<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
(Mark One)

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

For the fiscal year ended January 2, 1999

                                      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          1-8884                  
                        ------------------------

                             BUSH INDUSTRIES, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


           Delaware                                    16-0837346
------------------------------          ------------------------------------
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)

 One Mason Drive, Jamestown, New York                     14702
---------------------------------------      -------------------------------   
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code      (716) 665-2000   
                                                   -------------------------

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

  Title of each class                 Name of each exchange on which registered

  Class A Common Stock                         New York Stock Exchange
------------------------              --------------------------------------

          Securities registered pursuant to Section 12(g) of the Act:
                                     None
--------------------------------------------------------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.     Yes   X    No
                                            ---      --- 
<PAGE>
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of January 2, 1999, 10,481,359 shares of Class A Common Stock were
outstanding and the aggregate market value (based on the closing price on the
New York Stock Exchange on January 2, 1999 which was $12.44 per share) of the
Class A Common Stock held by non-affiliates was approximately $80,745,000. As of
January 2, 1999, 3,395,365 shares of Class B Common Stock were outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 13, 1999, are incorporated by
reference into Part III hereof. Certain exhibits listed in Part IV of this
Annual Report on Form 10-K are incorporated by reference from prior filings made
by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934.

                                       2
<PAGE>
 
                                    PART I
                                    ------
ITEM 1.  BUSINESS
-------  --------

(a)  GENERAL DEVELOPMENT OF BUSINESS
     -------------------------------

     Bush Industries, Inc. and its majority owned subsidiaries (the "Company" or
the "Registrant"), are primarily engaged in the design, manufacture and sale of
ready-to-assemble ("RTA") and set up furniture products for business and
consumer use. The Company was incorporated under the laws of the State of
Delaware on February 5, 1985. The Company was a successor to a corporation of
the same name incorporated under the laws of the State of New York in 1959. The
Company's principal place of business is located at One Mason Drive, Jamestown,
New York 14702.

     The Company completed in 1996, a one million square-foot manufacturing and
distribution facility in Erie, Pennsylvania, which is approximately 50 miles
west of the Company's corporate headquarters in Jamestown, New York. The first
phase of this expansion, approximately 500,000 square feet, replaced the
Company's leased distribution and warehouse facility in Saybrook, Ohio in April
1996. The second phase of the expansion program, consisting of an approximate
500,000 square foot facility, became operational in 1997. During 1998,
construction began on a new approximately 80,000 square foot automated material
handling system. Additional manufacturing capacity, incorporating newly
developed advanced technology, will be added incrementally to this facility as
demand requires.

     In 1996, the Company acquired all of the outstanding and issued capital
stock of The ColorWorks, Inc., a North Carolina corporation ("ColorWorks").
ColorWorks, with headquarters located in Greensboro, North Carolina, is a
finishing, design and decorating company which holds the master license to the
"HydroGraFix" film processing technology in the Western Hemisphere, portions of
Central Europe and South Africa.

     In the first quarter of 1997, the Company formed a wholly-owned German
subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global
market for advanced "surface technologies" in diverse applications. These
applications include products associated with the furniture, automotive,
electronics, building and construction industries. Bush-Viotechnik has developed
an advanced surface technology manufacturing line which is installed in the
Company's Erie, Pennsylvania facility.

     On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a
German furniture manufacturer. The Rohr Gruppe consisted of limited partnerships
and corporate entities, which were reorganized into a limited partnership prior
to the Company's acquisition, which name was subsequently changed to Rohr-Bush
GmbH & Co. ("Rohr-Bush").

     On April 22, 1998, the Company acquired all of the issued and outstanding
stock of Fournier Furniture, Inc. ("Fournier"), a Virginia based manufacturer of
RTA furniture.

                                       3
<PAGE>
 
(b)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS        
     ---------------------------------------------

     For financial information reporting purposes, the Company is deemed to
engage in one industry segment, the design, manufacture and sale of furniture
products. The Company's geographic operations outside the United States
principally include Germany.


(c)  NARRATIVE DESCRIPTION OF BUSINESS  
     ---------------------------------

     The Company is engaged primarily in the design, manufacture and sale of
ready-to-assemble ("RTA") and set up furniture products in various price ranges
for both business and consumer use. The Company's furniture product line,
inclusive of Rohr-Bush, includes audio/video home entertainment centers, home
theater furniture systems, audio cabinets, television/VCR carts, wall units,
bookcases, bedroom and kitchen/utility furniture, computer desks and
workstations, desks, hutches, armoires and file cabinets.

     The Company's diverse RTA furniture product line is designed for ease of
assembly, to ensure that such products can be readily assembled by following
simple, easy to read diagramed instructions, contained with each RTA product
sold. To enhance customer service, the Company maintains a toll free number in
the United States to assist consumers with any questions with respect to the
assembly of Bush products. The Company's diverse set up furniture, primarily
produced and sold by Rohr-Bush, is designed to be a high quality product that
appeals to popular price points. The component parts for the set up furniture
are manufactured using RTA technology and equipment.

     ColorWorks is engaged in the finishing and decoration of various substrate
materials. ColorWorks holds the master license to the "HydroGraFix" film
processing technology in the Western Hemisphere, portions of Central Europe, and
South Africa. This process permits the decoration of a variety of geometric
shapes, including complex three-dimensional parts. Cellular phones, pagers,
firearms, archery equipment and automotive interior components are examples of
major product lines decorated by ColorWorks.

     The objective of Bush-Viotechnik is to service the global market for
advanced "surface technologies" in diverse applications, including the
furniture, automotive, electronics, building and construction industries.
Bush-Viotechnik has developed an advanced surface technology manufacturing line
that is installed in the Company's Erie, Pennsylvania facility. The formation of
Bush-Viotechnik complements the Company's acquisition of ColorWorks.

MARKETING AND DISTRIBUTION

     The Company's furniture products, inclusive of Rohr-Bush, are marketed to a
variety of retailers for sale to both business and consumer end-users. The
Company's customers include national chains, electronic and computer
superstores, catalog showrooms, discount mass merchants, warehouse clubs, office
supply superstores, office furniture retailers, home furnishings retailers,
department stores, home improvement centers, furniture stores, buying groups in
Germany, and

                                       4
<PAGE>
 
independent wholesale distributors. The Company's furniture products, inclusive
of Rohr-Bush, are sold both through independent manufacturers' representatives
and directly by the Company's sales personnel. The Company's furniture products,
inclusive of Rohr-Bush, are currently sold to approximately 3,100 customers, and
the Company estimates that its products are currently carried in approximately
20,000 retail outlets.

     ColorWorks offers finishing and decorating processing services to
manufacturers and end-users of various products. ColorWorks either provides such
services directly or sublicenses the "HydroGraFix" film processing technology to
third parties in varying fields of application and/or geographic areas.

SOURCES AND AVAILABILITY OF RAW MATERIALS

     The Company purchases the raw materials used in the production of its
furniture at each manufacturing location from a variety of sources on a global
basis. The Company believes that none of the materials required for its
furniture manufacturing operations are proprietary in nature and that an
adequate supply of raw materials is available from multiple sources.

TRADEMARKS AND DESIGN PATENTS

     The Company either owns or has applied for various trade names and
trademarks in the United States and abroad, for use with its furniture product
lines. The Company believes that its trade names and trademarks are well
recognized within the furniture industry. The Company also believes that the
loss of any trade name and/or trademark would not have a material adverse effect
on its business operations.

     In addition, the Company owns a variety of patents with respect to surface
technologies and the design and manufacture of certain furniture products. The
Company believes that the loss of any of its patents would not have a material
adverse effect on its business. The Company also relies on trade secrets and
confidentiality to protect the proprietary nature of its technology.

SEASONALITY

     The nature of the business in which the Company is engaged is not seasonal.

WORKING CAPITAL PRACTICES

     The Company engages in no unusual practices regarding inventories,
receivables or other items of working capital.

CUSTOMERS

     For the fiscal year ended January 2, 1999, the Company had two customers
which accounted for approximately 15% and 11% of the Company's total gross
sales. No other single customer accounted for more than 10% of the Company's
total gross sales for the fiscal year ended January 2, 1999. While the loss of
any substantial customer could have a material short-term impact on the
Company's business, the Company believes that its diverse furniture distribution
channels would minimize the long-term impact of any such loss. 

                                       5
<PAGE>
 
BACKLOG

     The Company believes that order backlog at any particular point in time is
not predictive of future sales performance since, as is standard in the
furniture industry, a customer may cancel a product order prior to shipment
without penalty. The Company has historically filled orders within approximately
one to six weeks of the receipt of a purchase order.

GOVERNMENT CONTRACTS

     No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
Government.

COMPETITION

     The Company believes that, based on information reported in furniture trade
publications, it is the second largest United States-based manufacturer of RTA
furniture products (based on consolidated world wide sales) and that Rohr-Bush
is the eighth largest furniture manufacturer in Germany (excluding kitchen
cabinets and upholstered furniture). The furniture market is highly competitive,
and includes numerous entities, some of which may have substantially greater
financial and marketing resources than the Company. The Company believes that
the principal competitive factors in the furniture industry marketplace are
price, quality, function, innovative product design, style, prompt delivery, and
the ability to offer customers a full product line. The Company's varied product
line is designed based on the foregoing factors to achieve customer satisfaction
and, accordingly, the Company believes that its products effectively compete in
such marketplace.

ENVIRONMENTAL COMPLIANCE

     Environmental aspects of the Company's business are regulated primarily by
federal and state laws and by the ordinances of the localities where the
Company's facilities are located. See Item 3, "Legal Proceedings", for
additional information regarding environmental compliance.

EMPLOYEES

     As of the 1998 fiscal year end, the Company employed a total of
approximately 4,100 employees. Since Rohr-Bush is an active member of the German
employers' association for the wood and plastics processing industry, it is
governed by the collective bargaining agreements for this industry. There are no
other collective bargaining agreements covering any of the Company's employees.
The Company believes it has good employee relations.


(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
    ----------------------------------------------------------------------------

     For the 1998 fiscal year ended January 2, 1999, the Company generated
domestic sales of approximately $313,908,000 (or approximately 75.9% of total
sales) and foreign sales of approximately $99,619,000 (or approximately 24.1% of
total sales). Of the total foreign sales, approximately $14,288,000 (or
approximately 3.5% of total sales) represented products exported by the Company
from the United States. For the 1997 fiscal year ended January 3, 1998 and the

                                       6
<PAGE>
 
1996 fiscal year ended December 28, 1996, the Company generated domestic sales
of approximately $283,019,000 and $245,158,000, respectively (or approximately
87.0% of total sales for the 1997 fiscal year and approximately 95.6% of total
sales for the 1996 fiscal year). Foreign sales for the fiscal years ended
January 3, 1998 and December 28, 1996, respectively, were approximately
$42,270,000 and $11,174,000 (or approximately 13.0% of total sales for the 1997
fiscal year and approximately 4.4% of total sales for the 1996 fiscal year). Of
such total foreign sales, approximately $16,960,000 and $11,174,000 represented
products exported by the Company from the United States for the fiscal years
ended January 3, 1998 and December 28, 1996, respectively (or approximately 5.2%
for the 1997 fiscal year and 4.4% for the 1996 fiscal year).

                                       7
<PAGE>
 
ITEM 2.  PROPERTIES
-------  ----------

     The following table summarizes the Company's existing facilities as of
March 1, 1999:

<TABLE> 
<CAPTION> 

                                                       Approximate
Principal Character and                                     Square  Owned/Leased
use of Property                   Location                 Footage  (Lease Expiration Date)
-----------------------           --------             -----------  -----------------------
<S>                               <C>                  <C>          <C>    
Manufacturing and warehouse
facility                          Erie, PA               1,115,000  Owned (1)

Manufacturing, warehouse and
office facilities                 Mastholte, Germany       974,000  Owned

Manufacturing and warehouse       Allen Street
facility                          Jamestown, NY            450,000  Owned

Manufacturing, warehouse and      Mason Drive                                
corporate office facilities       Jamestown, NY            440,000  Owned (2) 
                                                                              
Manufacturing and                                                    
warehouse facility                St. Paul, VA             285,000  Owned

Manufacturing facility            Mantinghausen, Germany   208,000  Owned

Manufacturing and warehouse       Tiffany Street
facility                          Jamestown, NY            145,000  Owned (2)

Manufacturing facility            Tijuana, Mexico          135,000  Leased (September 2002)

Warehouse facility                Jamestown, NY            100,000  Leased (December 1999)

Manufacturing facility            Little Valley, NY         78,000  Owned

Manufacturing facility            Greensboro, NC            67,000  Owned

Manufacturing facility            Rutherfordton, NC         26,000  Owned

Showroom                          High Point, NC            13,000  Leased (April 2002)

Regional service center           Erie, PA                   8,000  Leased (June 2001)

Regional service center           Oxnard, CA                 8,000  Leased (July 2001)

Sales office and
design studio                     Ft. Myers, FL              5,000  Leased (February 2002)
</TABLE> 

-------------------------
(1)  Legal title to the facility is in EIDCO, Inc. in accordance with the terms
     of low interest financing being provided by the Commonwealth of
     Pennsylvania.

(2)  Legal title to the facility is in the County of Chautauqua Industrial
     Development Agency in 

                                       8
<PAGE>
 
     accordance with the terms of financing for the facility.

ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

     In November 1995, the Company was notified by the New York State Department
of Environmental Conservation ("DEC") of an alleged violation of a certain
environmental regulation concerning the presence of contaminates in the
groundwater, including trichloroethene ("TCE"), beneath the Company's property
located in Little Valley, New York. Based on available data, the Company
believes there is no conclusive evidence its property is the source of such
contamination, nor has the Company ever used TCE in its manufacturing
operations. The Company has proposed to the DEC, in a "Subsurface Investigation
Work Plan", certain monitoring and testing procedures to be undertaken by the
Company to obtain more reliable data as to the source of the TCE contamination.
Such Work Plan, if acceptable to the DEC, may form the basis of an Order On
Consent with the DEC with respect to those measures to be undertaken by the
Company. As of the date hereof, the DEC and the Company are working towards an
acceptable Work Plan and Order on Consent. On June 17, 1996, an approximate
five-mile long area in Little Valley, New York was added to the federal
Superfund national priorities list, and with respect thereto, the Company is not
aware of any potentially responsible parties having been identified as of the
date hereof. In December 1996, the Company responded to a request for
information from the United States Environmental Protection Agency (the "EPA"),
relating to the Company's Little Valley, New York property. No assurance can be
given that the Company's response will be sufficient for the EPA, or that the
EPA will not pursue further inquiries. Although no assurance can be given, the
Company believes that its financial statements will not be materially adversely
affected by the foregoing.

     The Company has also become aware of the possible presence of certain
levels of contaminates on the Greensboro, North Carolina property owned by
ColorWorks, of which the Company became the sole stockholder in September 1996.
The Company has been indemnified to a certain extent by the former shareholders
of ColorWorks, and has procured a $20,000,000 environmental insurance policy
relating thereto. In the unlikely event any such environmental costs are not
covered by such indemnification or insurance, the Company may be responsible for
certain costs. However, based on an initial assessment of the situation, the
Company believes, although no assurance can be given, that the Company's
financial statements will not be materially adversely affected by the foregoing.

     The Company has also become aware of the presence of certain levels of
contaminates on property located in Germany and owned by Rohr-Bush, of which the
Company became a 51% stockholder on June 30, 1997. The associated liability, the
quantification of which was based on the assessment of outside consultants, was
recorded in the allocation of the purchase price to the acquired assets and
liabilities as of June 30, 1997. Accordingly, the Company believes, although no
assurance can be given, that the Company's financial statements will not be
materially adversely affected by the foregoing.

     As of January 2, 1999, the Company is a party to various other legal
proceedings arising in the ordinary course of business. The Company believes
that these pending actions would not materially 

                                       9
<PAGE>
 
adversely affect the Company's financial statements.


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

     No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended January 2, 1999.

                                       10
<PAGE>
 
                                    PART II
                                    -------

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

     (a) Market Information. The Company's Class A Common Stock is traded on the
         -------------------
New York Stock Exchange. The Company's Class B Common Stock is not publicly
traded.

     The following table sets forth the high and low sales prices of the
Company's Class A Common Stock, as reported on the New York Stock Exchange for
the periods indicated:

Quarter                                           High                Low
--------------------------------                 ------             ------

January 1, 1997 - March 31, 1997                 $22.38             $17.25
April 1, 1997 - June 30, 1997                    $24.88             $18.88
July 1, 1997 - September 30, 1997                $28.38             $23.38
October 1, 1997 - December 31, 1997              $28.25             $23.50

January 1, 1998 - March 31, 1998                 $29.31             $24.13
April 1, 1998 - June 30, 1998                    $30.63             $21.75
July 1, 1998 - September 30, 1998                $23.25             $13.63
October 1, 1998 - December 31, 1998              $18.25             $12.00

     (b) Holders. As of March 1, 1999, the number of holders of record of the
         -------
Company's Class A Common Stock was approximately 445. The Company believes that
there are approximately an additional 2,400 holders who own shares of the
Company's Class A Common Stock in street name. As of the same date, there were
approximately 13 holders of record of the Company's Class B Common Stock.

     (c) Dividends. The Company instituted a quarterly cash dividend for holders
         ---------
of Class A and Class B Common Stock during the fourth quarter of 1992. Dividends
have been declared and paid for each succeeding quarter. The Company declared
cash dividends of $0.035 per share for each of the four quarters of 1997. The
Company increased the quarterly cash dividend from $0.035 to $0.05 per share
effective with the May 1998 dividend payment.

     The determination as to the payment and the amount of future cash dividends
will depend upon the Company's then current financial condition, capital
requirements, results of operations and other factors deemed relevant by the
Company's Board of Directors. In addition, a certain loan agreement to which the
Company is a party limits the amount of cash dividends that the Company can
declare, and also imposes certain conditions with respect thereto. The Company's
Certificate of Incorporation, as amended, also provides that any dividends paid
on Class A Common Stock must be at least equal to the dividends paid on the
Company's Class B Common Stock on a per share basis. Moreover, no dividend may
be paid to Class B stockholders without first being paid to Class A
stockholders.

                                       11
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA
-------  -----------------------

     The following selected financial data of the Company for the 1994 through
1998 fiscal years has been derived from the Consolidated Financial Statements of
the Company. This selected financial data should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
                                                 (In Thousands, except share and per share data)
                                                 -----------------------------------------------
                                         1998          1997          1996          1995          1994
                                     -----------   -----------   -----------   -----------   -----------
<S>                                  <C>           <C>           <C>           <C>           <C>        
Earnings Data (1)
----------------------------------

Net Sales ........................   $   413,527   $   325,289   $   256,332   $   220,014   $   213,216
Earnings Before
Income Taxes .....................   $    18,361   $    34,978   $    29,344   $    20,744   $    19,842
Net Earnings .....................   $    11,482   $    22,120   $    18,487   $    12,550   $    12,004
Earnings Per Share
  Basic ..........................   $      0.83   $      1.64   $      1.42   $      0.95   $      0.91
  Diluted ........................   $      0.78   $      1.52   $      1.31   $      0.95   $      0.86

Number of Weighted Average Class A
and Class B Shares Outstanding
  Basic ..........................    13,824,331    13,464,479    13,064,736    13,147,451    13,236,141
  Diluted ........................    14,747,523    14,523,356    14,073,381    13,270,544    14,012,070

Balance Sheet Data
----------------------------------

Working Capital ..................   $    40,046   $    28,111   $    28,213   $    24,018   $    34,421
Total Assets .....................   $   329,130   $   243,778   $   152,464   $   102,606   $   100,958
Long-term Debt ...................   $   121,054   $    56,955   $    36,339   $    15,031   $    16,774
Stockholders' Equity .............   $   123,619   $   112,430   $    84,317   $    59,113   $    52,265
</TABLE>

-------------------------------------
(1)  Effective for the year ended January 3, 1998, the Company adopted SFAS No.
     128, "Earnings per Share". In accordance with SFAS No. 128, the basic and
     diluted EPS and weighted average shares outstanding have been restated for
     all periods presented. Earnings per share and the number of weighted
     average Class A and Class B Shares of Common Stock outstanding have been
     adjusted to reflect the 3-for-2 stock split effectuated in the form of a
     fifty percent dividend paid on June 28, 1996 to stockholders of record as
     of June 14, 1996, and the 5-for-4 stock split effectuated in the form of a
     twenty-five percent dividend paid on January 20, 1995 to stockholders of
     record as of January 6, 1995.

                                       12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
        OF OPERATIONS
        -------------
General
     The domestic ready-to-assemble ("RTA") furniture market has experienced
significant growth over the past several years and has emerged as a key
component of the overall U.S. home and office furnishings industry. The growing
popularity and acceptance of RTA furniture products at both the retail and
consumer levels are the result, in the opinion of the Company, of basic
structural changes in the retail channels of distribution and increased demand
engendered by fundamental demographic trends.

     In recent years, the Company has committed substantial resources to the
development and implementation of a diversified sales, marketing, and product
strategy in order to capitalize on growth opportunities presented by emerging
retail channels of distribution and changes in consumer demographics and
preferences. Accordingly, the Company has structured its business to offer a
wide variety of RTA furniture products through increasingly popular retail
distribution channels, including electronics superstores, office superstores,
discount mass merchants, home improvement centers and home furnishings
retailers. The Company continues to strive towards building long-term
relationships with quality retailers in existing and emerging high-growth
distribution channels to develop and sustain its future growth.

     In 1998, the Company was involved in advancing several strategic business
initiatives, including integration of the newly acquired Virginia facility
(Fournier), the launching of new surface technology, a facility expansion to
automate the warehouse operation at the Erie, Pennsylvania facility, the
adaptation of Rohr-Bush manufacturing and the nationwide roll-out of a delivery
and assembly operation. The Company is continually monitoring these initiatives
in an effort to reduce costs and enhance profitability.

     On April 22, 1998, the Company acquired all of the issued and outstanding
stock of Fournier Furniture, Inc. ("Fournier"), a Virginia based manufacturer of
RTA furniture, for a purchase price of $7.0 million in cash. Substantially all
of Fournier's debt that existed on April 22, 1998 has been repaid utilizing the
Company's existing credit facility. The acquisition of Fournier has been
accounted for using the purchase method of accounting and accordingly, the
operating results of Fournier have been included in the consolidated financial
statements of the Company from the date of acquisition.

     On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a
German furniture manufacturer. The Rohr Gruppe consisted of limited partnerships
and corporate entities, which were reorganized prior to the Company's
acquisition into a limited partnership, which name was subsequently changed to
Rohr-Bush GmbH & Co. ("Rohr-Bush").

     In the first quarter of 1997, the Company formed a wholly-owned German
subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global
market for advanced "surface 

                                       13
<PAGE>
 
technologies" in diverse applications. These applications include products
associated with the furniture, automotive, electronics, building and
construction industries. Bush-Viotechnik has developed an advanced surface
technology manufacturing line which is completed and installed in the Company's
Erie, Pennsylvania facility.

     As described below, the Company is actively addressing its ability to
resolve any potential Year 2000 issues. The Year 2000 issue is the result of
computer software programs being written using two digits rather than four to
define the applicable year. Any of the Company's software programs, computer
hardware or equipment that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in system failures or miscalculation.

     The Company has appointed a Year 2000 Corporate Compliance Team, which has
prepared an international compliance program and work plan for the Company and
is responsible for coordinating and inspecting compliance activities. The
Company's plan to resolve the Year 2000 issue includes five major phases. First,
in the inventory phase, all resources are inventoried to identify those that
have any type of software or hardware Year 2000 issues. Second, in the
assessment phase, all inventoried items are assessed to confirm that a Year 2000
related issue is present and the extent of remediation required. Third, in the
strategy phase, a remediation strategy is created to ensure substantial
completion of upgrades for critical systems by the middle of calendar 1999.
Fourth, in the conversion / upgrade phase, upgrades are performed on all items
identified in the inventory and assessment phases. Finally, in the testing
phase, all upgraded items are tested to verify Year 2000 readiness.

     The Company has substantially completed the inventory, assessment and
strategy phases for both information technology ("IT") and non-IT systems. As of
March 1, 1999, the conversion / upgrade and testing phases of IT systems was
approximately 60% complete and is targeted to be completed by the middle of
1999. For non-IT systems, the Company is dependent on equipment manufacturers to
supply the upgrades required to remediate Year 2000 issues. As of March 1, 1999,
the conversion / upgrade and testing phases for non-IT systems was approximately
60% complete and is targeted to be completed by the middle of 1999.

     Part of the Company's initial assessment phase included a detailed Year
2000 questionnaire sent to all active vendors and customers. This questionnaire
included questions on products, services, IT and non-IT systems. As of March 1,
1999, the Company had received responses from approximately 75% of those
questioned. The Company is following up the questionnaires, where necessary, to
ensure Year 2000 compliance and uninterrupted services and supplies to the
Company.

     The Company utilizes both internal and external resources to address the
Year 2000 issue. The Company does not separately track the internal costs
incurred on the Year 2000 project. Such costs are principally payroll and
related costs for its internal IT personnel. Certain mainframe computer software
upgrades necessary to become Year 2000 compliant will be not be an incremental
expense, as the software upgrade is provided as part of the Company's software
maintenance agreement. The 

                                       14
<PAGE>
 
total cost of the Year 2000 project, excluding the above items, is estimated to
be less than $500,000.

     The Company presently believes it has an effective plan in place to
anticipate and resolve any material potential Year 2000 issues in a timely
manner. In the event, however, that the Company does not properly identify Year
2000 issues or complete the conversion / upgrade phase and testing phase of its
systems on a timely basis with respect to the Year 2000 issues that are
identified, there can be no assurance that Year 2000 issues will not materially
and adversely affect the Company's results of operations or relationships with
third parties. In addition, disruptions in the economy generally resulting from
Year 2000 issues also could materially and adversely affect the Company. The
amount of potential liability and lost revenue that would be reasonably likely
to result from the failure by the Company and certain key third parties to
achieve Year 2000 compliance on a timely basis cannot be reasonably estimated at
this time.

     The Company is developing a contingency plan for Year 2000 issues and
expects to have it in place by October 31, 1999. In addition, the Company is
forming a rapid response team as part of its IT group that will respond to any
operational problems during the Year 2000 date change period.

     During the first quarter of 1999 the Company commenced a review of certain 
aspects of its operations to reduce costs and increase its efficiencies and 
intends to initiate a restructuring plan before the end of the quarter. 
Although the final details of the plan are still being formulated, the 
restructuring plan will impact manufacturing and selling, general and 
administrative costs in European as well as domestic operations. The Company 
expects to incur severance and related restructuring charges of approximately 
seven to eleven million pre tax dollars as the result of its re-evaluation of
certain operations and costs.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activity", which is required to be adopted by the
Company in 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
of underlying transactions must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitment through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined the effect
SFAS No. 133 will have, if any, on the Company's consolidated financial
position, results of operations or cash flows.

     Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
which involve risks and uncertainties, including, but not limited to, economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.

                                       15
<PAGE>
 
Results of Operations
     The following table shows the approximate percentage of certain items
included in the Consolidated Statements of Earnings relative to net sales for
the fiscal years indicated:

                                                    Percentage of Net Sales
                                                 ----------------------------
                                                   1998      1997      1996
                                                   ----      ----      ----
Net Sales                                         100.0%    100.0%    100.0%
Cost of Sales                                      72.8%     70.2%     68.8%
                                                  -----     -----     -----
     Gross Profit                                  27.2%     29.8%     31.2%

Selling, General and Administrative Expenses       21.3%     17.9%     18.9%
                                                  -----     -----     -----
     Operating Income                               5.9%     11.9%     12.3%

Interest Expense                                    1.4%      1.1%      0.8%
                                                  -----     -----     -----
Earnings Before Income Taxes                        4.5%     10.8%     11.5%

Income Taxes                                        1.7%      4.0%      4.3%
                                                  -----     -----     -----
     Net Earnings                                   2.8%      6.8%      7.2%
                                                  =====     =====     =====

     The following paragraphs provide an analysis of the changes in net sales,
selected cost and expense items, and earnings for fiscal years 1996 through
1998.

RESULTS OF OPERATIONS: FISCAL 1998 COMPARED TO FISCAL 1997

     The Company's net sales for the 1998 fiscal year compared to the 1997
fiscal year increased $88,238,000, or approximately 27.1%, to $413,527,000. The
increase in net sales was attributable to the inclusion of a full year of sales
from the Company's majority owned German subsidiary, Rohr-Bush (only four months
of Rohr-Bush sales were included in fiscal year 1997) and good sales momentum at
the retail level. Revenues were, however, negatively impacted by new product
introduction delays which occurred as a result of the assignment of substantial
internal resources to advance recent strategic business initiatives. These
initiatives include the integration of the newly acquired Virginia facility
(Fournier), the launching of new surface technology, a facility expansion to
automate the warehouse operation at the Erie facility, the adaptation of
Rohr-Bush manufacturing and the nationwide roll-out of a delivery and assembly
operation.

     The cost of sales increased by $72,627,000 in 1998 primarily as a result of
higher sales volumes. The cost of sales as an approximate percentage of net
sales increased by 2.6% from 70.2% in 1997 to 72.8% in 1998. Higher cost of
sales as a percentage of net sales was primarily the result of increased costs
associated with the business initiatives described above.

     For 1998, selling, general and administrative expenses increased by
$29,873,000 compared to 1997. The increase in selling, general and
administrative expenses was primarily due to the inclusion of a full year of
Rohr-Bush and approximately eight months of Fournier in the Company's
consolidated financial statements, the costs associated with the business
initiatives described above, increased variable selling expenses (such as
commissions, marketing and promotional incentives), and other administrative
costs associated with the Company's higher sales volumes. Selling, general 

                                       16
<PAGE>
 
and administrative expenses increased as an approximate percentage of net sales
from 17.9% in 1997 to 21.3% in 1998.

     Interest expense increased to $5,897,000 in 1998 (or approximately 1.4% of
net sales) from $3,542,000 in 1997 (or approximately 1.1% of net sales). The
increase in interest expense was primarily due to an increase in average debt
related to the Company's capital expenditures, inventory growth and
acquisitions. The Company's overall effective federal, state and local tax rate
increased from 36.8% in 1997 to 37.5% in 1998. The exercise of stock options
during 1998 resulted in a tax benefit amounting to $1,011,000, which has been
credited directly to paid-in capital and is not reflected in 1998's provision
for taxes.

     For 1998, the Company generated net earnings after taxes of $11,482,000 (or
$0.83 basic earnings per share and $.78 diluted earnings per share), as compared
to $22,120,000 (or $1.64 basic earnings per share and $1.52 diluted earnings per
share) for 1997. This was an approximate 48.1% decrease in net earnings. The
decrease in net earnings is primarily due to increased costs associated with the
business initiatives described above.

RESULTS OF OPERATIONS: FISCAL 1997 COMPARED TO FISCAL 1996

     The Company's net sales for the 1997 fiscal year compared to the 1996
fiscal year increased $68,957,000, or approximately 26.9%, to $325,289,000. The
increase in net sales was attributable to the inclusion of $25,310,000 of
Rohr-Bush sales in the consolidated financial statements, the growing domestic
market acceptance for ready-to-assemble furniture products at both the retail
and consumer levels and to strong domestic sales in the office superstore and
consumer electronics distribution channels.

     The cost of sales increased by $52,127,000 in 1997 primarily as a result of
higher sales volumes. The cost of sales as an approximate percentage of net
sales increased by 1.4% from 68.8% in 1996 to 70.2% in 1997. Higher cost of
sales as a percentage of net sales was primarily the result of the integration
of the European operations.

     For 1997, selling, general and administrative expenses increased by
$9,785,000 compared to 1996. The increase in selling, general and administrative
expenses was primarily a result of increased variable selling expenses (such as
commissions, marketing and promotional incentives) and other administrative
costs associated with the Company's higher sales volumes. Selling, general and
administrative expenses decreased as an approximate percentage of net sales from
18.9% in 1996 to 17.9% in 1997.

     Interest expense increased to $3,542,000 in 1997 (or approximately 1.1% of
net sales) from $2,131,000 in 1996 (or approximately 0.8% of net sales). The
increase in interest resulted from an increase in average long-term debt. The
Company's overall effective federal, state and local tax rate decreased from
37.0% in 1996 to 36.8% in 1997. The exercise of stock options during 1997
resulted in a tax benefit amounting to $1,563,000, which has been credited
directly to paid-in capital and is not reflected in 1997's provision for taxes.

                                       17
<PAGE>
 
     For 1997, the Company generated net earnings after taxes of $22,120,000 (or
$1.64 basic earnings per share and $1.52 diluted earnings per share), as
compared to $18,487,000 (or $1.42 basic earnings per share and $1.31 diluted
earnings per share) for 1996. This was an approximate 19.7% increase in net
earnings. The increase in net earnings is primarily due to increased sales.

LIQUIDITY AND CAPITAL RESOURCES

     Working capital at fiscal year end 1998 increased by $11,935,000 over
fiscal year end 1997. Such increased working capital was primarily due to an
increase in inventory partially offset by an increase in accounts payable. Total
assets at fiscal year end 1998 increased $85,352,000 over fiscal year end 1997,
primarily as a result of an increase in net property, plant and equipment,
inventory and other assets. Additional inventory was put in place primarily to
enable the Company to improve its serviceability to its customers. In addition,
total liabilities at fiscal year end 1998 increased $74,163,000 over fiscal year
end 1997, due primarily to an increase in long-term debt and accounts payable.
The increase in long-term debt was primarily a result of the Company's capital
expenditures, inventory growth and the acquisition of Fournier. Capital
expenditures for fiscal 1998 included the cost of the additional equipment
purchased to increase serviceability to its customers and the previously
mentioned initiatives, including the integration of Fournier, the development of
new surface technology equipment, a facility expansion to automate the warehouse
operation at the Erie, Pennsylvania facility, and the adaptation of Rohr-Bush
manufacturing. In order to maximize cash flow the Company's accounts payable
increased. Total assets, including property, plant and equipment and other
assets, and total liabilities were all impacted as the result of the inclusion
of the Fournier acquisition in the Company's financial statements.

     During 1998, the Company paid $7,000,000 for the purchase of Fournier and
$48,182,000 on capital expenditures company wide, which were financed primarily
with increased debt. Capital expenditures in 1999 are currently forecasted to be
approximately $30 million, which includes the completion of the automation of
the warehouse operation at the Erie, Pennsylvania facility. The cash dividend
for the first quarter of 1998 was $0.035 per share. The Company increased the
quarterly cash dividend from $0.035 to $0.05 per share effective with the May
1998 dividend payment.

     The Company entered into a first amendment, dated as of August 17, 1998 to
its existing credit facility with The Chase Manhattan Bank, Mellon Bank, N.A.
and other lending institutions. The amendment modified the amount of money the
Company can borrow from an aggregate $155,000,000 to an aggregate $175,000,000.
In addition, the term of the credit facility was extended until June 30, 2003,
certain covenants were amended, and borrowings were permitted under the
anticipated single currency of participating member states of the European Union
(the Euro). The Company entered into a second amendment, dated as of December
31, 1998 to its existing credit facility with The Chase Manhattan Bank, Mellon
Bank, N.A. and other lending institutions. This amendment modifies both the
allowable consolidated leverage ratio and the allowable consolidated cash flow
coverage ratio. In addition, the pricing grid was modified primarily to reflect
the newly permitted ratios.

     The credit facility provides for revolving credit loans, swing line loans
and multi-currency loans, 


                                      18
<PAGE>
 
within the parameters described below. A balloon payment of the then remaining
principal and accrued interest is due on the termination date of the loan. The
Company has classified all of the line of credit as long-term debt, as there are
no required principal payments due within the next 12 months. At the Company's
option, borrowings may be effectuated, subject to certain conditions, on a NYBOR
rate, an eurocurrency rate for dollars, an applicable eurocurrency rate for
certain foreign currencies, a money market rate, or an alternative base rate.
Eurocurrency loans bear interest at the then current applicable LIBOR rate, plus
an applicable margin. The applicable margin, which pertains only to LIBOR and
NYBOR rate loans, varies from 0.5% to 2.00%, depending upon the Company's
ability to satisfy certain quarterly financial tests. In addition, the credit
agreement permits the Company to request the issuance of up to a maximum of
$20,000,000 in letters of credit, which issuance will be deemed part of the
$175,000,000 maximum amount of borrowing permitted under the credit facility.

     The line of credit agreement provides for achieving certain consolidated
cash flow coverage and leverage ratios, prescribes minimum consolidated net
worth requirements, limits capital expenditures and new leases and provides for
certain other affirmative and restrictive covenants. The Company is in
compliance with all of these requirements. In addition, the credit agreement
limits the amount of cash dividends that the Company can declare, and also
imposes certain conditions with respect thereto.

     Inflation affects the Company's business principally in the form of cost
increases from materials and wages. Historically, the Company has generally been
able to offset these cost increases by improved productivity, cost and waste
reduction, more effective purchasing practices, and to a lesser extent, price
increases.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-------  -----------------------------------------------------------
 
     Not Applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------

     The financial information required by Item 8 is included elsewhere in this
Report (see Part IV, Item 14).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
        FINANCIAL DISCLOSURE
        --------------------
   None.



                                      19
<PAGE>
 
                                    PART III
                                    --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------

     The information required by Item 10 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 13, 1999, under the caption, "Election of
Directors", to be filed by the Registrant.


ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------

     The information required by Item 11 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 13, 1999, under the caption, "Executive
Compensation", to be filed by the Registrant.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------

     The information required by Item 12 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 13, 1999, under the caption, "Security Ownership of
Management and Principal Stockholders", to be filed by the Registrant.


ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
-------- ---------------------------------------------

     The information required by Item 13 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 13, 1999, under the caption "Certain Transactions",
to be filed by the Registrant.



                                      20
<PAGE>
 
                                     PART IV
                                     -------


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

(A)  The consolidated balance sheets as of January 2, 1999 and January 3, 1998
     and the related consolidated statements of earnings, stockholders' equity,
     cash flows and financial statement schedule for each of the three years in
     the period ended January 2, 1999 are filed as part of this report:

(1)  Financial Statements                                                Page
     --------------------                                                ----

Independent Auditors' Report..............................................F-1
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Earnings.......................................F-3
Consolidated Statements of Stockholders' Equity...........................F-4
Consolidated Statements of Cash Flows.....................................F-5
Notes to Consolidated Financial Statements................................F-6

(2)  Consolidated Financial Statement Schedules
     ------------------------------------------

Schedule II - Valuation and Qualifying Accounts...........................S-1

     All other schedules are omitted because they are not applicable, or not
required because the required information is included in the Consolidated
Financial Statements or notes thereto.

(3)  Exhibits
     --------

3.1  Certificate of Incorporation. (1)

3.2  Amendment to Certificate of Incorporation, dated June 30, 1994. (6)

3.3  Amendment to Certificate of Incorporation, dated July 9, 1993. (4)

3.4  By-Laws. (1)

3.5  Amendment to By-Laws, dated March 9, 1998.

10.1 The Registrant's 1985 Stock Plan, as amended. (4)

10.2 The Registrant's 1985 Incentive Stock Option Plan, as amended. (4)



                                      21
<PAGE>
 
10.3 Lease Agreement between County of Chautauqua Industrial Development Agency
     and the Registrant dated January 1, 1990. (2)
 
10.4  Employment Agreement between the Registrant and Paul S. Bush dated July
      29, 1992, as amended. (3)

10.5  Employment Agreement between the Registrant and Robert L. Ayres dated July
      29, 1992, as amended. (3)

10.6  Employment Agreement between the Registrant and Lewis H. Aronson dated
      July 29, 1992, as amended. (3)

10.7  Employment Agreement between the Registrant and David G. Messinger dated
      July 29, 1992, as amended. (3)

10.8  Second Supplemental Indenture of Trust between the County of Chautauqua
      Industrial Development Agency and the Trustee, with the consent of Marine
      Midland Bank, N.A., Mellon Bank, N.A. and the Registrant dated June 23,
      1992. (3)

10.9  Split Dollar Insurance Agreements between the Registrant and Paul Bush
      dated November 1, 1990 and March 15, 1991 and related Collateral
      Assignment Agreements of same dates. (3)

10.10 Split Dollar Insurance Agreement between the Registrant and Robert L.
      Ayres dated December 19, 1991 and related Collateral Assignment Agreement.
      (3)

10.11 Performance Bonus Plan. (5)

10.12 The Registrant's 1995 Stock Plan. (7)

10.13 Stock Redemption Agreement between the Registrant and Paul S. Bush dated
      July 10, 1997. (8)

10.14 Credit Agreement, dated as of June 26, 1997, by and among the Registrant,
      as Borrower, the Lenders party thereto from time to time, The Chase
      Manhattan Bank as administrative agent and Mellon Bank, N.A., as co-agent.
      (8)

10.15 First Amendment, dated as of August 17, 1998, to the Credit and Guarantee
      Agreement dated as of June 26, 1997. (9)

10.16 Second Amendment, dated as of December 31, 1998, to the Credit and
      Guarantee Agreement dated as of June 26, 1997. (10)

21.1  List of Subsidiaries of Registrant.

23.1  Consent of Deloitte & Touche LLP, independent public auditors.


                                      22
<PAGE>
 
--------------------------------
(1)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 dated March 14, 1985 (File No. 2-96428).

(2)  Incorporated by reference to Registrant's Annual Report on Form 10-K for
     the fiscal year ended December 29, 1989.

(3)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the fiscal year ended January 2, 1993.

(4)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the fiscal year ended January 1, 1994.

(5)  Incorporated by reference to the Registrant's definitive Proxy Statement,
     dated May 16, 1994.

(6)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the fiscal year ended December 31, 1994.

(7)  Incorporated by reference to the Registrant's definitive Proxy Statement,
     dated March 29, 1995.

(8)  Incorporated by reference to the Registrant's Current Report on Form 8-K,
     filed September 10, 1997.

(9)  Incorporated by reference to the Registrant's Current Report on Form 8-K,
     filed September 14, 1998.

(10) Incorporated by reference to the Registrant's Current Report on Form 8-K,
     filed March 10, 1999.


(B)  Reports on Form 8-K.
     --------------------
     During the first quarter of fiscal year 1999, an 8-K was filed on March 10,
     1999 regarding an amendment to the Company's existing credit facility with
     The Chase Manhattan Bank, Mellon Bank, N.A. and other lending institutions.


                                      23
<PAGE>

                                  SIGNATURES

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

                                                REGISTRANT:

                                                BUSH INDUSTRIES, INC.


March 18, 1999                                  By /s/ Paul S. Bush     
                                                   ---------------------------
                                                   Paul S. Bush, President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

       SIGNATURE                 TITLE                             DATE
       ---------                 -----                             ----

/s/ Paul S. Bush              
-----------------------
Paul S. Bush              President, Chief
                          Executive Officer, and
                          Chairman of the Board
                          of Directors                         March 18, 1999


/s/ Robert L. Ayres         
-----------------------
Robert L. Ayres           Executive Vice President,
                          Chief Operating Officer,
                          Chief Financial Officer,
                          and Director                         March 18, 1999


/s/ Lewis H. Aronson      
-----------------------
Lewis H. Aronson          Senior Vice President of
                          Operations,
                          and Director                         March 18, 1999




                                      24
<PAGE>
 
/s/ Douglas S. Bush               
-----------------------
Douglas S. Bush           Vice President of
                          Merchandising and
                          Director                             March 18, 1999


/s/ Gregory P. Bush        
-----------------------
Gregory P. Bush           Vice President of
                          Furniture Research and
                          Development and Advanced
                          Systems Technology
                          and Director                         March 18, 1999


/s/ Donald F. Hauck        
-----------------------
Donald F. Hauck           Senior Vice President
                          and Director                         March 18, 1999


/s/ David G. Messinger     
-----------------------
David G. Messinger        Senior Vice President of
                          Sales and Marketing and
                          Director                             March 18, 1999


/s/ Paul A. Benke          
-----------------------
Paul A. Benke             Director                             March 18, 1999


/s/ Jerald D. Bidlack      
-----------------------
Jerald D. Bidlack         Director                             March 18, 1999


/s/ David G. Dawson        
-----------------------
David G. Dawson           Director                             March 18, 1999


/s/ Robert E. Hallagan     
-----------------------
Robert E. Hallagan        Director                             March 18, 1999


                                      25
<PAGE>
 

Schedule II
<TABLE>
<CAPTION> 
 
 
                                                    VALUATION AND QUALIFYING ACCOUNTS
                                                              (In Thousands)
<S>                                   <C>                <C>           <C>           <C>              <C>               <C>
                                     Col. B
                                    Balance at                                                           Col. D           Col. E
Col. A                              Beginning                        Col. C                            Deductions-     Balance at
Description                         of Period                       Additions                          Describe(1)    End of Period
                                                 -------------------------------------------------
                                                                                  Charged to
                                                      Charged to                Other Accounts- 
                                                   Costs & Expenses                Describe
                                               
 
Allowance for doubtful accounts
 
 
Fiscal 1998                         $1,329             $  834                      $394   (2)            $652           $1,905

 
Fiscal 1997                          2,036                 90                         0                   797            1,329
 
 
Fiscal 1996                          1,011              1,022                         0                    (3)           2,036


 
 
(1)  Accounts written off, net of collections on accounts receivable previously written off

(2)  Business acquisition during 1998

</TABLE>  

<PAGE>
 
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Bush Industries, Inc.
Jamestown, New York

We have audited the accompanying consolidated balance sheets of Bush Industries,
Inc. and Subsidiaries as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended January 2, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14 (A)
(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Bush Industries, Inc. and
Subsidiaries as of January 2, 1999 and January 3, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Deloitte & Touche LLP
Buffalo, New York

February 12, 1999

                                      F-1
<PAGE>
 
<TABLE>
<CAPTION>
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1999 AND JANUARY 3, 1998
------------------------------------------------------------------------------------------------------------
 <S>                                                                                  <C> 
                                                                                        (In Thousands)
ASSETS                                                                              1998              1997
 
CURRENT ASSETS:
  Cash and cash equivalents                                                       $  2,236          $  3,399
  Accounts receivable (less allowance for doubtful accounts of $1,905,000
    on January 2, 1999 and $1,329,000 on January 3, 1998)                           39,714            40,387
  Inventories                                                                       61,629            31,822
  Prepaid expenses and other current assets                                          6,182             9,909
                                                                                  --------          --------
          Total current assets                                                     109,761            85,517
 
PROPERTY, PLANT AND EQUIPMENT, NET                                                 191,218           142,710
 
OTHER ASSETS                                                                        28,151            15,551
                                                                                  --------          --------
 
TOTAL ASSETS                                                                      $329,130          $243,778
                                                                                  ========          ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
  Accounts payable                                                                $ 36,198          $ 22,940
  Income taxes                                                                         107                 0
  Other accrued liabilities                                                         32,703            33,748
  Current portion of long-term debt                                                    707               718
                                                                                  --------          --------
          Total current liabilities                                                 69,715            57,406
 
DEFERRED INCOME TAXES                                                                5,998             8,976
OTHER LONG-TERM LIABILITIES                                                          8,744             8,011
LONG-TERM DEBT                                                                     121,054            56,955
                                                                                  --------          --------
          Total liabilities                                                        205,511           131,348
                                                                                  --------          --------
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
  Common Stock - Class A                                                             1,054             1,023
  Common Stock - Class B                                                               340               356
  Paid-in capital                                                                   20,656            18,276
  Retained earnings                                                                102,629            93,708
  Accumulated other comprehensive loss                                                (264)             (137)
                                                                                  --------          --------
          Subtotal                                                                 124,415           113,226
  Less treasury stock                                                                 (796)             (796)
                                                                                  --------          --------
          Total stockholders' equity                                               123,619           112,430
                                                                                  --------          --------
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $329,130          $243,778
                                                                                  ========          ========
 
 
See notes to consolidated financial statements.
</TABLE>

                                      F-2
<PAGE>
 
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

 
                                                              (In Thousands, except share and per share data)
 
                                                                1998                1997                1996
                                                             (52 Weeks)          (53 Weeks)          (52 Weeks)
 <S>                                                       <C>                 <C>                 <C> 
NET SALES                                                   $   413,527         $   325,289         $   256,332
 
COSTS AND EXPENSES:
  Cost of sales                                                 301,132             228,505             176,378
  Selling, general and administrative                            88,137              58,264              48,479
  Interest expense                                                5,897               3,542               2,131
                                                            -----------         -----------         -----------
                                                                395,166             290,311             226,988
 
EARNINGS BEFORE INCOME TAXES                                     18,361              34,978              29,344
 
INCOME TAXES                                                      6,879              12,858              10,857
                                                            -----------         -----------         -----------
 
NET EARNINGS                                                $    11,482         $    22,120         $    18,487
                                                            ===========         ===========         ===========
 
EARNINGS PER SHARE
  Basic                                                     $      0.83         $      1.64         $      1.42
  Diluted                                                   $      0.78         $      1.52         $      1.31
 
WEIGHTED AVERAGE SHARES
 OUTSTANDING
  Basic                                                      13,824,331          13,464,479          13,064,736
  Diluted                                                    14,747,523          14,523,356          14,073,381

See notes to consolidated financial statements.
</TABLE> 
 


                                      F-3
<PAGE>
 
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION> 
                                                                             (In Thousands, except share data)
 
                                                                   Common Stock - Par Value $.10
                                                        ------------------------------------------------------
                                                                Class A                         Class B          Paid-in
                                                        -------------------------      ----------------------
                                                           Shares         Amount           Shares      Amount    Capital
<S>                                                          <C>            <C>              <C>          <C>       <C> 
                                                                                     
BALANCE, DECEMBER 30, 1995                                    6,294,168    $  629         2,570,247      $257     $ 7,146
  Purchase of treasury stock                                          -         -                 -         -           -
  Issuance of shares for acquisition                                  -         -                 -         -       3,075
  Three-for-two stock split                                   3,146,952       315         1,285,118       129        (444)
  Exercise of stock options                                     209,601        21                 -         -       1,762
  Tax benefit from exercise of stock options                          -         -                 -         -         772
  Dividends declared                                                  -         -                 -         -           -
  Net earnings (comprehensive income)                                 -         -                 -         -           -
                                                             ----------    ------         ---------    ------     -------
                                                                                     
BALANCE, DECEMBER 28, 1996                                    9,650,721       965         3,855,365       386      12,311
  Issuance of shares to pay loan                                      -         -                 -         -         171
  Issuance of shares for acquisition                                  -         -                 -         -       1,456
  Issuance of shares for patent rights                                -         -                 -         -         308
  Conversion of Class B stock to Class A                        300,000        30          (300,000)      (30)          -
  Exercise of stock options                                     278,755        28                 -         -       2,467
  Tax benefit from exercise of stock options                          -         -                 -         -       1,563
  Dividends declared                                                  -         -                 -         -           -
                                                                                     
  Comprehensive income:                                                              
   Net earnings                                                       -         -                 -         -           -
   Other comprehensive income:                                                       
    Foreign currency translation                                      -         -                 -         -           -
                                                                 ------     ------         ---------    ------     -------
       Total comprehensive income                                                    
                                                                                     
  BALANCE, JANUARY 3, 1998                                   10,229,476     1,023         3,555,365       356      18,276
    Conversion of Class B stock to Class A                      160,000        16          (160,000)      (16)          -
    Exercise of stock options                                   155,362        15                 -         -       1,369
    Tax benefit from exercise of stock options                        -         -                 -         -       1,011
    Dividends declared                                                -         -                 -         -           -
                                                                                     
  Comprehensive income:                                                              
    Net earnings                                                      -         -                 -         -           -
    Other comprehensive income:                                                      
      Foreign currency translation                                    -         -                 -         -           -
      Minimum pension liability                                       -         -                 -         -           -
                                                             ----------    ------         ---------    ------     -------
       Total comprehensive income                                                    
                                                                                     
BALANCE, JANUARY 2, 1999                                     10,544,838    $1,054         3,395,365      $340     $20,656
                                                             ==========    ======         =========    ======     =======

<CAPTION>

                                                                               (In Thousands, except share data)
                                                                                      Accumulated
                                                                                         Other
                                                     Retained       Comprehensive    Comprehensive          Treasury Stock
                                                                                                         ----------------------
                                                     Earnings           Income           Loss              Shares        Amount
<S>                                                    <C>                 <C>                <C>             <C>        <C> 
 
BALANCE, DECEMBER 30, 1995                           $ 56,341                           $   0              320,000    $ 5,260
  Purchase of treasury stock                                -                               -               83,032      1,488
  Issuance of shares for acquisition                        -                               -             (338,067)    (3,927)
  Three-for-two stock split                                 -                               -              160,000          -
  Exercise of stock options                                 -                               -                    -          -
  Tax benefit from exercise of stock options                -                               -                    -          -
  Dividends declared                                   (1,352)                              -                    -          -
  Net earnings (comprehensive income)                  18,487             $18,487           -                    -          -
                                                     --------         ===========       -----               ------      -----  

BALANCE, DECEMBER 28, 1996                             73,476                               0              224,965      2,821
  Issuance of shares to pay loan                            -                               -              (13,411)      (168)
  Issuance of shares for acquisition                        -                               -             (123,075)    (1,544)
  Issuance of shares for patent rights                      -                               -              (25,000)      (313)
  Conversion of Class B stock to Class A                    -                               -                    -          -
  Exercise of stock options                                 -                               -                    -          -
  Tax benefit from exercise of stock options                -                               -                    -          -
  Dividends declared                                   (1,888)                              -                    -          -
 
  Comprehensive income:
   Net earnings                                        22,120             $22,120           -                    -          -
   Other comprehensive income: 
    Foreign currency translation                            -                (137)       (137)                   -          -
                                                     --------         -----------       -----               ------      -----   
       Total comprehensive income                                         $21,983
                                                                      ===========
 
BALANCE, JANUARY 3, 1998                               93,708                            (137)              63,479        796
  Conversion of Class B stock to Class A                    -                               -                    -          -
  Exercise of stock options                                 -                               -                    -          -
  Tax benefit from exercise of stock options                -                               -                    -          -
  Dividends declared                                   (2,561)                              -                    -          -
 
  Comprehensive income:
   Net earnings                                        11,482             $11,482           -                    -          -
   Other comprehensive income: 
    Foreign currency translation                            -                 (36)        (36)                   -          -
    Minimum pension liability                               -                 (91)        (91)                   -          -
                                                     --------         -----------       -----               ------      -----   
       Total comprehensive income                                         $11,355
                                                                      ===========
 
BALANCE, JANUARY 2, 1999                             $102,629                           $(264)              63,479      $ 796
                                                     ========                           =====               ======      =====
</TABLE>

See notes to consolidated financial statements.
                                            
                                      F-4
<PAGE>
 
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                         (In Thousands)
                                                                             1998             1997             1996
<S>                                                                          <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                   
 Net earnings                                                             $ 11,482         $ 22,120          $ 18,487
 Adjustments to reconcile:                                              
  Depreciation and amortization                                             12,592            7,787             6,040
  Deferred income taxes                                                     (1,137)             406              (195)
 Changes in assets and liabilities affecting cash flows:                
  Accounts receivable                                                        6,511              291              (720)
  Inventories                                                              (27,472)           4,209            (3,695)
  Prepaid expenses and other current assets                                  1,540           (1,295)             (595)
  Accounts payable                                                           6,470            1,993              (103)
  Income taxes                                                               1,417              515               182
  Other accrued liabilities                                                 (5,494)          (3,039)            1,454
                                                                          --------         --------          --------
Net cash provided by operating activities                                    5,909           32,987            20,855
                                                                          --------         --------          --------
                                                                        
CASH FLOWS USED FOR INVESTING ACTIVITIES:                               
  Capital expenditures                                                     (48,182)         (28,474)          (35,640)
  Acquisition of business                                                   (7,000)               0              (827)
  Increase in other assets                                                  (1,729)          (2,676)             (860)
                                                                          --------         --------          --------
Net cash used in investing activities                                      (56,911)         (31,150)          (37,327)
                                                                          --------         --------          --------
                                                                        
CASH FLOWS FROM FINANCING ACTIVITIES:                                   
  Repayments of long-term debt                                             (11,008)         (47,444)           (3,379)
  Proceeds from long-term debt                                              61,341           45,656            20,789
  Purchase of Class A Stock for treasury                                         0                0            (1,488)
  Exercise of stock options                                                  1,384            2,495             1,783
  Dividends paid (per share $.185 - 1998; $.140 - 1997; $.103 - 1996)       (2,561)          (1,888)           (1,352)
                                                                          --------         --------          --------
Net cash provided by (used in) financing activities                         49,156           (1,181)           16,353
                                                                          --------         --------          --------
                                                                        
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                        683              (67)                0
                                                                          --------         --------          --------
                                                                        
NET INCREASE (DECREASE) IN CASH                                         
  AND CASH EQUIVALENTS                                                      (1,163)             589              (119)
                                                                        
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                 3,399            2,810             2,929
                                                                          --------         --------          --------
                                                                        
CASH AND CASH EQUIVALENTS, END OF YEAR                                    $  2,236         $  3,399          $  2,810
                                                                          ========         ========          ========
</TABLE> 
 
See notes to consolidated financial statements.

                                      F-5
<PAGE>
 
BUSH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
-------------------------------------------------------------------------------

1. DESCRIPTION OF BUSINESS AND SUMMARY OF
   SIGNIFICANT ACCOUNTING POLICIES

   Principles of Consolidation - The consolidated financial statements consist
   of Bush Industries, Inc. and its majority-owned subsidiaries (collectively,
   the "Company"). All significant intercompany accounts and transactions have
   been eliminated.

   Nature of Operations - The Company operates primarily in one industry segment
   - the design, manufacture and sale of both RTA (ready to assemble) and set-up
   furniture for the home and office. The majority of the Company's customer
   base is electronic and office product superstores and mass merchandisers
   throughout the United States and furniture stores in Europe.

   Cash Equivalents - The Company considers all highly liquid investments with a
   maturity of three months or less at the time of purchase to be cash
   equivalents.

   Inventories - Inventories, consisting of raw materials, work-in-progress and
   finished goods, have been stated at the lower of cost or market as determined
   by the first-in, first-out method.

   Property, Plant and Equipment - Property, plant and equipment is carried at
   cost. Depreciation is computed by the straight-line method over the estimated
   useful lives of the assets, which are as follows:  buildings and improvements
   10-50 years; machinery and equipment 3-20 years; transportation equipment 3-7
   years; office equipment 3-10 years; and leasehold improvements 3-10 years.
   Construction in progress is recorded in property, plant and equipment and
   amounted to $24,040,000 and $15,703,000 at January 2, 1999 and January 3,
   1998, respectively. Interest associated with construction indebtedness is
   capitalized. Interest amounting to approximately $338,000, $258,000 and
   $252,000 associated with construction in process was capitalized for 1998,
   1997 and 1996, respectively.

   The cost of repairs and maintenance is charged to expense as incurred.
   Renewals and betterments are capitalized. Upon retirement or sale of an
   asset, its cost and related accumulated depreciation or amortization are
   removed from the accounts and any gain or loss is recorded in income or
   expense. The Company continually reviews plant and equipment to determine
   that the carrying values have not been impaired by estimating the future
   discounted cash flows expected to result from the use of the plant and
   equipment.

   Other Assets - Other assets consist primarily of goodwill, cash value of
   officer's life insurance policies and certain intangible assets. The Company
   continually reviews these assets to determine that the carrying values have
   not been impaired by estimating the future discounted cash flows expected to
   result from the use of the asset.

   Postretirement and Postemployment Benefits  -  The Company has no material
   postretirement or postemployment benefits as defined in Statement of
   Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
   Postretirement Other Than Pensions," or SFAS No. 112, "Employers' Accounting
   for Postemployment Benefits."

                                      F-6
<PAGE>
 
   Fair Value of Financial Instruments  -  The fair value of financial
   instruments is determined by reference to various market data and other
   valuation techniques, as appropriate. Unless otherwise disclosed, the fair
   value of short-term instruments approximates their recorded values due to the
   nature of the instruments. The fair value of long-term debt instruments
   approximates their recorded values due primarily to their recent issuance and
   interest rates which approximate current rates available for similar
   instruments.

   Foreign Currency Translation - Essentially all assets and liabilities are
   translated into U.S. dollars at year-end exchange rates, while elements of
   the income statement and cash flow statement are translated at average
   exchange rates in effect during the year. Adjustments arising from the
   translation of most net assets located outside the United States are recorded
   as a component of stockholders' equity.

   Stock-Based Compensation - The Company accounts for stock-based compensation
   in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
   As permitted in that standard, the Company has elected to continue to follow
   Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
   Employees," and related interpretations in accounting for employee stock-
   based compensation.  No employee stock-based compensation expense was
   recorded for the years ended January 2, 1999, January 3, 1998 and December
   28, 1996.

   Income Taxes - Deferred taxes are recorded for temporary differences between
   the financial statement and tax basis of assets and liabilities using the
   anticipated tax rate when taxes are expected to be paid or recovered.

   Supplemental Cash Flow Information - Cash paid for interest was $5,898,000,
   $3,824,000 and $2,579,000 and cash paid for income taxes was $5,689,000,
   $12,814,000 and $10,389,000 in 1998, 1997 and 1996, respectively.

   Revenue Recognition - Revenues are recognized when products are shipped.

   Financial Statement Year End - The Company's year end is the closest Saturday
   to December 31. The accounts of two majority owned subsidiaries, Rohr-Bush
   GmbH & Co. and Bush-Viotechnik GmbH, have been consolidated on the basis of a
   year ending in October. Such fiscal period corresponds with those companies'
   fiscal year end.

   Environmental Compliance  -  Environmental compliance expenditures that
   relate to current operations are expensed or capitalized, as appropriate.
   Expenditures that relate to an existing condition caused by past operations
   and that do not contribute to current or future revenue generations are
   expensed. Liabilities are recorded when environmental assessments and/or
   remedial efforts are probable and costs can be reasonably estimated.

   Earnings Per Share - The Company reports its earnings per share (EPS) in
   accordance with SFAS No. 128 which requires a dual presentation of basic and
   diluted EPS. Basic EPS excludes dilution and is computed by dividing net
   income by the weighted average number of shares outstanding for the period.
   Diluted EPS reflects the potential dilution that could occur if securities or
   other contracts to issue common stock were exercised or converted into common
   stock. The dilutive effect of outstanding options issued by the Company are
   reflected in diluted EPS using the treasury stock method. Under the treasury
   stock method, options will only have a dilutive effect when the average
   market price of common stock during the period exceeds the exercise price of
   the options.

                                      F-7
<PAGE>
 
   Use of Estimates - The preparation of financial statements in conformity with
   generally accepted accounting principles requires management to make
   estimates and assumptions that effect the reported amounts of revenues and
   expenses during the reported period and the reported amounts of assets and
   liabilities and disclosure of contingent assets and liabilities at the date
   of the financial statements. Actual results could differ from those
   estimates.

   Recent Accounting Pronouncements - In the first quarter of 1998, the Company
   adopted SFAS No. 130, "Reporting Comprehensive Income," and restated prior
   years' consolidated financial statements to conform to the new reporting
   standard. SFAS No. 130 establishes standards for reporting and displaying
   comprehensive income and its components in a full set of general purpose
   financial statements. Comprehensive income includes all changes in
   stockholders' equity during a period except those resulting from investments
   by owners and distributions to owners. The adoption of SFAS No. 130 resulted
   in revised and additional disclosures but had no effect on the consolidated
   financial position, results of operations, or cash flows of the Company.

   In 1998, the Company also adopted SFAS No. 131, "Disclosures about Segments
   of an Enterprise and Related Information" which specifies the presentations
   and disclosure of operating segment information. SFAS No. 131 requires that
   segment information of earlier years be restated to conform to the new
   standard. The adoption of SFAS No. 131 resulted in revised and additional
   disclosures but had no effect on the consolidated financial position, results
   of operations, or cash flows of the Company.


   In 1998, the Company adopted the provisions of SFAS No. 132, "Employers'
   Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132
   requires additional disclosures about the Company's defined benefit and
   defined contribution pension plans but had no effect on the consolidated
   financial position or results of operations, or cash flows of the Company.

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
   "Accounting for Derivative Instruments and Hedging Activity," which is
   required to be adopted by the Company in 2001. The Statement will require the
   Company to recognize all derivatives on the balance sheet at fair value.
   Derivatives that are not hedges of underlying transactions must be adjusted
   to fair value through income. If the derivative is a hedge, depending on the
   nature of the hedge, changes in the fair value of derivatives will either be
   offset against the change in fair value of the hedged assets, liabilities or
   firm commitments through earnings or recognized in other comprehensive income
   until the hedged item is recognized in earnings. The ineffective portion of a
   derivative's change in fair value will be immediately recognized in earnings.
   Management has not yet determined the effect SFAS No. 133 will have, if any,
   on the Company's consolidated financial position, results of operations or
   cash flows.

                                      F-8
<PAGE>
 
2. INVENTORIES

   Inventories consist of (in thousands):



<TABLE>
<CAPTION>
                                                                            January 2,             January 3,
                                                                               1999                   1998
 
<S>                                                                    <C>                    <C>
       Raw materials                                                         $17,663                $ 9,762
       Work in progress                                                        9,754                  7,362
       Finished goods                                                         34,212                 14,698
                                                                             -------                -------
                            
       Total                                                                 $61,629                $31,822
                                                                             =======                =======
</TABLE>
                                                                                

3. PROPERTY, PLANT AND EQUIPMENT, NET

   Property, plant and equipment consist of (in thousands):


<TABLE>
<CAPTION>
                                                                            January 2,             January 3,
                                                                               1999                   1998
 
<S>                                                                      <C>               <C>
       Land                                                                 $  6,704               $  6,233
       Building and improvements                                             107,829                 85,371
       Machinery and equipment                                               163,945                126,092
       Transportation equipment                                                1,698                  1,460
       Office equipment                                                        9,085                  7,630
       Leasehold improvements                                                  1,497                  1,146
                                                                            --------               --------
                                                                             290,758                227,932
       Less accumulated depreciation                                         (99,540)               (85,222)
                                                                            --------               --------
                                    
       Total                                                                $191,218               $142,710
                                                                            ========               ========
</TABLE>
                                                                                

4. OTHER ACCRUED LIABILITIES

   Other accrued liabilities consist of (in thousands):


<TABLE>
<CAPTION>
                                                                            January 2,             January 3,
                                                                               1999                   1998
 
<S>                                                                      <C>              <C>
       Payroll, profit sharing and related liabilities                       $12,775                $12,486
       Commissions and sales related expenses                                 16,512                 14,487
       Restructuring charges                                                       0                  3,533
       Other                                                                   3,416                  3,242
                                                                             -------                -------
                                                          
       Total                                                                 $32,703                $33,748
                                                                             =======                =======
</TABLE>
                                                                                

                                      F-9
<PAGE>
 
5. LONG-TERM DEBT

   Long-term debt consists of:


<TABLE>
<CAPTION>
                                                                                         (in thousands)
                                                                                January 2,             January 3,
                                                                                   1999                   1998
<S>                                                                             <C>                     <C>
    Revolving credit facility with first contractual principal payment
     due June 2003.                                                             $115,690                $50,736
 
    Industrial Development Revenue Bonds, issued December 27, 1984,
     interest at rate of short-term, tax exempt obligations (TENR rate)
     plus 1/2% to 2%, depending on market. Future principal payments
     due in quarterly installments of $75,000 through January 1, 2000.               375                    600
 
    Pennsylvania Industrial Development Authority loan, issued
     October 3, 1996, interest at a rate of 3%. Monthly principal and
     interest payments of $13,812 are due through 2011.                            1,773                  1,884
 
    Pennsylvania Industrial Development Authority loan, issued
     February 26, 1997, interest at a rate of 3.75%. Monthly
     principal and interest payments of $14,544 are due through 2012.              1,820                  1,924
 
    Pennsylvania Sunny Day Loan Fund loan, issued June 27, 1996,
     interest at a rate of 3%. Monthly principal and interest payments
     of $13,812 are due through 2011.                                              1,735                  1,847
 
    Pennsylvania Machinery & Equipment Loan Fund loan, issued
     November 6, 1996, interest at a rate of 3%. Monthly principal
     and interest payments of $6,707 are due through 2003.                           368                    435
 
    Other                                                                              0                    247
                                                                                --------                -------
    Total debt                                                                   121,761                 57,673
    Less current portion                                                            (707)                  (718)
                                                                                --------                -------
 
    Total long-term debt                                                        $121,054                $56,955
                                                                                ========                =======
</TABLE>
                                                                                

   The Company finances operations through a $175 million revolving credit
   facility with a consortium of banks. The revolving credit facility is
   available through June 30, 2003. Interest is payable on the average daily
   balance of loans outstanding on a NYBOR based rate (7.875% at January 2,
   1999) or a FIBOR based rate (4.4375% at January 2, 1999) option. As part of
   this revolving line, the Company may also issue letters of credit, not to
   exceed $20 million, which issuance will be deemed part of the $175 million
   maximum amount of borrowing permitted. As of January 2, 1999, letters of
   credit amounting to $4,655,250 were outstanding.

                                      F-10
<PAGE>
 
   The revolving credit facility provides for achieving certain consolidated
   cash flow coverage and leverage ratios, prescribes minimum consolidated net
   worth requirements, limits capital expenditures and new leases and provides
   for certain other affirmative and restrictive covenants. The Company is in
   compliance with all these covenants as of January 2, 1999. In addition, the
   revolving credit facility provides for certain limitations of the amount of
   cash dividends that the Company can declare. The Company classifies this
   facility as long-term because there are no contractual requirements for
   repayment of principal until the year 2003.

   The Industrial Development Revenue Bonds are supported by a $681,250 letter
   of credit (which is included in the total letters of credit outstanding of
   $4,655,250 as discussed above) expiring in February 1999. The bonds are
   further collateralized by land, building and certain equipment acquired with
   the proceeds.

   A five-year summary of aggregate principal payments on outstanding long-term
   debt is (in thousands):


<TABLE>
<S>                                                                     <C>
     1999                                                               $    707
     2000                                                                    495
     2001                                                                    434
     2002                                                                    448
     2003                                                                116,152
     Thereafter                                                            3,525
                                                                        --------
     Total                                                              $121,761
                                                                        ========
</TABLE>
                                                                                

6. COMMITMENTS AND CONTINGENCIES

   The Company has incurred rental expense for manufacturing and warehouse space
   and equipment. A summary of rent expense follows (in thousands):

<TABLE>
<CAPTION>
                                      1998              1997               1996
 
<S>                                  <C>               <C>                <C>
     Real estate                     $1,144            $  769             $1,374
     Equipment                        2,555             1,451              1,277
</TABLE>


   Minimum future obligations over the next five years under all operating
   leases are summarized as follows (in thousands):


<TABLE>
<S>                                                                       <C>
     1999                                                                 $3,386
     2000                                                                  1,808
     2001                                                                  1,416
     2002                                                                    928
     2003                                                                    300
</TABLE>


   The Company is a party to various legal actions arising in the normal course
   of business.  The Company does not believe that any such pending activities
   should have a material adverse effect on its financial statements.

                                      F-11
<PAGE>
 
7. INCOME TAXES

   The provision (benefit) for income taxes is as follows (in thousands):


<TABLE>
<CAPTION>
                                              1998            1997             1996
<S>                                    <C>              <C>             <C>  
     Current:                                                                         
      Federal                               $ 7,550          $11,662         $10,240  
      State                                     466              790             812  
     Deferred                                (1,137)             406            (195) 
                                            -------          -------         -------  
     Total                                  $ 6,879          $12,858         $10,857  
                                            =======          =======         =======   
</TABLE>
                                                                                

   The tax effects of the principal temporary differences resulting in deferred
   taxes are as follows (in thousands):


<TABLE>
<CAPTION>
                                              1998            1997          1996
 
<S>                                     <C>              <C>           <C>
     Depreciation                           $   556          $ 718         $ 410 
     Accrued expenses                         1,592            421          (197)
     Accounts receivable and inventories      1,123            246          (408)
     Subsidiary net operating loss           (4,408)          (979)            0 
                                            -------          -----         -----  
     Total                                  $(1,137)         $ 406         $(195) 
                                            =======          =====         =====
</TABLE>
                                                                                

   The types and tax effects of temporary differences included in deferred tax
   assets and liabilities are as follows (in thousands):


<TABLE>
<CAPTION>
                                                    1998            1997
<S>                                             <C>             <C> 
     Deferred Tax Assets:                                                      
      Accounts receivable                           $    657        $    457   
      Accrued expenses                                 2,323           3,508   
      Inventories                                        960           2,019   
      Deferred income                                    581             613   
      State investment tax credit carryforward         3,907           3,423   
      Subsidiary net operating loss carryforward       6,556           1,937   
                                                    --------        --------   
                                                      14,984          11,957   
                                                                               
     Deferred Tax Liabilities:                                                 
      Property, plant and equipment                  (12,686)        (10,903)  
                                                    --------        --------   
       Subtotal                                        2,298           1,054   
                                                                               
     Total valuation allowance                        (3,907)         (3,423)  
                                                    --------        --------   
                                                                               
     Net deferred tax liability                     $ (1,609)       $ (2,369)  
                                                    ========        ========    
</TABLE> 

                                      F-12
<PAGE>

                                                         1998            1997

   Reported as (in thousands):                  
    Current asset (included in prepaid expenses                        
     and other current assets)                         $ 4,389        $  6,607
    Long-term liability                                 (5,998)         (8,976) 
                                                       -------        --------  
   Net deferred tax liability                          $(1,609)       $ (2,369)
                                                       =======        ========
                                                                                

   The Company has recorded a valuation allowance primarily in anticipation that
   certain state investment tax credits will expire prior to their usage.

   The provision for income taxes differs in each of the years from the federal
   statutory rate due to the following:


                                           1998           1997           1996
 
   Statutory rate                          35.0 %         35.0 %         35.0 %
   State taxes                              1.8            1.6            1.8
   Effect of non-deductible costs           1.1            0.7            0.4
   Effect of foreign tax rates              1.3            0.0            0.0
   Other, net                              (1.7)          (0.5)          (0.2)
                                          -----          -----          -----
                                  
   Effective tax rate                      37.5 %         36.8 %         37.0 %
                                          =====          =====          =====
                                                                                
   The Company realized tax benefits amounting to $1,011,000, $1,563,000 and
   $772,000 as the result of stock option transactions during 1998, 1997, and
   1996, respectively. The benefit has been credited to paid-in capital and is
   not reflected in the current year provision for taxes.

8. CAPITAL STOCK

   The authorized capital stock of the Company consists of 20,000,000 shares of
   Class A Common Stock, $.10 par value, and 6,000,000 shares of Class B Common
   Stock, $.10 par value. Dividends may be declared and paid on Class A Common
   Stock without being paid on Class B Common Stock. No dividend may be paid on
   Class B Common Stock without equal amounts paid concurrently on Class A
   Common Stock. Holders of Class A Common Stock have one-tenth vote per share
   and are entitled to elect at least 25% of the Board of Directors as long as
   the number of outstanding shares of Class A Common Stock is at least 10% of
   the total of all Common Stock outstanding. Holders of Class B Common Stock
   have one vote per share.

   On July 10, 1997, the Company entered into a stock redemption agreement with
   the principal shareholder, which provides that upon his death the Company may
   be required to redeem a portion of the Company's stock then owned by the
   shareholder's estate. The redemption price per share shall be determined at
   the then market price based upon a thirty day average prior to the closing of
   any such stock redemption. The amount of the redemption is limited to
   approximately $21.4 million which will be funded by the proceeds from life
   insurance policies maintained on the life of the principal shareholder. The
   shareholder's estate can request the Company to redeem shares under the
   agreement until the maximum time period permitted to pay estate taxes has
   elapsed.

   On May 21, 1996, the Board of Directors declared a 3-for-2 stock split
   payable in the form of a dividend to all holders of Class A and Class B
   Common Stock of record on June 14, 1996, paid on June 28, 1996.

                                      F-13
<PAGE>
 
9. STOCK OPTION PLANS

   The Company currently has one open stock option plan with 375,000 shares of
   Class A Common Stock available for issuance subsequent to the 3-for-2 stock
   split effective June 28, 1996. As of January 2, 1999, there were 241,500
   shares available for issuance under the plan.  Incentive Stock Options
   granted under the plan must have an option price of at least 100% (110% for
   stockholders with more than 10% of the total combined voting power) of the
   fair market value of the Class A Common Stock on the date of the grant. The
   option price of the Non-Qualified Stock Options granted pursuant to the plan
   shall be determined by the Compensation Committee of the Board of Directors,
   in its sole discretion. No option can be exercised within one year after the
   date of grant.

   As of January 2, 1999, there were options to purchase 1,049,748 shares of
   Class A Common Stock under the current and prior plans at prices ranging from
   $1.69 to $28.02 that could be exercised, as adjusted for stock splits
   effectuated in the form of stock dividends. Of these outstanding options,
   1,019,804 have an exercise price of $8.91.

   The following is a summary of option transactions:


<TABLE>
<CAPTION>
                                                1998           1997          1996
<S>                                          <C>            <C>           <C>
    Options outstanding, beginning of year   1,639,751      1,857,506     1,363,248   
    Options granted                             73,000         51,000        13,720   
    Options exercised                         (137,862)      (268,755)     (201,101)  
    Effect of stock splits                           0              0        681,639  
                                             ---------      ---------      ---------  
                                                                                      
    Options outstanding, end of year         1,574,889      1,639,751      1,857,506  
                                             =========      =========      =========   
</TABLE>
                                                                                

   All of the options outstanding expire at various dates from 1999 through
   2008.  The option price of the shares subject to options exercised in 1998
   was $8.91. The weighted-average exercise prices of options were $8.91, $8.95
   and $8.49 for fiscal years 1998, 1997 and 1996, respectively. The weighted-
   average grant-date fair value of options granted were $25.14, $23.12 and
   $14.97 for fiscal years 1998, 1997 and 1996, respectively.

   In addition to the options granted under the aforementioned plans, the
   Company has outstanding 48,376 shares subject to non-qualifying options
   granted to certain key individuals which can be exercised through 2003 at an
   exercise price of $8.91, as adjusted for stock splits effectuated in the form
   of stock dividends.

   Pro forma information regarding net income and earnings per common share is
   required by SFAS No. 123 and has been determined as if the Company had
   accounted for its employee stock options and awards under the fair value
   method of that standard. The fair value of those options were estimated at
   the date of grant using a Black-Scholes option pricing model with the
   following weighted-average assumptions for the years ended January 2, 1999,
   January 3, 1998 and December 28, 1996, respectively: risk free interest rate
   of 4.8%, 5.5% and 6.3%; dividend yield of .90%, .60% and .75%; volatility
   factors of the expected market price of the Company's common stock of 39%,
   30% and 45%; and a weighed-average expected life of 7 years for all three 
   years.

   For purposes of pro forma disclosures, the estimated fair value of the
   options is amortized to expense over the options' vesting period. The
   Company's pro forma net earnings, basic and diluted earnings per common share
   for the years ended January 2, 1999, January 3, 1998 and December 28, 1996
   were $11,126,000, $.80 and $.75; $22,092,000, $1.64 and $1.52: and
   $18,482,000, $1.42 and $1.31, respectively.

                                      F-14
<PAGE>
 
10. PENSIONS

   The Company sponsors a defined benefit plan for eligible non-U.S. employees
   at its German facility.

   The following are reconciliations of the benefit obligation, the funded
   status of the plan, and the amounts recognized in the balance sheets (in
   thousands):


<TABLE>
<CAPTION>

                                                       1998            1997
<S>                                               <C>             <C>  
   Change in benefit obligation:                                                
     Benefit obligation at beginning of year         $ 5,925         $ 5,610    
     Service cost                                        147             113    
     Interest cost                                       400             331    
     Foreign currency exchange rate changes              384               0    
     Actuarial loss                                      459               0    
     Benefits paid                                      (184)           (129)   
                                                     -------         -------    
                                                                                
   Benefit obligations at end of year                  7,131           5,925    
                                                     -------         -------    
                                                                                
   Funded status (the plan is unfunded)               (7,131)         (5,925)   
     Unrecognized net actuarial loss                     459               0    
                                                     -------         -------    
                                                                                
   Net amount recognized                             $(6,672)        $(5,925)   
                                                     =======         =======
</TABLE>
                                                                                

Amounts recognized in the balance sheets consist of:


<TABLE>
<CAPTION>
                                                         1998            1997  
                                                                               
    <S>                                               <C>             <C>      
    Accrued benefit liability                         $(6,763)        $(5,925) 
    Accumulated other comprehensive loss                   91               0  
                                                      -------         -------  
                                                                               
    Net amount recognized                             $(6,672)        $(5,925) 
                                                      =======         =======   
</TABLE>
                                                                                

   There were no plan assets at January 2, 1999 and January 3, 1998. Valuations
   of the pension plan as shown above were conducted as of October 31, 1998 and
   1997. The plan is funded to the extent of benefits paid.

   Weighted average assumptions for the years ended:


<TABLE>
<CAPTION>
                                                            
                                                             1998           1997        
    <S>                                                      <C>           <C>          
    Discount rate                                            6.25 %         7.25 %      
    Rate of increase in compensation levels                  3.00 %         3.00 %      
</TABLE> 
                                              
                                     F-15
<PAGE>
 
   Components of net periodic benefit cost consisted of the following:


<TABLE>
<CAPTION>
                                                                                     1998          1997
 
 <S>                                                                          <C>           <C>
     Service cost                                                                    $ 147         $ 113
     Interest cost                                                                     400           331
                                                                                     -----         -----
 
     Net periodic benefit cost                                                       $ 547         $ 444
                                                                                     =====         =====
</TABLE>
                                                                                

    The Company also sponsors defined contribution plans which cover
    substantially all of the Company's eligible U.S. employees. The plans
    provide for both direct employer contributions and a salary reduction
    feature under Section 40l(k). Employer contributions can be paid in cash or
    in shares of Class A Common Stock at the discretion of the Board of
    Directors. Net pension cost related to the plans were $1,315,000, $1,259,000
    and $877,000 for the years ended January 2, 1999, January 3, 1998 and
    December 28, 1996, respectively.

11. SEGMENT AND GEOGRAPHIC INFORMATION

    The Company operates and manages it business in one reportable industry
    segment - the design, manufacture and sale of both RTA (ready to assemble)
    and set-up furniture for the home and office. The Company's geographic
    operations outside of the United States principally include Germany. The
    Company's products are sold throughout the world. There were no significant
    segment operations by geographic area prior to 1997. Net sales by geographic
    area are presented by attributing net sales to external customers based on
    the domicile of the selling location. This data (in thousands) is presented
    in accordance with SFAS No. 131, "Disclosures about Segments of an
    Enterprise and Related Information," which the Company has retroactively
    adopted for all periods presented.


<TABLE>
<CAPTION>
      Geographic areas                                            1998             1997             1996
 
 
      Net sales:
<S>                                                       <C>              <C>              <C>
        United States                                           $328,196         $299,979         $256,332
        Germany                                                   85,331           25,310                0
                                                                --------         --------         --------
 
                                                                $413,527         $325,289         $256,332
                                                                ========         ========         ========
 
                                                                  1998             1997
      Long-lived assets:
       United States                                            $141,797         $ 99,397
       Germany                                                    48,130           41,860
       Other                                                       1,291            1,453
                                                                --------         --------
 
                                                                $191,218         $142,710
                                                                ========         ========
</TABLE>

                                      F-16
<PAGE>
 
    Electronic and office product superstores and mass merchandisers, throughout
    the United States and furniture stores in Europe, comprise a significant
    portion of the Company's customer base. The Company performs ongoing credit
    evaluations of its customers' financial condition and, generally, requires
    no collateral from its customers. Although the Company's exposure to credit
    risk associated with nonpayment by customers is affected by conditions or
    occurrences within the retail industry, the majority of trade receivables
    were current at January 2, 1999. The Company has one United States customer
    that accounted for total gross sales of approximately 15% in 1998, 16% in
    1997 and 15% in 1996, and approximately 11% and 15% of accounts receivable
    at January 2, 1999 and January 3, 1998, respectively. The Company has a
    second United States customer that accounted for total gross sales of
    approximately 11% in 1998, 9% in 1997 and 12% in 1996, and approximately 14%
    and 4% of accounts receivable at January 2, 1999 and January 3, 1998,
    respectively.

12. ACQUISITIONS

    On April 22, 1998, the Company acquired all of the issued and outstanding
    shares of Fournier Furniture, Inc. ("Fournier"), a Virginia based
    manufacturer of RTA furniture, for a purchase price of $7.0 million in cash.
    Substantially all of Fournier's debt that existed on April 22, 1998 was
    repaid utilizing the Company's existing credit facility. The acquisition of
    Fournier has been recorded under the purchase method of accounting and
    accordingly, the results of operations of Fournier have been included in the
    consolidated financial statements from the date of acquisition. The excess
    of purchase price over fair value of the net tangible assets acquired
    resulted in an allocation of goodwill of approximately $11.9 million which
    is being amortized over 15 years.

    Unaudited, pro forma consolidated net sales, net income and basic earnings
    per share assuming the acquisition had taken place at the beginning of 1997
    was $426.7 million, $11.4 million and 83c per share for fiscal 1998, and
    $361.9 million, $17.8 million and $1.33 per share for fiscal 1997. Such pro
    forma results are not necessarily indicative of what the actual consolidated
    results of operations might have been if the acquisition had been effective
    at the beginning of fiscal 1997.

    On June 30, 1997, the Company acquired a 51% interest in Rohr Gruppe (Rohr),
    a German furniture manufacturer by issuing 123,075 shares of Class A Common
    Stock (approximate market value on June 30, 1997 of $3,000,000). The
    transaction had been recorded under the purchase method of accounting and
    accordingly, the results of operations are included in the accompanying
    consolidated financial statements from the date of acquisition. The purchase
    price has been allocated to the assets acquired and liabilities assumed
    based on fair market value at the date of acquisition. The excess of
    purchase price over fair value of the net tangible assets acquired resulted
    in an allocation to goodwill of approximately $2.5 million which is being
    amortized over 15 years. All of the Company shares issued in connection with
    this transaction are being held in escrow for three years to secure any
    indemnification claims under the Purchase Agreement.

    During 1996, the Company acquired all of the outstanding stock of The
    ColorWorks, Inc. for 338,067 shares of the Company's Class A Common Stock,
    approximately $231,000 in equipment and other assets and approximately
    $827,000 in cash. The acquisition was recorded under the purchase method of
    accounting and accordingly, The ColorWorks, Inc. financial statements are
    included in the accompanying consolidated financial statements from the date
    of acquisition. The majority of the purchase price has been assigned to
    goodwill, which is being amortized over 15 years.

                                      F-17
<PAGE>
 
13. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED


<TABLE>
<CAPTION>
                                                                  (In Thousands, except per share data)
                                                           4th Qtr.        3rd Qtr.        2nd Qtr.         1st Qtr.
 
     1998
 
     <S>                                             <C>              <C>             <C>             <C>
     Net sales                                             $113,373         $94,252         $97,089         $108,813
     Gross profit                                            29,693          25,486          26,724           30,492
     Net earnings                                             1,118           1,006           3,893            5,465
     Earnings per share - basic                                0.08            0.07            0.28             0.40
     Earnings per share - diluted                              0.08            0.07            0.26             0.37
 
     1997
  
     Net sales                                             $105,476         $76,517         $72,429         $ 70,867
     Gross profit                                            28,127          22,412          23,724           22,521
     Net earnings                                             6,393           5,279           5,170            5,278
     Earnings per share - basic                                0.47            0.39            0.39             0.40
     Earnings per share - diluted                              0.43            0.36            0.36             0.37
</TABLE>


                                    ******

                                      F-18
<PAGE>
 

Schedule II
<TABLE>
<CAPTION> 
 
 
                                                    VALUATION AND QUALIFYING ACCOUNTS
                                                              (In Thousands)
<S>                                <C>                   <C>           <C>           <C>              <C>             <C>  
                                     Col. B   
                                   Balance at                                                           Col. D           Col. E 
        Col. A                     Beginning                         Col. C                           Deductions-      Balance at
        Description                of Period                        Additions                         Describe(1)     End of Period
                                                 -------------------------------------------------
                                                                                  Charged to
                                                      Charged to                Other Accounts- 
                                                   Costs & Expenses                Describe
                                               
 
Allowance for doubtful accounts
 
 
Fiscal 1998                         $1,329             $  834                      $394   (2)            $652           $1,905

 
Fiscal 1997                          2,036                 90                         0                   797            1,329
 
 
Fiscal 1996                          1,011              1,022                         0                    (3)           2,036


 
 
(1)  Accounts written off, net of collections on accounts receivable previously written off

(2)  Business acquisition during 1998

</TABLE>  


                                      S-1