, 1998, 1997, and 1996. The earnings per
         share calculations for fiscal 1997 and 1996 additionally assume the
         conversion of outstanding convertible preferred stock.

         Unaudited pro forma earnings per share presents the historical data
         adjusted for the sale of 3,760 shares of common stock to the public
         pursuant to the Initial Public Offering as discussed in Note 2. For pro
         forma purposes, the assumed weighted average shares outstanding totals
         15,929.

         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 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.

2.       SALE OF COMMON STOCK
         --------------------

         On April 3, 1996, the Company consummated the Initial Public Offering
         whereby approximately 7,207 shares, representing approximately 55.1% of
         the Company's common stock, were sold by the Company and its former
         parent, Waxman USA Inc. ("Waxman"), at an initial public offering price
         of $14.00 per share. The Company sold 3,760 shares resulting in net
         proceeds to the Company of approximately $47.7 million. The Company
         used approximately $23.0 million to repay all of the outstanding
         indebtedness borrowed by it under a secured credit facility, $22.0
         million to pay a dividend to Waxman and the remaining $2.7 million was
         used for working capital. The proceeds from the sale of approximately
         3,447 shares of Common Stock by Waxman were not received by the
         Company. As a result of Waxman's conversion of non-voting preferred
         stock of the Company, Waxman owned 49.9% of the Company's common stock
         and approximately a 54.0% economic interest in the Company as of June
         30, 1996.

         In April 1997, the Company consummated a secondary public offering
         pursuant to which 425 and 1,300 shares were sold by the Company and
         Waxman, respectively, resulting in net proceeds of approximately $6.7
         million to the Company. The Company used approximately $3.1 million to
         repay borrowings under its credit facility and the remainder for
         working capital. Subsequent to the secondary public offering, Waxman
         converted the remainder of the convertible non-voting preferred stock
         of the Company to common stock. As a result of the secondary offering
         and the subsequent conversion of preferred stock, Waxman owned 44.5% of
         the Company's common stock as of June 30, 1997 and 44.4% as of June 30,
         1998.

3.       EXTRAORDINARY ITEM
         ------------------

         The Company incurred a one-time, non-cash extraordinary charge of $0.7
         million (net of applicable tax benefit of $0.4 million) which was a
         result of the write-off of unamortized debt issuance costs incurred in
         connection with the Company prepaying its borrowings under a secured
         revolving credit facility, including the push-down bank indebtedness
         from Waxman as discussed in Note 5.  This charge was recorded in the 
         quarter ended June 30, 1996.

4.       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 and tax bases of assets and liabilities given the provisions
         of the enacted tax laws.

         Commencing July 1, 1994, the Company began participating in a tax
         sharing agreement with Waxman Industries, Inc. ("Waxman Industries").
         Under this agreement, the Company's federal tax liability was equal to
         the lesser of the federal tax liability calculated on a stand alone
         basis or Waxman Industries' federal tax liability. As Waxman Industries
         had $75.0 million of available domestic net operating loss carry
         forwards at June 30, 1995 for income tax purposes the Company had no
         liability for federal taxes at June 30, 1995. The Company files
         separate income tax returns in certain states based on the result of
         operations within the applicable states. As a result of the Initial
         Public Offering, as explained in Note 2, the Company is no longer
         included

                                       F-8
<PAGE>   33



         in Waxman Industries' consolidated tax return. Therefore, Waxman
         Industries' remaining net operating loss carry forwards are not
         available to offset the Company's taxable income after April 3, 1996,
         the consummation date of the Initial Public Offering.

         The components of the provision for income taxes, calculated on a
         stand-alone basis for the periods prior to the initial public offering,
         are as follows:

<TABLE>
<CAPTION>
                                             FISCAL YEAR ENDED JUNE 30,
                                             --------------------------

                                    1998                1997               1996
                                    ----                ----               ----
<S>                                <C>                 <C>               <C>   
     Current:
     U.S. Federal                  $8,095              $6,697            $3,952
     State                          1,218                 684               658
                                    -----               -----             -----
                                    9,313               7,381             4,610
     Deferred                        (365)                149                15
                                    -----                ----             -----
                                   $8,948              $7,530            $4,625
                                   ======              ======            ======
</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 are as follows:


<TABLE>
<CAPTION>
                                                             JUNE 30,
                                                             --------

                                                       1998             1997
                                                       ----             ----
<S>                                                   <C>               <C>  
     Inventories                                       $781              $590
     Accounts receivable                                539               446
     Accrued benefits                                   176               129
     Other                                              214               132
                                                      -----             -----
     Deferred tax assets                              1,710             1,297
     Property                                          (628)             (403)
     Deferred costs                                    (366)             (543)
                                                     ------            ------
                                                       $716              $351
                                                      =====             =====
</TABLE>

         The following table reconciles the U.S. statutory rate applied to
         pretax income to the Company's provision for income taxes:

<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED JUNE 30,
                                                            --------------------------

                                                       1998             1997            1996
                                                       ----             ----            ----
<S>                                                   <C>              <C>             <C>   
     U.S. Statutory rate applied
       to pretax income                               $8,129           $6,848          $4,252
     State taxes, net                                    792              650             434
     Goodwill amortization                                49               44              45
     Other                                               (22)             (12)           (106)
                                                     -------          -------         --------
     Provision for income taxes                       $8,948           $7,530          $4,625
                                                      ======          =======         =======
</TABLE>

         All deferred tax accounts are considered to be realizable due to
         assumed future taxable income; thus, no valuation allowance has been
         recorded against the deferred tax assets.

         The Company made federal income tax payments of $7,876, $7,250 and $0
         in fiscal 1998, 1997 and 1996, respectively, and state income tax
         payments of $1,496, $719 and $372 in fiscal 1998, 1997 and 1996,
         respectively.




                                       F-9

<PAGE>   34





5.       SHORT TERM DEBT
         ---------------

         In April 1996, the Company entered into a revolving credit agreement
         with First Union National Bank of Florida ("First Union") for an
         unsecured three-year credit facility providing borrowings of up to
         $15.0 million, including a letter of credit subfacility of $4.0
         million. Borrowings under this facility bear interest, at the Company's
         option, at the prime rate minus 75 basis points or LIBOR plus 100 basis
         points. The Company is required to pay a commitment fee of 0.1% per
         annum on the unused commitment. The credit agreement contains customary
         affirmative and negative covenants, including certain covenants
         requiring the Company to maintain debt to net worth, interest coverage
         and current ratios, as well as a minimum net worth test. The Company
         was in compliance with all covenants at June 30, 1998. At June 30,
         1998, there were $714 of borrowings under the credit agreement and
         there were $3.4 million of letters of credit outstanding. This credit
         agreement expires in April 1999 and management expects the agreement to
         be renewed.

         As discussed in Note 2, the Company and Waxman consummated an Initial
         Public Offering on April 3, 1996. In accordance with certain Securities
         and Exchange Commission rules, the financial statements have been
         adjusted to reflect push-down adjustments from Waxman, comprising
         certain bank indebtedness ("push-down debt") which was repaid by the
         Company with the net proceeds of the Initial Public Offering and which
         was secured by the inventories, accounts receivable, general
         intangibles and other unencumbered assets of the Company. Related
         interest expense and debt issue costs were also pushed down. The
         push-down adjustments were made for all periods presented in the
         Financial Statements prior to the Initial Public Offering.

         The Company made interest payments of $164 in fiscal 1998, $116 in
         fiscal 1997 and $1,525 in fiscal 1996.

6.       STOCKHOLDERS' EQUITY
         --------------------

         In connection with the Initial Public Offering, as explained in Note 2,
         the Company (i) filed an Amended and Restated Certificate of
         Incorporation which increased the authorized number of shares of common
         stock to 40,000, (ii)effected a 238,180 for 1 stock split and (iii)
         authorized 10,000 shares of preferred stock and issued to Waxman 2,591
         shares of Series A Preferred Stock in exchange for 2,591 shares of
         common stock held by Waxman. These changes have been retroactively
         reflected in the accompanying financial statements. Additionally, the
         Company declared a dividend to Waxman evidenced by a $22.0 million note
         payable to Waxman, which was paid with a portion of the proceeds of the
         Initial Public Offering.

         In connection with the consummation of the Initial Public Offering, as
         explained in Note 2, all advances from Waxman were eliminated and
         charged against retained earnings. The elimination of advances in
         excess of retained earnings was charged to paid-in capital.

         Each share of Series A Preferred Stock, which was owned by Waxman,
         generally was not entitled to vote; had a liquidation preference of
         $1.00 per share and was convertible into one share of Common Stock,
         subject to certain limitations, at the option of Waxman. On June 24,
         1996, Waxman converted 1,320 shares of its Series A Preferred Stock of
         the Company into a like number of shares of common stock of the
         Company. Waxman owned 49.9% of the Company's outstanding common stock
         at June 30, 1996.

         In April 1997, the Company consummated a secondary public offering
         pursuant to which 425 and 1,300 shares were sold by the Company and
         Waxman, respectively. Subsequent to the secondary public offering,
         Waxman converted the remaining 1,271 shares of the Company's Series A
         Preferred Stock into a like number of shares of common stock. As a
         result of the secondary offering and the subsequent conversion of the
         preferred stock, Waxman owned 44.4% and 44.5% of the Company's common
         stock as of June 30, 1998 and 1997, respectively.

7.       LEASE COMMITMENTS
         -----------------

         The Company leases its distribution centers and office facilities as
         well as certain equipment under operating lease agreements, which
         expire at various dates through 2007 with, in some cases, options to
         extend the terms of the leases.






                                      F-10

<PAGE>   35







         Future minimum payments, by year and in the aggregate, consist of the
         following at June 30, 1998:

<TABLE>
         <S>                                        <C>    
         1999                                        $3,115
         2000                                         2,803
         2001                                         2,518
         2002                                         2,223
         2003                                         1,484
         Thereafter                                   2,188
                                                      -----
         Total future minimum lease payments        $14,331
                                                    =======
</TABLE> 

         Total rent expense charged to operations was $3,458 in fiscal 1998,
         $2,503 in fiscal 1997 and $2,217 in fiscal 1996.

8.       BENEFIT PLANS
         -------------

         During fiscal 1997, the Company established a 401(k) retirement plan
         for employees. Prior to the establishment of the Company's 401(k) plan,
         the Company participated in the Waxman Industries profit sharing and
         401(k) plan ("Waxman Plan"). Employees are able to contribute up to 15%
         of pretax compensation and control the investment options for their
         entire account. Employees vest in Company contributions ratably over 5
         years of service.

         Company contributions to the 401(k) plan are discretionary and may be
         changed each year as determined by the Board of Directors. In fiscal
         1998 and 1997, the Company contributed $209 and $110, respectively, in
         matching contributions to the Company's 401(k) plan. In fiscal 1996
         there were no contributions made to the Waxman Plan. The Board of
         Directors has approved a 50% match of up to 4% of employee
         contributions for fiscal 1999.

         The Company offers no other post-retirement or post-employment benefits
         to its employees.

9.       EMPLOYEE STOCK PLANS
         --------------------

         In connection with the Initial Public Offering discussed in Note 2, the
         Board of Directors of the Company adopted and approved the 1996 Omnibus
         Incentive Plan (the "Omnibus Plan") and the 1996 Employee Stock
         Purchase Plan ("ESPP") under which an aggregate of 1,500 shares of
         common stock may be subject to awards. Under the Omnibus Plan, awards
         may be granted for no consideration and consist of stock options and
         other stock based awards. The Omnibus Plan was designed to provide an
         incentive to the officers and other key employees of the Company by
         making available to them an opportunity to acquire a proprietary
         interest in the Company.

         In fiscal 1998 and 1997, the Company granted options to employees which
         vest over four years and are exercisable for a ten year period. In
         fiscal 1996, 507.5 options were granted and none were exercisable,
         expired or canceled as of June 30, 1996. All outstanding options are
         non-qualified. The exercise price of all outstanding options at June
         30, 1998 range from $ 14.00 to $ 27.25 per share.

<TABLE>
<CAPTION>
                                                  1998                          1997
                                                  ----                          ----
                                                       Weighted                       Weighted
                                           Shares       Average         Shares         Average
                                          (000's)    Exercise Price      (000's)    Exercise Price
                                          -------    --------------      -------    --------------
<S>                                        <C>          <C>              <C>           <C>   
Outstanding at beginning
of year                                    780.0        $16.91           507.5         $14.04
Granted                                    215.0        $21.80           303.5         $21.43
Exercised                                   26.2        $14.00            13.0         $14.04
Canceled / Expired                          31.4        $19.63            18.0         $14.04
Outstanding at end of                      937.4        $18.02           780.0         $16.91
year
</TABLE>


                                      F-11

<PAGE>   36




<TABLE>

<S>                                        <C>          <C>              <C>           <C>   
Exercisable at end of                      276.7        $15.97           109.9         $14.04
year
</TABLE>


         During fiscal 1998, 1997 and fiscal 1996, the weighted average fair
         value of options granted was $9.51, $9.84 and $6.51, respectively.

         The information relating to the different ranges of exercise prices of
         stock options as of June 30, 1998 are as follows:


<TABLE>
<CAPTION>
                    Options Outstanding                                               Options   Exercisable
                    -------------------                                               ---------------------

                                                    Weighted
                                                    Average            Weighted
                              Number of             Remaining          Average               Number of
Actual Range of               Options               Contractual        Exercise              Options            Weighted Average
Exercise Price                Outstanding           Life               Price                 Exercisable        Exercise Price
--------------                -----------           ----               -----                 -----------        --------------
<S>                               <C>                  <C>                <C>                  <C>                   <C>   
$14.00 to $21.00                  714.9                8.0                $16.66               267.7                 $15.70
$21.00 to $27.75                  222.5                9.0                $22.36                 9.0                 $24.12
                                  -----                                                        ----
$14.00 to $27.75                  937.4                8.2                $18.02               276.7                 $15.97
</TABLE>

         The Company has chosen to continue to account for its options under the
         provisions of Accounting Principles Board ("APB") Statement No. 25
         "Accounting for Stock Issued to Employees"and thus has adopted the
         disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
         Compensation." Accordingly, no compensation cost has been recognized
         for the stock option plans, as the exercise price of options granted
         were equal to the fair value at the date of grant. Had compensation
         cost for the options granted in fiscal 1998 and fiscal 1997 been
         determined based on fair value at the grant date for awards in fiscal
         1998 and fiscal 1997, consistent with the fair value provisions of SFAS
         No. 123, the Company's net income per share would have been reduced to
         the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                  1998                      1997                  1996
                                                  ----                      ----                  ----
<S>                                              <C>                       <C>                    <C>   
Net Income-as reported                           $14,277                   $12,035                $7,158
Net Income-pro forma                             $12,422                   $10,783                $6,981
Basic Net Income per
share- as reported                                 $0.88                     $0.76                 $0.55
Basic Net Income per
share- pro forma                                   $0.77                     $0.68                 $0.54
Diluted Net Income per
share-as reported                                  $0.87                     $0.75                 $0.55
Diluted Net Income per
share- pro forma                                   $0.76                     $0.67                 $0.54
</TABLE>

         The assumptions regarding the stock options issued to executives in
         fiscal 1998 and fiscal 1997 are that the options vest equally over four
         years. The fair value of each option grant is estimated on the date of
         grant using the Black-Scholes option-pricing model with the following
         assumptions. In fiscal 1998: dividend yield of 0.0%; expected
         volatility of 38.4%; risk free interest rate of 6.05%; turnover rate of
         10% for employees and 0% for executives; and expected life of options
         of 5 years. In fiscal 1997: dividend yield of 0.0%; expected volatility
         of 42.0%; risk free interest rate of 6.31%; turnover rate of 10% for
         employees and 0% for executives; and expected life of options of 5
         years. In fiscal 1996: dividend yield of 0.0%; expected volatility of
         42.0%; risk free interest rate of 6.31%; turnover rate of 10% for
         employees and 0% for executives; and expected life of options of 5
         years.

         The ESPP enables employees of the Company to subscribe for shares of
         common stock on annual offering dates at a purchase price which is 85%
         of the fair market value of the shares on the first day of the annual
         period. Employee contributions to the ESPP were $195 and $415 for
         fiscal 1998 and 1997, respectively. Pursuant to the ESPP, 11 and 35
         shares were issued to employees during fiscal 1998 and 1997,
         respectively.



                                      F-12

<PAGE>   37
10.      RELATED PARTY TRANSACTIONS
         --------------------------

         The Company engages in business transactions with Waxman Industries and
         its subsidiaries. Products purchased for resale from Waxman Industries
         and its subsidiaries totaled $15,307 in fiscal 1998, $13,702 in fiscal
         1997 and $12,183 in fiscal 1996. Sales to these entities totaled $517
         in fiscal 1998, $140 in fiscal 1997 and $172 in fiscal 1996. The
         Company also entered into a five year rental agreement with Waxman
         Industries in fiscal 1998 for the leasing of a warehouse facility in
         the normal course of business. The Company prepaid all rent totaling
         $500.

         Management fees charged to the Company by Waxman Industries are
         included in "corporate charge" in the accompanying financial
         statements. Corporate charges are allocations of expenses to the
         Company that Waxman Industries incurs to support its corporate
         activities. These fees were eliminated in the fourth quarter of fiscal
         1996.

         The Company and Waxman Industries 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 Initial Public Offering, the Company
         and Waxman Industries, among others, entered into a New Intercorporate
         Agreement. Pursuant to the New Intercorporate Agreement, Waxman
         Industries provides certain managerial, administrative and financial
         services to the Company and the Company pays Waxman Industries the
         allocable cost of the salaries and expenses of Waxman Industries'
         employees while they are rendering such services. The Company also
         reimburses Waxman Industries for actual out-of-pocket disbursements to
         third parties by Waxman Industries required for the provision of such
         services by Waxman Industries. In addition to the services provided by
         Waxman Industries to the Company pursuant to the New Intercorporate
         Agreement, the Company also continues to provide certain services to
         the operating divisions of WOC Inc., including LeRan Gas Products
         (substantially all of the business of which was acquired by the Company
         effective July 1, 1997), and U.S. Lock. These services include the
         utilization of the Company's management information systems, financial
         accounting, order processing and billing and collection services.
         Waxman Industries pays to the Company the allocable cost of the
         salaries and expenses of the Company's employees while they are
         performing such services. Waxman Industries also reimburses the Company
         for all actual out-of-pocket disbursements to third parties by the
         Company 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 Waxman Industries.

         All amounts incurred by the Company on behalf of Waxman Industries have
         been reimbursed by Waxman Industries. All amounts incurred by Waxman
         Industries on behalf of the Company have been reimbursed by the Company
         and are reflected in selling, general and administrative expense in the
         accompanying statements of income. In management's opinion, the
         Company's selling, general and administrative expenses include all
         costs of an independent stand-alone company.

         The following is a reconciliation of the activity contributed to
         capital related to the push-down bank debt described in Note 5:

<TABLE>
<CAPTION>
                                                          FISCAL YEAR ENDED JUNE 30
                                                      1998          1997         1996
                                                      ----------------------------------
<S>                                                 <C>            <C>         <C>   
         Push-down interest expense,
         including amortization of
          debt issue costs                          $ --           $ --        $   355
         Change in push-down bank debt                --             --          3,791
         Income taxes                                 --             --           (391)
         Change in push-down interest
          accrual                                     --             --             15
         Change in push-down of
         unamortized debt issue costs                 --             --           (198)
                                                    -------        -----        -------
         Capital contribution from
         Waxman Industries, net                     $ --           $ --        $ 3,572
                                                    ========      ========     ========
</TABLE>

11.      COMMITMENTS AND 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 financial position, liquidity or
         results of operations.


                                      F-13
<PAGE>   38



12.      ACQUISITION OF LERAN GAS PRODUCTS
         ---------------------------------

         On July 1, 1997, the Company acquired substantially all of the assets
         of LeRan Gas Products, an operating unit of Waxman Industries,
         accounted for using the purchase method of accounting. The acquisition
         price was $ 3.8 million, of which $ 3.2 million was paid in cash and
         the remainder was paid by the issuance to Waxman of 25 shares of the
         common stock of the Company. The operations related to these assets are
         not material to the Company's financial statements, however, the
         operations related to these assets have been included in the results of
         the Company since the date of acquisition.








                                      F-14

<PAGE>   39



                 SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

Quarterly Results of Operations:

         The following is a summary of the unaudited quarterly results of
operations for the fiscal years ended June 30, 1998 and 1997 (in thousands,
except per share amounts)



<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Diluted
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Earnings
---------------------------------------------------------------------------------------------------------------------------------
                                          Net                      Gross                    Net                           Per
---------------------------------------------------------------------------------------------------------------------------------
                                         Sales                    Profit                   Income                        share
                                         -----                    ------                   ------                        -----
---------------------------------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                       <C>                     <C>                            <C>  
Fourth                                  $51,577                   $17,445                 $3,872                         $0.24
---------------------------------------------------------------------------------------------------------------------------------
Third                                    49,465                    16,618                  3,301                          0.20
---------------------------------------------------------------------------------------------------------------------------------
Second                                   51,767                    17,660                  3,821                          0.23
---------------------------------------------------------------------------------------------------------------------------------
First                                    46,769                    15,720                  3,283                          0.20
---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
1997
---------------------------------------------------------------------------------------------------------------------------------
Fourth                                  $42,956                   $14,764                 $3,230                         $0.20
---------------------------------------------------------------------------------------------------------------------------------
Third                                    40,750                    13,938                  3,102                          0.20
---------------------------------------------------------------------------------------------------------------------------------
Second                                   39,871                    13,626                  3,006                          0.19
---------------------------------------------------------------------------------------------------------------------------------
First                                    36,491                    12,364                  2,697                          0.17
---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
</TABLE>






                                      F-15