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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                   FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                      THE SECURITIES EXCHANGE ACT OF 1934

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<CAPTION>
 For the Fiscal Year Ended December 31, 1996          Commission File Number: 333-11905
<S>                                             <C>
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                            ------------------------

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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                   Delaware                                       56-1977928
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           (State of Incorporation)                  (I.R.S. Employer Identification No.)
    1300 National Highway, Thomasville, NC                          27360
   (Address of Principal Executive Offices)                       (Zip Code)
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       Registrant's telephone number, including area code: (910) 476-4777

        Securities Registered Pursuant to Section 12(b) of the Act: None

        Securities Registered Pursuant to Section 12(g) of the Act: None

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

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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/

The registrant is a privately held corporation. As such, there is no practicable
method to determine the aggregate market value of the voting stock held by
non-affiliates of the registrant.

    Number of shares outstanding of the registrant's Common Stock at March 1,
1997:

              100 shares of Common Stock, par value $.01 per share

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                               TABLE OF CONTENTS

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ITEM                                                                                                             PAGE NO.
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                                                          PART I

        1.   Business.........................................................................................           3
        2.   Properties.......................................................................................          13
        3.   Legal Proceedings................................................................................          13
        4.   Submission of Matters to a Vote of Security Holders..............................................          14

                                                          PART II

        5.   Market for Registrant's Common Equity and Related Stockholder Matters............................          15
        6.   Selected Financial Data..........................................................................          16
        7.   Management's Discussion and Analysis of Financial Condition and
             Results of Operations............................................................................          17
        8.   Financial Statements.............................................................................          22
        9.   Changes in and Disagreements With Accountants on Accounting and
             Financial Disclosure.............................................................................          48

                                                         PART III

       10.   Directors and Executive Officers of the Registrant...............................................          49
       11.   Executive Compensation...........................................................................          49
       12.   Security Ownership of Certain Beneficial Owners and Management...................................          49
       13.   Certain Relationships and Related Transactions...................................................          49

                                                          PART IV

       14.   Exhibits, Financial Statement Schedule, and Reports on Form 8-K..................................          50
       15.   Signatures.......................................................................................          52

                                               FINANCIAL STATEMENT SCHEDULE

 LIFESTYLE FURNISHINGS INTERNATIONAL LTD. Financial Statement Schedule.......................................          F-1
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                                       2
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                                     PART I

ITEM 1. BUSINESS

GENERAL

    LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") is the largest
manufacturer and marketer of home furnishing products. The Company markets a
comprehensive selection of quality products under well-known brand names through
an extensive worldwide distribution network. The Company offers products in
price categories ranging from "promotional" to "premium," with a primary
concentration in the "good," "better" and "best" categories. The Company's
products enjoy an international reputation for quality, craftsmanship, style and
value.

    FINE FURNITURE.  The Company designs, manufactures and markets a full range
of quality wood and upholstered furniture to furnish any room of a home in
virtually any style, under such well-known brand names as
Henredon-Registered Trademark-, Drexel Heritage-Registered Trademark-,
Lexington-Registered Trademark-, Universal-Registered Trademark-,
Berkline-Registered Trademark- and BenchCraft-Registered Trademark-, and a wide
range of furniture accessories under the Maitland-Smith-TM- and La
Barge-Registered Trademark- brand names.

    DECORATIVE HOME FURNISHING FABRICS.  The Company designs, markets and
distributes over 25,000 decorative home furnishing fabrics, such as fabrics for
upholstery and draperies, under such well-known brand names as Robert Allen-TM-,
Sunbury-TM- and Beacon Hill-Registered Trademark-.

    The Company was incorporated under the laws of Delaware in May 1996 for the
purpose of acquiring the Home Furnishings Group (the "Predecessor") of Masco
Corporation ("Masco"). FURNISHINGS INTERNATIONAL INC., a Delaware corporation
("Holdings"), subscribed for 100 shares of the common stock, par value $.01 per
share, of the Company and is the Company's sole stockholder. On August 5, 1996,
Holdings acquired the Predecessor from Masco pursuant to an acquisition
agreement (the "Acquisition Agreement") for a purchase price of approximately
$1.1 billion and contributed substantially all of the businesses acquired to the
Company as common equity. The purchase price was financed by: (1) senior bank
facilities ($325.0 million); (2) $200.0 million principal amount 10 7/8 percent
senior subordinated notes due 2006 (the "Notes"); (3) equity contribution
($421.0 million); and (4) proceeds from sale of accounts receivable ($155.0
million). Prior to the closing of such transactions on August 5, 1996, the
Company conducted no business. References to the Company for periods prior to
August 5, 1996 refer, unless the context otherwise requires, to the Predecessor.

PRODUCTS

    The Company is the largest manufacturer and marketer of home furnishing
products. It believes it offers the most comprehensive product line in the home
furnishings industry, including (i) bedroom, dining room, living room, family
room and home office casegoods; (ii) stationary upholstered products such as
sofas, love seats, sectionals and chairs; (iii) upholstered recliners, motion
furniture and sleep sofas; (iv) occasional furniture such as home entertainment
centers, lamps, chairs, tables, mirrors and other accent items and (v)
decorative home furnishing fabrics.

    FINE FURNITURE

    The product category "Fine Furniture" includes wood and upholstered
residential furniture (other than "ready-to-assemble" products), as well as
occasional tables, decorative mirrors, lighting and other related furnishing
accessories. The Company designs, manufactures and markets a full range of
quality wood and upholstered furniture to furnish any room of a home in
virtually any style, under such well-known brand names as
Henredon-Registered Trademark-, Drexel Heritage-Registered Trademark-,
Lexington-Registered Trademark-, Universal-Registered Trademark-,
Berkline-Registered Trademark- and BenchCraft-Registered Trademark-, and a wide
range of furniture accessories under the Maitland-Smith-TM- and La
Barge-Registered Trademark- brand names. The Company offers these products
across all major price categories, from "promotional" to "premium," and in every
major style category, including American Traditional, Country, Eighteenth
Century, European Country, European Traditional, Casual, Contemporary, Home
Office, Youth and Oriental. By offering such a broad product line, the Company
can supply up to 75% of the product demands of most furniture

                                       3
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retailers, and more easily satisfy retailers who increasingly prefer to buy from
a smaller number of larger suppliers.

    The following table illustrates the product and price category coverage of
the Company's fine furniture brands. The residential furniture industry
generally classifies its products by several price categories ranging from
"promotional" to "premium." Products in successively higher price categories are
made using more expensive raw materials, have higher quality finishes, and often
involve higher labor costs.

<TABLE>
<CAPTION>
      PRICE
    CATEGORY                                    PRODUCT CATEGORY
                                         STATIONARY           MOTION/
                       CASEGOODS         UPHOLSTERY          RECLINER          OCCASIONAL
<S>                <C>                <C>                <C>                <C>
PREMIUM            Henredon-RTM-      Beacon Hill-RTM-                      Henredon-RTM-
                   Maitland-Smith-    Henredon-RTM-                         La Barge-RTM-
                   TM-                                                      Maitland-Smith-
                                                                            TM-
BEST               Drexel Heritage-   Beacon Hill-RTM-   Drexel Heritage-   Drexel Heritage-
                   RTM-               Drexel Heritage-   RTM-               RTM-
                   Henredon-RTM-      RTM-                                  Henredon-RTM-
                   Maitland-Smith-    Henredon-RTM-                         La Barge-RTM-
                   TM-                                                      Maitland-Smith-
                                                                            TM-
BETTER             Drexel Heritage-   BenchCraft-RTM-    BenchCraft-RTM-    Drexel Heritage-
                   RTM-               Drexel Heritage-   Berkline-RTM-      RTM-
                   Lexington-RTM-     RTM-               Drexel Heritage-   Lexington-RTM-
                   Universal-RTM-     Lexington-RTM-     RTM-
                                      Universal-RTM-
GOOD               Lexington-RTM-     BenchCraft-RTM-    BenchCraft-RTM-    Universal-RTM-
                   Universal-RTM-     Universal-RTM-     Berkline-RTM-
PROMOTIONAL        Universal-RTM-     BenchCraft-RTM-    BenchCraft-RTM-    Universal-RTM-
                                                         Berkline-RTM-
</TABLE>

    Shaded area indicates product category does not exist.

HENREDON-REGISTERED TRADEMARK-

    Henredon designs and manufactures wood, upholstered and occasional furniture
for the bedroom, dining room, living room, family room and home office. Its
products are in the "best" and "premium" price categories and are aimed at the
"replacement" market, where customers typically trade up in price and quality
and demand superior design, materials and craftsmanship. Product design and
development represent an important element of Henredon's success, and Henredon
is considered to be one of the premier names in design for furniture in the
high-end price categories. Henredon currently sells approximately 19
collections, and designs and develops approximately four new product collections
each year. Henredon's products cover all major style categories within the
high-end niche, including Eighteenth Century, European Traditional,
Transitional, Contemporary, Sophisticated Country and Casual. Since 1993,
Henredon has manufactured and marketed products for the Ralph Lauren Furniture
Collection-TM- under a special licensing relationship with the Ralph Lauren
organization. Henredon believes this line of high-end wood and upholstered
furniture is an excellent complement to its other product lines.

                                       4
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DREXEL HERITAGE-REGISTERED TRADEMARK-

    Drexel Heritage designs and manufactures wood, upholstered, motion and
occasional furniture for the bedroom, dining room, living room, family room and
home office in the "better" and "best" price categories. It currently produces
approximately 26 collections of wood and upholstered furniture. Approximately
four to six new collections are offered each year. Drexel Heritage's product
styles include American Traditional, Country, Eighteenth Century, European
Traditional, Contemporary and Transitional. Drexel Heritage also produces
furniture for sale to the hospitality and government markets.
LEXINGTON-REGISTERED TRADEMARK-

    Lexington designs and manufactures wood, upholstered and occasional
furniture for the bedroom, dining room, living room, family room and home office
in the "good" and "better" price categories. Lexington currently produces over
40 collections of furniture and designs and develops four to six new collections
each year. The Company believes that Lexington's merchandising and design teams,
which have received several industry awards for product design and marketing in
recent years, are among the industry's best. Product design and development
represent an integral part of Lexington's success. Lexington pioneered
"Lifestyle" and designer collections, and its collections currently include the
popular The World of Bob Timberlake-TM-, The Palmer Home Collection-TM-, Lynn
Hollyn at Home-TM-, Weekend Retreat-TM-, American Country West-TM-, Old Salem
Collection-TM-, DeCristofaro-TM-, Vestiges-TM- and Pacific Overtures-TM-. These
collections have become an important part of Lexington's offerings. Product
styles include Traditional, Eighteenth Century, Country and Casual.
UNIVERSAL-REGISTERED TRADEMARK-

    Universal's products include wood, upholstered and occasional furniture in
the "promotional," "good" and "better" price categories. Universal products are
manufactured in part in Asia, where the Company is the largest United States
residential furniture manufacturer, with access to a highly-skilled (in such
areas as intricate veneering and hand carving), low-cost work force, and to
scarce raw materials such as Chinese oak, wicker, rattan and certain exotic
woods. Universal currently sells approximately 20 collections of furniture,
including styles such as Eighteenth Century, Traditional, Transitional, Oriental
and Country, and introduces four to six new collections a year. Universal's
Alexander Julian Home Colours-TM- and American Generations-TM- collections are
among the industry's best sellers.
BERKLINE-REGISTERED TRADEMARK-

    Berkline designs and manufactures a wide range of recliners, motion
furniture and sleep sofas, primarily in the "good" and "better" price
categories. The Berkline-Registered Trademark- brand name is well known in the
rapidly growing market for upholstered modular and motion furniture and free
standing recliners. Berkline offers a wide range of styles, fabrics and leathers
for these products, as well as popular innovative features such as hidden cup
holders and built-in tables.
BENCHCRAFT-REGISTERED TRADEMARK-

    BenchCraft designs and manufactures a comprehensive line of upholstered
furniture, including stationary, motion, leather, wicker and rattan.
BenchCraft's products are in the "promotional," "good," and "better" price
categories and are marketed as fashionable, affordable furniture for "casual
living."

MAITLAND-SMITH-TM-

    Maitland-Smith designs and manufactures an innovative line of "best" and
"premium" hand-crafted, antique-inspired furniture, accessories and lighting,
utilizing a wide range of unique materials, including leather, fancy faced
veneer, stone and hand-painted metal.

                                       5
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LA BARGE-REGISTERED TRADEMARK-

    La Barge-Registered Trademark- designs and sells decorative mirrors, metal
and glass occasional tables, decorative lighting and related accessories under
three brand names: La Barge-Registered Trademark-, Marbro-Registered Trademark-
and Entree-TM-, in the "best" and "premium" price categories. La
Barge-Registered Trademark- designs its products, and contracts their
manufacture with established suppliers around the world who it believes can
produce high quality, specialty products with decorative style.
BEACON HILL-REGISTERED TRADEMARK-

    The Company's Beacon Hill Showrooms sell primarily "best" and "premium" fine
furniture products manufactured by the Company and third parties, including
certain products under the Beacon Hill-Registered Trademark- brand name,
exclusively to interior design professionals and their clients.

    DECORATIVE HOME FURNISHING FABRICS

    The Company designs, markets and distributes over 25,000 decorative home
furnishing fabrics, such as fabrics for upholstery and draperies, under such
well-known brand names as Robert Allen-TM-, Sunbury-TM- and Beacon
Hill-Registered Trademark-. The Company offers decorative home furnishing
fabrics (including trim and finished products) in each of the "good," "better,"
"best" and "premium" price categories. The following table illustrates the price
category coverage of the Company's decorative home furnishing fabric brands:

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PRICE CATEGORY                                 BRAND
<S>                                            <C>
Premium                                        Beacon Hill-Registered Trademark-
                                               Ramm, Son & Crocker-TM-

Best                                           Beacon Hill-Registered Trademark-
                                               Ramm, Son & Crocker-TM-
                                               Sunbury-TM-

Better                                         Ametex-TM-
                                               Robert Allen Total Home-TM-
                                               Sunbury-TM-

Good                                           Ametex-TM-
                                               American Town & Country-TM-
</TABLE>

ROBERT ALLEN-TM-

    Robert Allen's products include over 22,000 different SKU's of upholstery
fabrics, drapery fabrics, trim and finished products (bedspreads, comforters,
pillows and similar products), sourced from a variety of independent fabric
mills and manufacturers located around the world. Robert Allen offers products
in all price categories. Its American Town & Country-TM- fabrics, which are in
the "good" price category, are targeted at smaller upholstery and drapery shops.
Its Robert Allen Total Home-TM- fabrics, which are in the "better" price
category, are targeted at designer and specialty stores. Its Beacon
Hill-Registered Trademark- fabrics, which are in the "best" and "premium" price
categories, are targeted at upper-end interior designers.

AMETEX-TM-

    Ametex's products include a broad line of printed and woven fabrics in the
"good" and "better" price categories. Ametex converts fabrics from both its own
designs and those licensed from third parties, including designs based on the
Vatican Museum collection. Ametex also produces, to order, finished fabric
products such as bedding and draperies. Ametex U.K. produces a line of "better"
printed and woven

                                       6
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fabrics, which include many designs that are in the domestic Ametex line, as
well as designs that are made specifically for the European market.

SUNBURY-TM-

    Sunbury designs and weaves a line of proprietary decorative jacquard
upholstery fabrics for the furniture industry in the "better" and "best" price
categories. Fabrics are woven in traditional, transitional, contemporary,
sophisticated country and custom designs. Sunbury strives to produce fabrics
that allow furniture manufacturers to differentiate their products from those of
their competitors, rather than commodity fabric products. Most of Sunbury's
woven designs are protected by exclusive copyright, and all of its products are
woven to order.

RAMM, SON & CROCKER-TM-

    Ramm, Son & Crocker produces traditional furnishing fabrics in the "best"
and "premium" price categories. Its product line consists primarily of
decorative printed fabrics and, to a lesser extent, woven fabrics and wallpaper.
It owns a unique archive of approximately 17,000 documented 18th and 19th
Century designs, and also has exclusive United States distribution rights to
such major brands as Liberty of London, Zoffany, Pepe Penalver, Haas and Blue
Home.

DISTRIBUTION

    The Company distributes its fine furniture products through an extensive
worldwide distribution network that includes (i) more than 25,000 independent
retail locations, including national and regional chains, department stores,
specialty stores and more than 570 galleries within retail stores; (ii) more
than 90 independent dedicated stores exclusively selling Company products and
(iii) 14 Company operated Beacon Hill-Registered Trademark- decorator showrooms.
The Company also sells its fine furniture domestically and internationally to
the hospitality and government markets, and has recently begun offering product
information through non-traditional channels such as the Internet. The Company
distributes over 25,000 different decorative home furnishing fabrics through
numerous distribution channels, including the Beacon Hill-Registered Trademark-
showrooms, to an extensive customer base consisting of over 30,000 retailers,
decorators and designers worldwide. The Company also sells decorative home
furnishing fabrics to furniture manufacturers. The Company's extensive
distribution network provides limited dependence on any one customer. In 1996,
the Company's 20 largest customers represented only 18.5% of net sales, with no
single customer representing more than 3.0%. The Company believes it has more
active accounts than any other manufacturer in the furniture or home furnishings
industry.

    FINE FURNITURE

    The Company believes that it is the most comprehensive and complete resource
in the residential furniture industry, capable of supplying up to 75% of the
product demands of most furniture retailers, whether local, regional or national
in scope. This, in turn, enables the Company to secure additional display space
from retailers, who increasingly are relying on a smaller number of larger
suppliers. The Company sells its fine furniture products worldwide primarily
through approximately 580 commissioned independent representatives. The Company
offers substantial services to retailers to support their marketing efforts,
including national advertising, merchandising and display programs. The Company
also displays its fine furniture products at the semi-annual International Home
Furnishings Market in High Point, North Carolina.

                                       7
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    The following table illustrates the distribution of the Company's fine
furniture products by brand:

<TABLE>
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                                   DISTRIBUTION CHANNEL
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<S>                    <C>                    <C>                    <C>
     INDEPENDENT                                    DEDICATED              DESIGNER
      RETAILERS              GALLERIES               STORES                SHOWROOMS
---------------------  ---------------------  ---------------------  ---------------------
BenchCraft-Registered Trademark- Berkline-Registered Trademark- Drexel Beacon
Berkline-Registered Trademark- Drexel         Heritage-Registered Trademark- Hill-Registered Trademark-
Drexel                 Heritage-Registered Trademark-                Drexel
Heritage-Registered Trademark- Henredon-Registered Trademark-        Heritage-Registered Trademark-
Henredon-Registered Trademark- La                                    Henredon-Registered Trademark-
La                     Barge-Registered Trademark-                   La
Barge-Registered Trademark- Lexington-Registered Trademark-          Barge-Registered Trademark-
Lexington-Registered Trademark- Maitland-Smith-TM-                   Lexington-Registered Trademark-
Maitland-Smith-TM-                                                   Maitland-Smith-TM-
Universal-Registered Trademark-
</TABLE>

    Furniture retailers remain the most significant distribution channel in the
industry, and the Company is committed to maintaining these important
relationships. The Company's diverse product offerings and national distribution
enable it to effectively service national retailers such as Federated Department
Stores, Heilig-Meyers, J.C. Penney, Levitz, Montgomery Ward and Sears, and large
regional retailers such as Baers Furniture, Breunners, Homestead House, Kittles
Furniture and Wayside Furniture, as well as independent single store retailers
nationwide. As the furniture retailing industry consolidates, large retailers
are commanding an increasing presence, and management believes that the Company
is better positioned than its competitors to meet their needs.

    The Company has developed gallery programs for its
Henredon-Registered Trademark-, Drexel Heritage-Registered Trademark-,
Lexington-Registered Trademark-, Berkline-Registered Trademark-,
Maitland-Smith-TM- and La Barge-Registered Trademark- product lines with more
than 570 retailers. Galleries are dedicated space within a larger retail store
that display products in complete and fully accessorized room settings instead
of as individual pieces. This presentation format encourages consumers to
purchase an entire room of furniture instead of individual pieces from different
manufacturers. The Company believes that stores with galleries result in higher
sales per square foot than furniture stores without galleries.

    The Company also sells its products through dedicated stores that
exclusively offer the Company's products. Drexel Heritage-Registered Trademark-
products are sold through Drexel Heritage Showcase Stores and the newly
formatted Home Inspirations Stores, a group of more than 90 independently owned
and operated stores which sell Drexel Heritage-Registered Trademark- products
exclusively in a gallery format. Each store employs a consistent, but not
identical, lifestyle concept, with products displayed in complete rooms and
eclectic settings, which include furnishings, wall decor, window treatments and
accessories. The Company also operates seven dedicated retail stores for its
Universal-Registered Trademark- products in Asia and owns and operates a
Maitland-Smith-TM-retail store in Hong Kong.

    The Company operates the Beacon Hill-Registered Trademark- Showrooms, a
national network of 14 showrooms for the sale of primarily "best" and "premium"
price category products to interior design professionals and their clients. The
showrooms are located in Atlanta, Boston, Chicago, Cleveland, Dallas, Dania
(Florida), Houston, Los Angeles, New York, Philadelphia, San Francisco, Seattle,
Troy (Michigan) and Washington, D.C. Approximately 50% of Beacon Hill's sales
are of the Company's fine furniture products, primarily
Henredon-Registered Trademark-, Maitland-Smith-TM-, Drexel
Heritage-Registered Trademark- and Lexington-Registered Trademark-. In addition
to Company products, Beacon Hill offers products manufactured by such
well-known, high-end furniture manufacturers as Kindel Furniture and John
Widdicomb Co. The Beacon Hill Showrooms feature Robert Allen's Beacon
Hill-Registered Trademark- fabric line, which is produced exclusively for sale
in the Company's showrooms.

                                       8
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    DECORATIVE HOME FURNISHING FABRICS

    The Company distributes its Robert Allen-TM- products through numerous
distribution channels, including its own showroom and approximately 54
commissioned, independent representatives, to over 30,000 retailers, decorators
and designers worldwide. The Company sells its Ametex-TM- products through
approximately 26 commissioned independent representatives, primarily to
furniture manufacturers, bedding and drapery manufacturers and contract
purchasing agents. Sunbury-TM- products are sold to furniture manufacturers and
distributors of decorative home furnishing fabrics in the United States and
Canada by eight commissioned sales representatives. The Company's decorative
home furnishing fabrics are also sold to decorators and designers through the
Company's Beacon Hill-Registered Trademark- showrooms, which offer Robert
Allen-TM- and Ramm, Son & Crocker-TM- fabrics on a commission basis.

MARKETING AND ADVERTISING

    In partnership with its selected retailers, the Company works to strengthen
its brand equity with consumers and increase their purchases of Company
products. These consumers are carefully profiled through marketing research and
are then targeted through advertising programs on the national and local levels,
comprehensive cataloging, education through focused marketing events and
selected promotional programs.

    Retailers are also carefully selected to market the Company's products to a
wide range of consumers. These retailers, in turn, are supported with innovative
training for their sales people, design assistance for their retail displays of
Company products, noted speakers and planning support for their focused
marketing events, visually stimulating point of purchase materials, catalogs and
sales materials, direct communications linkage to the manufacturers for timely
stock and status information and promotional support.

    Architects, designers and decorators who specify and sell Company products
are targeted through trade publications such as INTERIOR DESIGN, and receive
exclusive sales support through Beacon Hill Showrooms. Value added services such
as continuing education and special events with shelter publications draw new
designers into the showrooms and build designer loyalty.

    Contract, government and hospitality specifiers and purchasers receive
specialized services through the Company's contract division. A global sales and
marketing network is well-supported from initial presentation through project
completion, with extensive cataloging, on-line and customized products, and
specialized delivery services.

    The Company builds brand equity and increases consumer awareness through
editorial coverage and advertising in leading shelter magazines. Targeting
specific consumer demographics, advertisements are placed in publications which
include ARCHITECTURAL DIGEST, COUNTRY HOME, COUNTRY LIVING, HOUSE BEAUTIFUL,
HOUSE & GARDEN, MARTHA STEWART LIVING, METROPOLITAN HOME, TRADITIONAL HOME and
VICTORIA. The large combined volume of advertising from all product lines gives
the Company leverage in purchasing advertising. Innovative products continue to
draw the attention of editors for major shelter magazines. Their valuable
editorial coverage favorably positions products with consumers at no cost to the
Company.

    Responding to consumers' desire for home furnishings information, the
Company has created interactive sites on the Internet which allow users to
browse its product lines, learn more about the Company and be directed to local
retailers.

MANUFACTURING

    The Company believes that it has a modern and efficient manufacturing base
that will enable it to meet the manufacturing requirements of its business
strategy over the next several years without the necessity of making significant
additional capital expenditures to expand capacity.

                                       9
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    Management has adopted a continuous improvement philosophy with particular
emphasis on improving customer and consumer satisfaction. Pursuant to this
continuous improvement philosophy, the Company is committed to achieving
significant improvements in productivity, quality and service levels to benefit
its retailer partners and consumers.

    Currently, the Company manufactures its products worldwide through 89
manufacturing and distribution facilities, with more than 24 million square
feet, including over 20 million square feet of production space. These
facilities are strategically located to efficiently supply the Company's
worldwide distribution network. The Company's facilities have benefited from
investment in state-of-the-art equipment and other capital expenditures in
excess of $270.0 million over the past five years. The Company is also beginning
to realize the benefits from its continuous improvement programs directed at
manufacturing methods and process improvements incorporating just-in-time
logistics, cellular concepts, quality circles, reduced cycle times, laser
cutting methodologies, computerization and related modern production methods.

    The Company utilizes certain specialized facilities dedicated to
manufacturing a limited number of products, as well as sub-contracted
manufacturing facilities. The Company also promotes inter-company sourcing of
products and components. These steps have helped the Company balance its global
manufacturing capacity and increase its operating efficiency.

    The Company's fine furniture lines are produced in domestic manufacturing
and distribution facilities located in North Carolina, Tennessee, Michigan,
Massachusetts, South Carolina, Mississippi, Georgia, Illinois, and California,
and internationally in facilities located in Taiwan, Singapore, Malaysia, China,
Indonesia, Hong Kong, Thailand, the United Kingdom, Canada, Sweden, Japan and
Germany.

    With manufacturing and distribution facilities encompassing over five
million square feet, the Company is the largest U.S. furniture manufacturer in
Asia, and this provides it with access to a highly-skilled (in such areas as
intricate veneering and hand carving), low-cost work force, and to scarce raw
materials such as Chinese oak, exotic woods, wicker and rattan. Five of the
Asian facilities with over 1.0 million square feet have been built or renovated
in the last five years and all are equipped with up-to-date manufacturing
technology. In addition, the Asian manufacturing facilities have developed a
process to use readily available rubber tree wood, a fast-growing wood resource.

    Substantially all of the Company's Robert Allen-TM- and Ramm, Son &
Crocker-TM- decorative home furnishing fabrics are manufactured for the Company
by third parties.

RAW MATERIALS AND SUPPLIERS

    The principal raw materials used by the Company in the manufacture of its
products include: lumber, finishing products (stains, sealants and lacquers),
glue, steel, leather, cotton, wool, synthetic and vinyl fabrics, polyester
batting and polyurethane foam. The various types of wood used in the Company's
products are purchased both domestically and internationally. Management
believes that its supply sources of those materials are adequate. The Company
has experienced no significant problems in supplying its operations. Although
the Company has ongoing relationships with certain suppliers of raw materials,
the Company believes that there are a number of reliable vendors available
contributing to its ability to obtain competitive pricing for raw materials. Raw
material prices fluctuate over time depending on supply, demand and other
factors. Increases in raw material prices may have a short-term impact on the
Company's financial performance. Under the provisions of the Clean Air Act of
1970, as amended, (the "CAA"), in December 1995, the United States Environmental
Protection Agency promulgated hazardous air emission standards applicable to the
wood furniture industry, known as the NESHAPs. The furniture industry and its
suppliers are attempting to develop water-based and other forms of compliant
finishing material to replace commonly-used, organic-based finishes which are a
major source of regulated emissions. The Company cannot at this time estimate
how these new standards will affect the Company. See "--Environmental
Regulations."

                                       10
<PAGE>
COMPETITION

    The furniture manufacturing industry is highly competitive and includes a
large number of domestic and foreign manufacturers. The industry is highly
fragmented, and no one company is dominant. Competition is generally based on
product quality, brand name recognition, price and service. The Company's
furniture products compete with products made by a number of furniture
manufacturers, including Furniture Brands International, Inc., La-Z-Boy Chair
Company, Klaussner Furniture Industries Inc., LADD Furniture, Inc. and Bassett
Furniture Industries, Inc., as well as numerous smaller producers. In decorative
home furnishing fabrics, competition is based upon design, price, style and
quality, and competitors include Schumacher/Waverly, Richloom and Mastercraft.

EMPLOYEES

    As of December 31, 1996, the Company employed approximately 33,900 persons.
Virtually all are non-union, although approximately 30%, most of whom are
employed in Asia, are subject to certain government-mandated terms of
employment. The Company believes it has good relations with its employees.

INTELLECTUAL PROPERTY

    The Company owns a number of trademarks, trade names, copyrights, licenses
and patents. The Company believes that many of its trademarks and trade names
are important to the Company because they are well recognized and associated
with quality and value in the home furnishings industry. The Company
aggressively protects its major trademarks, trade names and copyrights.

ENVIRONMENTAL REGULATIONS

    The Company is subject to a wide range of federal, state and local
environmental laws and regulations relating to the protection of the
environment, worker health and safety and the emission, discharge, storage,
treatment and disposal of hazardous materials. These laws include the CAA, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act,
and the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund" or "CERCLA"). The Company believes that it is in material
compliance with applicable federal, state, local and foreign environmental
regulations. Compliance with these regulations has not in the past had any
material effect on the Company's earnings, capital expenditures or competitive
position; however, the effect of such compliance on the Company in the future
cannot be determined. The Company does not anticipate making any material
capital expenditures for environmental control facilities in the foreseeable
future.

    Under the provisions of the CAA, in December 1995, the United States
Environmental Protection Agency promulgated hazardous air emission standards for
the wood furniture industry. These regulations, known as the NESHAPs, will
require the Company to reduce emissions of certain hazardous air pollutants by
November 1997. In order to comply with NESHAPs, the Company intends to
reformulate certain furniture finishes or institute process changes. The
furniture industry and its suppliers are attempting to develop water-based and
other forms of compliant finishing materials to replace commonly used, organic-
based finishes which are a major source of regulated emissions. The Company
cannot at this time estimate the impact of these new standards or other future
regulations on the Company's operations and future capital expenditure
requirements, or the cost of compliance. There can be no assurance that
reformulation of finishes or process changes will not adversely affect the
quality or durability of certain of the Company's products. Furthermore, if the
Company cannot satisfy applicable regulatory requirements following
reformulation or process changes, the Company likely will be required to install
air pollution control technology at certain of its facilities. However, while
there can be no assurance, the Company does not believe at this time that its
future financial performance or the quality or the durability of its products is
likely to be materially adversely impacted as a result of these regulations.

                                       11
<PAGE>
    As the result of historical operations, spills and releases of hazardous
substances may have occurred at several of the Company's facilities. These
releases may warrant further investigation, including soil and groundwater
sampling. If hazardous substances are detected in the soil or groundwater, the
Company would be required under CERCLA or its state analogues to incur expenses
relating to the investigation and remediation of these releases. The Company
does not believe that the costs associated with investigating or remediating
these releases will have a material adverse effect on the Company's financial
condition, operating expenses or earnings. Furthermore, pursuant to the
Acquisition Agreement, Masco will indemnify the Company for certain liabilities
in excess of specified amounts relating to the existence of hazardous substances
at certain of the facilities.

    The Company has been named as a potentially responsible party at a total of
seven non-owned contaminated sites, including Superfund sites. The Company
presently believes that any potential liability relating to these sites will not
have a material adverse effect on the Company's earnings, capital expenditures
or competitive position. Actual resolution of these matters, however, could
differ from management's estimates and assumptions.

OTHER GOVERNMENT REGULATIONS

    The Company's operations must meet extensive federal, state, and local
regulatory standards in the areas of health and safety. Historically, these
standards have not had any material adverse effect on the Company's sales or
operations.

BACKLOG

    The combined backlog of the Company as of December 31, 1996 aggregated
approximately $315 million, compared to approximately $314 million as of
December 31, 1995.

                                       12
<PAGE>
ITEM 2. PROPERTIES

    The following list includes the Company's principal manufacturing facilities
by location:

<TABLE>
<S>                       <C>
California                City of Industry and Whittier
Georgia                   Atlanta
Illinois                  Alsip
Massachusetts             Holyoke
Michigan                  Holland
Mississippi               Baldwin, Blue Mountain, New Albany and Ripley(2)
North Carolina            Black Mountain, Drexel, Goldsboro, Hickory(2), High Point(3),
                          Hildebran(2), Lexington(5), Linwood, Longview, Marion(2),
                          Mocksville, Morganton(5), Mt. Airy, Shelby, Spruce Pine(2) and
                          Whittier
Pennsylvania              Sunbury
South Carolina            Kingstree
Tennessee                 Lenoir City, Livingston, Morristown(6) and Rockwood
Canada                    Mississauga, Ontario; and Ville D'Anjou, Quebec
China (P.R.C.)            Fuzhou, Guang Dong, Guangzhou, Tianjin and Xian
Germany                   Tangermunde
Great Britain             Silsden and Warminster, England; and Aberdare, Wales
Indonesia                 Semarang
Malaysia                  Johor and Kedah(2)
Philippines               Cebu
Singapore                 Singapore(2)
Sweden                    Skene
Taiwan                    Kaohsiung, Ping Tung and Tao Yuan Hsian
</TABLE>

    Note: The parentheticals denote multiple facilities in that location.

    As of December 31, 1996, the Company operated manufacturing and distribution
facilities, showrooms, and retail and office space with a total area of
approximately 26.4 million square feet. The Company owns approximately 20.0
million square feet and leases approximately 6.4 million square feet.

    The Company's corporate headquarters are located in Thomasville, North
Carolina and are owned by the Company.

    The Company's buildings, machinery and equipment have been generally
well-maintained, are in good operating condition, and are adequate for current
production requirements.

ITEM 3. LEGAL PROCEEDINGS

    From time to time, the Company is a party to various legal actions in the
normal course of its business. The Company is not currently a party to any
litigation which, if adversely determined, would have a material adverse effect
on the liquidity or results of operations of the Company.

                                       13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    Holdings, the sole shareholder of the Company, executed a consent on October
31, 1996, whereby Holdings elected Martin D. Walker as a Director of the
Company.

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

    Information contained herein contains "forward-looking statements" which can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other similar terminology, or by discussions of strategy. The Company's actual
results could differ materially from those anticipated by any such
foward-looking statements as a result of certain factors, including matters
discussed herein and factors affecting the home furnishings industry in general,
fluctuations in the price and supply of raw materials, competition and the
dependence of the Company on its managerial, manufacturing and sales and
marketing personnel.

                                       14
<PAGE>
                                    PART II

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

    There is no established trading market for the common stock of the Company.

    As of December 31, 1996, Holdings was the only holder of the common stock of
the Company. Holdings is a privately owned company, the capital stock of which
is held by members of management, Masco, 399 Ventures, Inc. and other private
investors.

    There have been no cash dividends declared on the common stock of the
Company.

                                       15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

                            SELECTED FINANCIAL DATA
                            (DOLLARS IN MILLIONS)(1)

<TABLE>
<CAPTION>
                                                                            PREDECESSOR                         COMPANY
                                                       -----------------------------------------------------  -----------
                                                                                                    1/1/96      8/6/96
                                                                                                      TO          TO
                                                         1992       1993       1994       1995      8/5/96     12/31/96
                                                       ---------  ---------  ---------  ---------  ---------  -----------
<S>                                                    <C>        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................  $ 1,589.6  $ 1,763.5  $ 1,897.5  $ 1,992.6  $ 1,147.9   $   857.5
Cost of sales                                            1,192.2    1,326.8    1,434.0    1,501.0      870.7       638.2
                                                       ---------  ---------  ---------  ---------  ---------  -----------
  Gross profit.......................................      397.4      436.7      463.5      491.6      277.2       219.3
                                                       ---------  ---------  ---------  ---------  ---------  -----------
Selling, general, and administrative(2)..............      334.8      368.5      386.8      397.8      222.2       144.5
                                                       ---------  ---------  ---------  ---------  ---------  -----------
  Operating profit...................................       62.6       68.2       76.7       93.8       55.0        74.8
                                                       ---------  ---------  ---------  ---------  ---------  -----------
Interest expense(3)..................................       84.1       82.7       87.1       94.8       52.7        20.0
Other, net(4)........................................        2.6        3.2        7.3        8.3        3.5         6.7
                                                       ---------  ---------  ---------  ---------  ---------  -----------
  Income (loss) before income taxes..................      (24.1)     (17.7)     (17.7)      (9.3)      (1.2)       48.1
Income taxes.........................................        1.0        8.0        6.1        7.0        6.8        16.8
                                                       ---------  ---------  ---------  ---------  ---------  -----------
  Net income (loss)..................................  $   (25.1) $   (25.7) $   (23.8) $   (16.3) $    (8.0)  $    31.3
                                                       ---------  ---------  ---------  ---------  ---------  -----------
                                                       ---------  ---------  ---------  ---------  ---------  -----------
OTHER FINANCIAL DATA:
Gross profit margin..................................       25.0%      24.8%      24.4%      24.7%      24.2%       25.6%
EBITDA(5)............................................  $   120.5  $   132.6  $   139.5  $   160.1  $    91.8   $    87.7
EBITDA margin........................................        7.5%       7.5%       7.4%       8.0%       8.0%       10.2%
Depreciation & amortization..........................  $    60.5  $    66.8  $    66.4  $    67.9  $    39.3   $    15.4
Cash provided by (used for) operating activities.....      (56.2)     (42.9)      (0.7)      34.3       39.7       105.8
Cash (used for) investing activities.................      (51.1)     (77.9)     (53.1)     (57.5)     (16.4)     (705.5)
Cash provided by (used for) financing activities.....      106.3      129.9       53.1       15.8      (21.9)      622.1
BALANCE SHEET DATA:
Working capital(6)...................................  $   669.9  $   724.0  $   743.3  $   749.1     --       $   496.1
Total assets.........................................    1,743.7    1,853.5    1,970.5    1,903.9     --         1,190.7
Total debt...........................................      124.5       61.9       45.2       27.2     --           444.6
Total liabilities....................................      343.0      295.9      274.4      282.9     --           737.4
Masco net investment & advances(7)...................    1,391.7    1,557.6    1,633.1    1,621.0     --          --
Stockholder's equity.................................     --         --         --         --         --           453.4
</TABLE>

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

(1) Results include The Berkline Corporation, which was acquired in April 1994
    in a pooling-of-interests transaction. The financial information of the
    Predecessor includes certain businesses of Holdings.

(2) Included in selling, general and administrative expenses of the Predecessor
    are general corporate expenses which represent certain corporate staff
    support and administrative services provided by Masco. These expenses, which
    were charged to the Predecessor by Masco, consisted of $9.8, $10.5, $12.7
    and $16.0 in 1992 through 1995, respectively, and $9.4 for the period
    January 1, 1996 to August 5, 1996.

(3) Interest expense of the Predecessor consists primarily of interest on
    advances from Masco.

(4) Other, net, includes receivables securitization costs of $4.4 and
    amortization of deferred charges of $1.7 for the period August 6, 1996 to
    December 31, 1996.

(5) EBITDA is defined as net income (loss) before interest expense, income
    taxes, depreciation and amortization expense (including amortization of
    sample book expenditures) and certain other non-cash charges. Such other
    non-cash charges were $0, $0.7, $3.8, $6.7 for 1992 through 1995,
    respectively, and were $1.0 for the period January 1, 1996 to August 5, 1996
    and $(0.2) for the period August 6, 1996 to December 31, 1996. The Company
    believes that EBITDA provides additional information for determining its
    ability to meet debt service requirements. EBITDA does not represent and
    should not be considered as an alternative to net income or cash flow from
    operations as determined by generally accepted accounting principles, and
    EBITDA does not necessarily indicate whether cash flow will be sufficient
    for cash requirements. Not every company calculates EBITDA in exactly the
    same fashion. As a result, EBITDA as presented above may not necessarily be
    comparable to similarly titled measures of other companies.

(6) Working capital is defined as total current assets (excluding cash and cash
    equivalents) less total current liabilities (excluding current maturities of
    long-term debt).

(7) Advances from Masco were $943.4, $1,091.0, $1,192.0, and $1,195.0 at
    December 31, 1992 through 1995, respectively.

                                       16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

GENERAL

    The Company is the largest manufacturer and marketer of home furnishing
products. Approximately 86% of net sales are derived from residential furniture,
which includes decorative accessories ("fine furniture"). Decorative home
furnishing fabrics accounted for the remaining 14% of net sales.

    The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.

THE ACQUISITION TRANSACTIONS

    The Company was formed in May 1996 for the purpose of acquiring the
Predecessor. On August 5, 1996, Holdings acquired the Predecessor from Masco for
approximately $1.1 billion and contributed substantially all of the businesses
acquired to the Company. The purchase price of $1.1 billion was financed by: (i)
senior bank facilities ($325.0 million); (ii) senior subordinated notes ($200.0
million); (iii) equity contribution ($421.0 million); and (iv) proceeds from
sale of accounts receivable ($155.0 million).

    The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was allocated to the acquired assets and
assumed liabilities based upon estimated fair values as of the closing date of
the acquisition. This allocation resulted in a reduction of non-current assets,
principally property and equipment.

    As a result of the acquisition and new basis of accounting, the Company's
financial statements for the periods subsequent to the acquisition are not
comparable to the Predecessor's financial statements for the periods prior to
the acquisition.

    The unusual tax rate for periods prior to August 6, 1996 is primarily the
result of state and local taxes and taxes on foreign earnings calculated at
rates in excess of U.S. federal statutory rates.

RESTRUCTURING INITIATIVES AND INVENTORY REDUCTION

    In connection with the acquisition, management has developed a restructuring
plan. The plan was finalized in December 1996 upon approval by the Company's
Board of Directors and implementation is expected to be completed in 1997. As
permitted by Emerging Issues Task Force ("EITF") Issue 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination," the total cost
of the plan, which management estimates to be approximately $28.3 million, was
included as part of the purchase price allocation. The Company does not expect
any significant impact on its liquidity as a result of this plan.

    The restructuring plan provides for severance costs associated with the
closure of various facilities, costs associated with the relocation of equipment
and office facilities and other closure related expenses.

    Management has also initiated a plan to reduce inventory levels to generate
cash flow and reduce carrying costs. At this time, management does not believe
this inventory reduction program will have a material adverse effect on future
results of operations or the financial condition of the Company.

                                       17
<PAGE>
RESULTS OF OPERATIONS

    For the purposes of the discussions that follow, the results of operations
for the period August 6, 1996 through December 31, 1996 have been combined with
the results of the Predecessor.

COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995

    Net sales were $2,005.4 million for the year ended December 31, 1996, an
increase of $12.8 million, or 0.6%, from $1,992.6 million for the year ended
December 31, 1995. Net sales of fine furniture increased 0.7% to $1,733.3
million for the year ended December 31, 1996 from $1,721.2 million for the year
ended December 31, 1995. Net sales of fine furniture grew primarily due to
recent product introductions and modest increased industry demand. Net sales of
decorative home furnishings fabrics increased 0.3% to $272.1 million for the
year ended December 31, 1996 from $271.4 million for the year ended December 31,
1995, primarily due to strength in the woven segment of the market and improved
business conditions.

    Gross profit was $496.5 million for the year ended December 31, 1996, an
increase of $4.9 million, or 1.0%, from $491.6 million for the comparable period
of 1995. This increase was primarily attributable to the impact of a modest
increase in sales and the gross profit margin. Gross profit margin improved from
August 6, 1996 to December 31, 1996 primarily due to the reduced depreciation
expense which resulted from the reduction in carrying value of depreciable fixed
assets due to the allocation of purchase price. This improvement was offset by
decreases in the gross profit margin earlier in 1996, which were primarily the
result of temporary plant closings due to bad weather and start-up costs related
to substantial new product introductions.

    Selling, general and administrative expenses were $366.7 million for the
year ended December 31, 1996, a decrease of $31.1 million, or 7.8%, from $397.8
million for the comparable period of 1995. As a percentage of net sales,
selling, general and administrative expenses improved to 18.3% for the year
ended December 31, 1996 from 20.0% for the year ended December 31, 1995. Selling
expense was 11.0% of net sales as compared to 11.8% for 1995, and general and
administrative expenses decreased to 7.3% of net sales from 8.2% in 1995. The
decrease in general and administrative expenses reflects the benefits of the
Company's cost reduction initiatives implemented in late 1995, combined with the
net decrease in general and administrative expenses incurred since August 6,
1996 as a stand alone company when compared to the management fees previously
charged to the Company by Masco.

    Operating profit increased to $129.8 million for the year ended December 31,
1996, an increase of $36.0 million, or 38.4%, from $93.8 million for the
comparable period of 1995. As a percentage of net sales, operating profit
increased to 6.5% for the year ended December 31, 1996 from 4.7% for the
comparable period of 1995. This improvement was achieved primarily for the
reasons discussed above.

    Interest expense was $72.6 million for the year ended December 31, 1996, a
decrease of $22.2 million, or 23.4%, from the year ended December 31, 1995. This
decrease was a result of lower average debt outstanding during the period from
August 6, 1996 to December 31, 1996. Proceeds from debt issued in connection
with the acquisition were used to repay, in part, the funds previously advanced
by Masco. The decrease in interest expense as a result of the lower average debt
outstanding was partially offset by higher average borrowing rates from August
6, 1996 to December 31, 1996.

COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994

    Net sales were $1,992.6 million for the twelve months ended December 31,
1995, an increase of $95.1 million, or 5.0%, from $1,897.5 million for the year
ended December 31, 1994. Net sales of fine furniture increased 6.8% to $1,721.2
million in 1995 from $1,611.5 million in 1994. This increase in net sales of
fine furniture was primarily the result of the success of the "Lifestyles"
collections such as The World of Bob Timberlake-TM-, increased sales of motion
furniture products and increased sales of decorative accessories. Net sales of
decorative home furnishing fabrics decreased 5.1% to $271.4 million in 1995 from
$285.9

                                       18
<PAGE>
million in 1994. This decline was primarily the result of softness in the
printed fabrics market and management's focus on reducing the number of lower
margin product lines.

    Gross profit was $491.6 million for the year ended December 31, 1995, an
increase of $28.1 million, or 6.1%, from $463.5 million for the year ended
December 31, 1994, primarily due to an increase in net sales and gross profit
margin. Gross profit margin increased to 24.7% in 1995 from 24.4% in the prior
year. This increase was primarily due to continued rationalization of
manufacturing facilities that resulted in greater capacity utilization,
increased manufacturing efficiency due to cost reduction programs, continued
rationalization of raw materials purchasing and personnel reductions. The
Company also benefited from the elimination of certain low margin product lines.

    Selling, general and administrative expenses were $397.8 million for the
year ended December 31, 1995, an increase of $11.0 million, or 2.8%, from $386.8
million for the year ended December 31, 1994. As a percentage of net sales,
selling, general and administrative expenses decreased slightly to 20.0% for the
year ended December 31, 1995 from 20.4% for the year ended December 31, 1994.
Selling expense was 11.8% of net sales as compared to 11.6% for 1994, and
general and administrative expenses decreased to 8.2% of net sales from 8.8% for
1994. Included in selling, general and administrative expenses were general
corporate expenses which represent certain corporate staff support and
administrative services provided by Masco.

    Operating profit increased to $93.8 million for the year ended December 31,
1995, an increase of $17.1 million, or 22.3%, from $76.7 million for the year
ended December 31, 1994. As a percentage of net sales, operating profit
increased to 4.7% for the year ended December 31, 1995 from 4.0% for the same
period in 1994. This improvement was achieved primarily for the reasons
discussed above.

    Interest expense was $94.8 million for the year ended December 31, 1995, an
increase of $7.7 million or 8.9% from the year ended December 31, 1994. This
increase was a result of higher average interest rates during 1995.

PRO FORMA RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                         YEARS ENDED(A)
                                                                   --------------------------
<S>                                                                <C>           <C>
                                                                     DEC. 31,      DEC. 31,
                                                                       1996          1995
                                                                   ------------  ------------
Net sales........................................................   $  2,005.4    $  1,975.1
Gross profit.....................................................        502.0         496.5
Operating profit.................................................        147.9         125.2
Net income.......................................................         48.4          28.3
</TABLE>

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

(a) The Note to Financial Statements captioned "Pro Forma Supplementary Data" as
set forth in Item 8 of this report should be read in conjunction with this
information.

    On a pro forma basis for the year ended December 31, 1996 (after giving
effect to the acquisition transactions as if they had occurred on January 1,
1995), the Company's operating income was $147.9 million, an increase of $22.7
million, or 18.1%, from pro forma operating income of $125.2 million for the
comparable period of 1995. The Company's net income was $48.4 million, an
increase of $20.1 million or 71% from pro forma net income of $28.3 million for
the comparable period of 1995. This increase is primarily attributable to
increased sales, reduced interest expense due to repayments of long term debt,
and reductions, since August 5, 1996, in actual selling, general and
administrative expenses resulting from reductions in corporate overhead expenses
associated with the acquisition and the elimination of certain marketing and
consulting arrangements during 1996. Had the reductions in corporate overhead
expenses resulting from the acquisition been in effect for the entire year ended
December 31, 1996, pro forma EBITDA would have increased by $4.3 million to
$182.8 million. There is no assurance that the Company will actually realize
such savings in any future periods.

                                       19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

    The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in
connection with the transactions, working capital needs and the funding of
capital expenditures.

    Principal and interest payments under the Company's long-term debt
arrangements represent significant liquidity requirements for the Company. At
December 31, 1996, the maturities of long-term debt during each of the next five
years were approximately as follows: 1997-$19.0 million; 1998-$18.6 million;
1999-$16.9 million; 2000-$17.9 million; 2001-$27.7 million; thereafter $344.6
million. During October 1996, the Company purchased an interest rate collar
resulting in $250 million of the Company's long term debt being subject to an
interest rate ceiling of 8.0% and floor of 5.45%.

    The Company made capital expenditures of $30.3 million for the year ended
December 31, 1996. The Company believes that as a result of the availability of
excess capacity in its manufacturing facilities, no significant additional
capital expenditures will be required to expand capacity. The Company's ability
to make capital expenditures is subject to certain restrictions under the
Company's long-term debt arrangements.

    The Company's principal source of cash to fund its liquidity needs is its
net cash from operating activities and availability of borrowings under its
revolving credit facility. Net cash from operating activities for the year ended
December 31, 1996 was $139.5 million, an increase of $105.2 million from $34.3
million in the comparable period of 1995, primarily as a result of increases in
earnings and decreases in working capital.

    As of December 31, 1996, the amount available under the Company's revolving
credit facility was $150 million (less the face amount of existing letters of
credit of $11.4 million) and no amounts were outstanding. Amounts available
under the revolving credit facility may be used for working capital and general
corporate purposes (including up to $50.0 million for letters of credit),
subject to certain limitations under the Company's long-term debt arrangements.
The Company believes that cash generated from operations, together with the
amounts available under the revolving credit facility, will be adequate to meet
its debt service requirements, capital expenditures and working capital needs
for the foreseeable future, although no assurance can be given in this regard.

    In connection with the issuance of the Notes, the Company's domestic
operating subsidiaries fully and unconditionally guarantee the Company's
performance under the Notes on a joint and several basis. There are no
restrictions under the Company's financing arrangements on the ability of the
Company's domestic operating subsidiaries to distribute funds to the Company in
the form of cash dividends, loans or advances.

INTERNATIONAL OPERATIONS

    The Company conducts operations in several foreign countries including
Canada, Taiwan, Singapore, the Philippines, China, Malaysia, Indonesia, Thailand
and several European countries.

    The Company's international operations may be subject to volatility because
of currency fluctuations, inflation and changes in political and economic
conditions in these countries. Most of the revenues and costs and expenses of
the Company's operations in these countries are denominated in the local
currencies. The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency, although the dollar would be used if any of these countries were
deemed hyperinflationary in accordance with Statement of Financial Accounting
Standards No. 52.

    Financial information concerning the Company's export sales and foreign
operations, including the net sales, operating profit and assets which are
attributable to the Company's operations in the United States and in foreign
countries, are set forth in Item 8 of this Report in the Notes to Financial
Statements captioned "Geographic Information."

                                       20
<PAGE>
INFLATION

    The Company does not believe that inflation has had a material impact on its
financial position or results of operations during the periods covered by the
Financial Statements and the related notes thereto included herein.

SEASONALITY

    The Company does not believe that its results of operations fluctuate
materially due to seasonality.

                                       21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.:

We have audited the accompanying consolidated balance sheet of LIFESTYLE
FURNISHINGS INTERNATIONAL LTD. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations and cash flows for the period from
August 6, 1996 to December 31, 1996. We have also audited the combined balance
sheet of the Masco Home Furnishings Group (certain subsidiaries of Masco
Corporation, as described in Note 2, and the Company's predecessor) as of
December 31, 1995, and the related combined statements of operations and cash
flows for the period from January 1, 1996 to August 5, 1996 and the years ended
December 31, 1995 and 1994. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

The combined financial statements for the periods ended prior to August 6, 1996
do not reflect the new basis of accounting established by the acquisition of the
Masco Home Furnishings Group as described in Note 1, and are presented on the
historical cost basis existing prior to the acquisition period.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LIFESTYLE
FURNISHINGS INTERNATIONAL LTD. and subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the period
from August 6, 1996 to December 31, 1996, and the combined financial position of
the Masco Home Furnishings Group as of December 31, 1995, and the combined
results of their operations and their cash flows for the period from January 1,
1996 to August 5, 1996 and the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.

Coopers & Lybrand L.L.P.
Greensboro, North Carolina
February 18, 1997

                                       22
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                                 BALANCE SHEETS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       CONSOLIDATED    COMBINED
                                                                                         COMPANY     PREDECESSOR
                                                                                       ------------  ------------
                                                                                       DECEMBER 31,  DECEMBER 31,
                                                                                           1996          1995
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                                     ASSETS
Current assets:
  Cash and cash investments..........................................................   $   22,400    $   17,310
  Trade receivables..................................................................       81,810       298,970
  Investment in Receivables Trust....................................................       51,120        --
  Other receivables..................................................................       46,280        26,450
  Inventories........................................................................      526,300       559,940
  Prepaid expenses...................................................................       22,690        26,370
  Deferred income taxes..............................................................       14,080        17,000
                                                                                       ------------  ------------
      Total current assets...........................................................      764,680       946,040

Property and equipment, net..........................................................      349,330       484,100
Excess of cost over acquired net assets..............................................       --           402,280
Notes receivable.....................................................................        7,620        31,010
Other assets.........................................................................       69,100        40,480
                                                                                       ------------  ------------
      Total assets...................................................................   $1,190,730    $1,903,910
                                                                                       ------------  ------------
                                                                                       ------------  ------------

                                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Long-term debt, current............................................................   $   18,970    $   25,500
  Accounts payable...................................................................       93,030        92,350
  Accrued liabilities................................................................      153,130        87,300
                                                                                       ------------  ------------
      Total current liabilities......................................................      265,130       205,150

Long-term debt.......................................................................      425,650         2,150
Other long-term liabilities..........................................................       46,590        75,570
                                                                                       ------------  ------------
      Total liabilities..............................................................      737,370       282,870
                                                                                       ------------  ------------
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and
  outstanding........................................................................       --            --
Additional paid-in capital...........................................................      421,050        --
Retained earnings....................................................................       31,270        --
Foreign currency translation.........................................................        1,040        --
Masco Net Investment and Advances....................................................       --         1,621,040
                                                                                       ------------  ------------
      Total shareholder's equity.....................................................      453,360     1,621,040
                                                                                       ------------  ------------
      Total liabilities and shareholder's equity.....................................   $1,190,730    $1,903,910
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       23
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      CONSOLIDATED
                                                         COMPANY                   COMBINED PREDECESSOR
                                                     ---------------  -----------------------------------------------
<S>                                                  <C>              <C>            <C>              <C>
                                                       PERIOD FROM     PERIOD FROM     PERIOD FROM      PERIOD FROM
                                                      AUG. 6, 1996    JAN. 1, 1996    JAN. 1, 1995     JAN. 1, 1994
                                                           TO              TO              TO               TO
                                                      DEC. 31, 1996   AUG. 5, 1996    DEC. 31, 1995    DEC. 31, 1994
                                                     ---------------  -------------  ---------------  ---------------
Net sales..........................................    $   857,490     $ 1,147,890    $   1,992,610    $   1,897,480
Cost of sales......................................        638,140         870,650        1,500,990        1,434,030
                                                     ---------------  -------------  ---------------  ---------------
    Gross profit...................................        219,350         277,240          491,620          463,450
Selling, general and administrative expenses.......        144,580         222,230          397,790          386,800
                                                     ---------------  -------------  ---------------  ---------------
    Operating profit...............................         74,770          55,010           93,830           76,650
                                                     ---------------  -------------  ---------------  ---------------
Other expense, net:
    Interest expense...............................         19,930             970            2,360            2,250
    Interest expense, Masco........................        --               51,720           92,470           84,840
    Other, net.....................................          6,730           3,480            8,260            7,280
                                                     ---------------  -------------  ---------------  ---------------
                                                            26,660          56,170          103,090           94,370
                                                     ---------------  -------------  ---------------  ---------------
    Income (loss) before income taxes..............         48,110          (1,160)          (9,260)         (17,720)
Income taxes.......................................         16,840           6,830            6,980            6,050
                                                     ---------------  -------------  ---------------  ---------------
    Net income (loss)..............................    $    31,270     $    (7,990)   $     (16,240)   $     (23,770)
                                                     ---------------  -------------  ---------------  ---------------
                                                     ---------------  -------------  ---------------  ---------------
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       24
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           CONSOLIDATED
                                                              COMPANY                COMBINED PREDECESSOR
                                                           -------------  -------------------------------------------
                                                            PERIOD FROM    PERIOD FROM    PERIOD FROM    PERIOD FROM
                                                           AUG. 6, 1996   JAN. 1, 1996   JAN. 1, 1995   JAN. 1, 1994
                                                                TO             TO             TO             TO
                                                           DEC. 31, 1996  AUG. 5, 1996   DEC. 31, 1995  DEC. 31, 1994
                                                           -------------  -------------  -------------  -------------
<S>                                                        <C>            <C>            <C>            <C>
OPERATING ACTIVITIES:
    Net income (loss)....................................    $  31,270      $  (7,990)     $ (16,240)     $ (23,770)
    Adjustments to reconcile net income (loss) to net
      cash provided by (used for) operating activities:
        Depreciation and amortization....................       15,430         39,260         67,920         66,380
        Bad debt provision, net..........................        1,580          2,250          6,620          5,720
        Deferred income taxes............................       (5,890)        (2,610)         4,560         (3,260)
    Changes in operating assets and liabilities:
        Receivables......................................       (3,710)        39,550        (19,120)       (10,240)
        Inventories......................................       34,460        (17,480)        10,390        (38,130)
        Prepaid expenses.................................      (13,000)        (6,720)       (14,740)       (20,110)
        Liabilities......................................       45,640         (6,610)        (5,070)        22,730
                                                           -------------  -------------  -------------  -------------
      Net cash provided by (used for) operating
        activities.......................................      105,780         39,650         34,320           (680)
                                                           -------------  -------------  -------------  -------------
INVESTING ACTIVITIES:
    Acquisition of businesses, net of cash acquired......     (645,430)        --             --             --
    Net investments in Receivables Trust.................      (51,120)        --             --             --
    Capital expenditures.................................      (13,820)       (16,520)       (61,030)       (68,790)
    Issuance of notes receivable.........................       --             --            (10,260)        (1,000)
    Collection of notes receivable, net..................        1,670          2,790          5,020          3,710
    Other, net...........................................        3,200         (2,640)         8,790         12,970
                                                           -------------  -------------  -------------  -------------
      Net cash used for investing activities.............     (705,500)       (16,370)       (57,480)       (53,110)
                                                           -------------  -------------  -------------  -------------
FINANCING ACTIVITIES:
    Proceeds from long-term debt.........................      525,000         87,760         16,200          5,360
    Net proceeds from sale of accounts receivable........      167,000         --             --             --
    Capital contribution.................................       76,400         --             --             --
    Deferred financing costs.............................      (37,590)        --             --             --
    Repayments of long-term debt.........................     (108,690)       (87,090)        (3,720)       (52,090)
    Increase (decrease) in Masco net investment and
      advances...........................................       --            (22,600)         3,280         99,830
                                                           -------------  -------------  -------------  -------------
      Net cash provided by (used for) financing
        activities.......................................      622,120        (21,930)        15,760         53,100
                                                           -------------  -------------  -------------  -------------
CASH AND CASH INVESTMENTS:
    Increase (decrease) for the period...................       22,400          1,350         (7,400)          (690)
    Balance, beginning of period.........................       --             17,310         24,710         25,400
                                                           -------------  -------------  -------------  -------------
    Balance, end of period...............................    $  22,400      $  18,660      $  17,310      $  24,710
                                                           -------------  -------------  -------------  -------------
                                                           -------------  -------------  -------------  -------------
Cash paid for:
    Interest.............................................    $   6,200      $  52,700      $  94,700      $  87,000
    Income taxes.........................................    $   7,000      $  10,000      $   2,000      $  10,000
</TABLE>

Non-cash transactions:

    In addition to the acquisition consideration reflected above, FURNISHINGS
INTERNATIONAL INC., the parent of LIFESTYLE FURNISHINGS INTERNATIONAL LTD.,
issued $285 million in notes and $60 million in equity securities to the seller.

    The accompanying notes are an integral part of the financial statements.

                                       25
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                         NOTES TO FINANCIAL STATEMENTS

1. THE ACQUISITION

    LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") was formed in May
1996 for the purpose of acquiring (the "acquisition") the Masco Home Furnishings
Group (the "Group" or "Predecessor"). In the formation of the Company, 100
shares of common stock were issued to FURNISHINGS INTERNATIONAL INC. ("FII"),
the Company's sole stockholder. On August 5, 1996, FII acquired the Predecessor
from Masco Corporation ("Masco") for approximately $1.1 billion and contributed
substantially all of the businesses acquired to the Company. The purchase price
of $1.1 billion was financed by: (i) senior bank facilities ($325.0 million);
(ii) senior subordinated notes ($200.0 million); (iii) equity contribution
($421.0 million); and (iv) proceeds from sale of accounts receivable ($155.0
million). (See Note 7 Receivables Facility and Note 8 Long-Term Debt).

    The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was allocated to the acquired assets and
assumed liabilities based upon estimated fair values as of the closing of the
acquisition. This allocation resulted in a reduction of non-current assets,
principally property and equipment.

    As a result of the acquisition and new basis of accounting, the Company's
financial statements for the periods subsequent to the acquisition are not
comparable to the Predecessor's financial statements for the periods prior to
the acquisition.

2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

    BASIS OF PRESENTATION.  The Consolidated Financial Statements as of December
31, 1996 and for the period from August 6, 1996 to December 31, 1996 include the
accounts of the Company and its subsidiary companies. Inter-company accounts and
transactions are eliminated. In the Notes to the Financial Statements, all
dollar amounts are shown in thousands unless otherwise stated.

    The financial information for the periods ended on or prior to August 5,
1996 refers to the Predecessor as it existed prior to the acquisition. The Group
was not a legal entity and included certain Masco subsidiaries whose operations
consisted of the manufacture and sale of home furnishings products including
quality furniture, fabrics and other home furnishings principally in the United
States. The financial position and results of operations of the Predecessor as
presented herein, may not be the same as would have occurred had the Group been
an entity independent of Masco.

    Included in selling, general and administrative expenses of the Predecessor
are general corporate expenses which represent certain corporate staff support
and administrative services previously provided by Masco. These expenses were
charged to the Group by Masco based upon approximately 1 percent of sales of
most domestic Group operations. Masco's management believes this method of
allocation was reasonable. Because these services were never contracted with
outsiders nor bids obtained, it is not practical to disclose estimates of what
the cost would have been on a stand alone basis. In addition, the Group
participated in certain programs provided by Masco including various insurance
programs and incentive compensation plans; related costs of these programs that
exceed amounts included in general corporate expenses were separately charged to
the Group by Masco. Outstanding liabilities related to the above services and
programs were included in Masco Net Investment and Advances in the accompanying
balance sheet of the Predecessor.

    USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS.  The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets

                                       26
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from such estimates and assumptions.

    RESTATEMENT.  The financial statements of the Predecessor were restated for
all periods presented to reflect the write-down of certain prepaid expenses. In
addition, the 1994 financial statements were restated primarily to reflect the
correction of the accounting for certain Asian joint ventures. As a result of
these restatements, the net loss increased (decreased) by approximately $(0.2)
million for the period January 1, 1996 to August 5, 1996 and $(l.7) million and
$4.5 million for the years ended December 31, 1995 and 1994, respectively.

    CASH AND CASH INVESTMENTS.  The Company considers all highly liquid
investments with an original maturity of three months or less to be cash and
cash investments.

    RECEIVABLES.  Accounts and notes receivable are presented net of aggregate
allowances for doubtful accounts of $4.8 million at December 31, 1996 and $9.0
million at December 31, 1995.

    DEFERRED CHARGES.  Deferred charges, which consist primarily of debt
issuance costs associated with the acquisition, are amortized over the terms of
the related debt using the effective interest method. At December 31, 1996,
deferred charges totaled $38.3 million, net of accumulated amortization of $1.7
million, and were included in Other Assets in the accompanying balance sheet.

    PROPERTY AND EQUIPMENT.  Property and equipment are stated at acquisition
cost as determined under APB Opinion No. 16 "Business Combinations." Assets
acquired subsequent to the acquisition, including significant betterments to
existing facilities, are recorded at cost. Upon retirement or disposal, the cost
and accumulated depreciation are removed from the accounts and any gain or loss
is included in income. Maintenance and repair costs are charged to expense as
incurred.

    DEPRECIATION AND AMORTIZATION.  Depreciation is computed principally using
the straight line method over the estimated useful lives of the assets. The
Company generally uses estimated useful lives ranging from 15 to 40 years for
buildings and land improvements, and 3 to 8 years for machinery and equipment.
Depreciation was $7.6 million for the period August 6, 1996 to December 31,
1996, $21.5 million for the period January 1, 1996 to August 5, 1996, and $36.0
million and $34.1 million during 1995 and 1994, respectively.

    The Company produces fabric sample books which are used to market some of
its products. The Company capitalizes the cost of these sample books and
amortizes their cost over three years as a selling expense. The unamortized net
cost of the sample books is included in other assets and prepaid expenses and at
December 31, 1996 and 1995 aggregated $20.8 million and $24.4 million,
respectively, and the related amounts charged to selling expense were $5.8
million for the period August 6, 1996 to December 31, 1996, $9.8 million for the
period January 1, 1996 to August 5, 1996 and $17.1 million and $19.3 million
during 1995 and 1994, respectively.

    JOINT VENTURES.  The Company has investments in several fifty-fifty joint
ventures in Asia which are accounted for on the equity method. At December 31,
1996 and 1995, the Company's investment in these joint ventures totaled $9.4
million and $24.1 million, respectively, and is included in other assets. In
connection with certain of these investments, the Company has guaranteed a
minimum return on investment to its joint venture partners if certain annual
financial targets are not achieved. The Company records a liability for these
guarantees when payment is both probable and estimable.

                                       27
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
    FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK.  The
carrying value of financial instruments reported in the balance sheet for
current assets and current liabilities approximates fair value. The carrying
values of notes receivable and senior bank facilities approximate fair value as
the floating rates inherent in the related financial instruments reflect changes
in overall market interest rates. The fair value of the senior subordinated
notes was approximately $215 million as of December 31, 1996, based on quoted
market values, compared to a carrying value of $200 million.

    The Company's interest rate collar, which results in $250 million of the
Company's long-term debt being subject to an interest rate ceiling of 8.0% and
floor of 5.45%, has a fair value of approximately $(0.8) million and a carrying
value of zero. The Company may periodically use foreign currency forward and
option contracts to offset the effects of exchange rate fluctuations on cash
flows denominated in foreign currencies. The balance of these contracts at
December 31, 1996 is not material and the Company does not use derivative
financial instruments for trading or speculative purposes.

    FOREIGN CURRENCY TRANSLATION.  The financial position and results of
operations of the Company's foreign subsidiaries are measured using the local
currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the balance sheet date exchange rate and
statement of operations accounts are translated at the average rate prevailing
during the year. The following table reconciles the changes from period to
period:

<TABLE>
<CAPTION>
                                                   COMPANY                   PREDECESSOR
                                               ---------------  -------------------------------------
                                               AUG. 6, 1996 TO  JAN. 1, 1996 TO
                                                DEC. 31, 1996    AUG. 5, 1996      1995       1994
                                               ---------------  ---------------  ---------  ---------
<S>                                            <C>              <C>              <C>        <C>
Balance, beginning of period.................     $  --            $   5,200     $   5,200  $   8,700
Translation adjustment.......................         1,040              780        --         (3,500)
Income tax effect............................        --               --            --         --
                                                     ------           ------     ---------  ---------
Balance, end of period.......................     $   1,040        $   5,980     $   5,200  $   5,200
                                                     ------           ------     ---------  ---------
                                                     ------           ------     ---------  ---------
</TABLE>

    RECENTLY ISSUED ACCOUNTING STANDARDS.  Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," will become effective in 1997. The Company
does not believe its adoption will have a material impact on the Company's
financial statements.

3. INVENTORIES

<TABLE>
<CAPTION>
                                                                        COMPANY    PREDECESSOR
                                                                       ----------  -----------
<S>                                                                    <C>         <C>
                                                                          1996        1995
                                                                       ----------  -----------
Finished goods.......................................................  $  223,610   $ 262,930
Raw material.........................................................     216,250     206,820
Work in process......................................................      86,440      90,190
                                                                       ----------  -----------
                                                                       $  526,300   $ 559,940
                                                                       ----------  -----------
                                                                       ----------  -----------
</TABLE>

    Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method.

                                       28
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                        COMPANY    PREDECESSOR
                                                                       ----------  -----------
<S>                                                                    <C>         <C>
                                                                          1996        1995
                                                                       ----------  -----------
Land and improvements................................................  $   37,330   $  26,970
Buildings............................................................     206,380     321,090
Machinery and equipment..............................................     113,250     398,320
                                                                       ----------  -----------
                                                                          356,960     746,380
Less accumulated depreciation                                               7,630     262,280
                                                                       ----------  -----------
                                                                       $  349,330   $ 484,100
                                                                       ----------  -----------
                                                                       ----------  -----------
</TABLE>

    The Company leases various facilities and equipment under non-cancelable
lease arrangements. Rent expense was $8.4 million for the period August 6, 1996
to December 31, 1996, $12.3 million for the period January 1, 1996 to August 5,
1996, and $21.5 and $19.2 million during 1995 and 1994, respectively.

    At December 31, 1996, future minimum rental commitments for operating leases
with non-cancelable terms in excess of one year are as follows: 1997-$17.5
million; 1998-$14.1 million; 1999-$12.2 million; 2000-$9.1 million; 2001-$8.7
million; and thereafter-$11.4 million.

5. NOTES RECEIVABLE

    The Company has notes receivable from certain of its customers. Generally,
these notes require periodic payments of principal and interest and are
collateralized by inventory and personal guarantees of the customers. These
notes bear interest based predominately on the prevailing prime rate.
Approximately $13.8 million of these notes are due from one customer at December
31, 1996. Although the Company does not currently foresee a material credit risk
associated with this receivable, repayment is dependent upon the financial
stability of this customer.

6. ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                        COMPANY    PREDECESSOR
                                                                       ----------  -----------
<S>                                                                    <C>         <C>
                                                                          1996        1995
                                                                       ----------  -----------
Salaries, wages and commissions......................................  $   31,810   $  25,930
Employee retirement plans............................................       7,700      11,380
Interest.............................................................      13,720      --
Advertising and sales promotion......................................      10,380       9,310
Insurance............................................................       7,710       6,050
Warranty reserve.....................................................       2,500      --
Income taxes.........................................................      15,760       1,920
Property, payroll and other taxes....................................       4,010       3,780
Restructuring........................................................      27,950      --
Other................................................................      31,590      28,930
                                                                       ----------  -----------
                                                                       $  153,130   $  87,300
                                                                       ----------  -----------
                                                                       ----------  -----------
</TABLE>

                                       29
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. ACCRUED LIABILITIES (CONTINUED)
    In connection with the acquisition, management has developed a restructuring
plan. The plan was finalized in December 1996 upon approval by the Company's
Board of Directors and implementation is expected to be completed in 1997. As
permitted by Emerging Issues Task Force ("EITF") Issue 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination," the total cost
of the plan, which management estimates to be approximately $28.3 million, was
included as part of the purchase price allocation. The Company does not expect
any significant impact on its liquidity as a result of this plan.

    The restructuring plan provides for severance costs associated with the
closure of various facilities, costs associated with the relocation of equipment
and office facilities and other closure related expenses.

7. RECEIVABLES FACILITY

    In connection with the acquisition, the Company established a $175 million
Receivables Facility and formed LFI Receivables Corporation (the "Receivables
Subsidiary"), a special-purpose, bankruptcy remote subsidiary of the Company.
The Receivables Subsidiary purchases, on a revolving basis, substantially all
domestic trade receivables generated by the Company and FII at a 2.04% discount
from face. The Receivables Subsidiary transfers and assigns all its rights in
substantially all those receivables to the LFI Receivables Master Trust (the
"Master Trust").

    A syndicate of banks and other financial institutions (the "Participants")
may purchase investor certificates representing fractional undivided senior
interests in the assets of the Master Trust ("Senior Investor Certificates").
The Receivables Subsidiary also retains an investment in the Master Trust equal
to the face value of receivables transferred to the Master Trust but not sold to
the Participants comprised of: i) a fractional, undivided senior interest in
trade receivables; and ii) a fractional, undivided subordinated interest in
trade receivables.

    As of December 31, 1996, the outstanding balance of trade receivables
purchased by the Receivables Subsidiary and transferred to the Master Trust
amounted to $218 million. Of this amount, $167 million had been sold to the
Participants at face value through the issuance of Senior Investor Certificates.
The Receivables Subsidiary's retained investment in the Master Trust totaled $51
million, of which $5.0 million represented senior interests and $46.2 million
represented subordinated interests in the Master Trust. This investment is
carried at cost, which equals the face value of the underlying trade receivables
and approximates fair value.

    The Senior Investor Certificates bear interest at LIBOR plus 1% and there is
a commitment fee of .5% per annum on the unused commitment under the facility.
The cost of this facility amounted to $4.4 million for the period August 6, 1996
to December 31, 1996, and is included in "Other, net" in the accompanying
Statement of Operations.

    This arrangement places certain restrictions on the Company and the
Receivables Subsidiary, including placing liens on the Company's trade
receivables. At December 31, 1996, the Company was in compliance with these
covenants.

    During February 1997, the Receivables Facility was replaced by a similar
facility under which the Master Trust may issue asset-backed certificates of up
to $200 million.

                                       30
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT

    As of December 31, the outstanding balances of long-term debt were as
follows:

<TABLE>
<CAPTION>
                                                                        COMPANY    PREDECESSOR
                                                                          1996        1995
                                                                       ----------  -----------
<S>                                                                    <C>         <C>
Revolving credit facility............................................  $   --       $  --
Tranche A term loan..................................................     100,420      --
Tranche B term loan..................................................     140,580      --
Senior subordinated notes............................................     200,000      --
Other borrowings.....................................................       3,620      27,650
                                                                       ----------  -----------
                                                                          444,620      27,650
Less current portion.................................................      18,970      25,500
                                                                       ----------  -----------
                                                                       $  425,650   $   2,150
                                                                       ----------  -----------
                                                                       ----------  -----------
</TABLE>

    The Company may periodically guarantee loans, leases or other credit
facilities for its customers and joint venture partners. At December 31, 1996,
the outstanding balance of these guarantees approximated $5.2 million. In
addition, the Company has guaranteed to certain joint venture partners a minimum
return on investment. Future guarantees under these arrangements aggregated
approximately $4.8 million at December 31, 1996.

    At December 31, 1996, the maturities of long-term debt during each of the
next five years were approximately as follows: 1997-$19.0 million; 1998-$18.6
million; 1999-$16.9 million; 2000-$17.9 million; 2001-$27.7 million; and
thereafter $344.6 million.

    In connection with the acquisition, the Company entered into loans under
senior bank facilities and issued senior subordinated notes, the net proceeds of
which were used to repay certain existing inter-company indebtedness of the
Predecessor to Masco.

    SENIOR BANK FACILITIES.  The Company entered into a credit agreement
providing for term loans of $300 million and a revolving credit facility of $150
million. The term loans consist of: (i) $125 million Tranche A bearing interest
at LIBOR plus 2.5% payable in quarterly installments through 2002; and (ii) $175
million Tranche B bearing interest at LIBOR plus 3.0% payable in quarterly
installments through 2004. The revolving credit facility is a 6 year facility
and bears interest at LIBOR plus 2.5%. The revolving credit facility requires a
commitment fee of .5% per annum on the unused portion of the facility. The
Company, at its option, may prepay the term loans or permanently reduce the
revolving credit facility.

    At closing of the acquisition, borrowings under the senior bank facilities
totaled $300 million in term loans and $25 million under the revolving credit
facility. During the period ended December 31, 1996, all borrowings under the
revolving credit facility were repaid, and the term loans were prepaid in the
amount of $59 million.

    The obligations under the senior bank facilities are unconditionally
guaranteed, jointly and severally, by FII and substantially all domestic
subsidiaries of the Company, and are collateralized by substantially all the
assets of the Company and the guarantors. The senior bank facilities contain
significant restrictive covenants including minimum interest coverage ratios,
maximum leverage ratios, annual capital expenditure limitations and net worth
requirements. At December 31, 1996, the Company was in compliance with these
covenants.

                                       31
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT (CONTINUED)
    SENIOR SUBORDINATED NOTES.  In connection with the acquisition, the Company
issued, in a private placement, $200 million unsecured senior subordinated notes
maturing August 1, 2006 ("Notes"). Interest on the Notes is payable semiannually
at 10 7/8% per annum commencing on February 1, 1997. On November 8, 1996, the
Company's registration statement on Form S-4 (No. 333-11905) became effective
under the Securities Act of 1933, providing for the exchange of the Notes for
new Notes. All old Notes were exchanged for new Notes on December 13, 1996. The
new Notes are identical in all material respects to the Notes issued through the
private placement except that they are registered under the Securities Act, thus
allowing, subject to certain limitations, transfer pursuant to the Securities
Act.

    The Notes may be redeemed by the Company subsequent to August 1, 2001 at
premiums which begin at 5.438% and decline each year to face for redemptions
taking place after August 1, 2004. In addition, at any time prior to August 1,
1999, the Company may redeem up to 33 1/3% of the original aggregate principal
amount of the Notes with the proceeds of one or more public equity offerings at
a redemption price of 110.875%. Also, upon a qualifying change of control, the
Notes may be redeemed at the option of the Company at the Applicable Premium (as
defined), or in certain instances at the option of the Note holders at a premium
of 1%. The Notes contain certain restrictive covenants which, among others,
limit the incurrence of additional indebtedness and restrict capital
transactions, distributions, and asset dispositions of certain subsidiaries. At
December 31, 1996, the Company was in compliance with these covenants.

    In connection with the Note offering, the Company's domestic operating
subsidiaries (the "Guarantor Subsidiaries") fully and unconditionally guarantee
the Company's performance under the Notes on a joint and several basis (see Note
16 Guarantor Financial Statements).

9. EMPLOYEE RETIREMENT PLANS

    The Company sponsors qualified defined benefit and defined contribution
retirement plans for most of its employees. The Company also maintains a
non-qualified, defined benefit retirement plan for certain key executives. The
Company's funding policy with respect to the qualified defined benefit plans is
to contribute amounts to the plan sufficient to meet minimum funding
requirements as set by law. The non-qualified plan is unfunded. The Company's
defined contribution plans, available to most domestic employees, contain a
savings provision that permits pre-tax employee contributions and, at certain
locations, a limited employer match. Aggregate charges to income under these
plans were $4.4 million for the period August 6, 1996 to December 31, 1996, $4.0
million for the period January 1, 1996 to August 5, 1996, and $7.1 million and
$5.8 million during 1995 and 1994, respectively.

    Net periodic pension cost for the Company's pension plans includes the
following components:

<TABLE>
<CAPTION>
                                                              COMPANY                   PREDECESSOR
                                                           -------------  ---------------------------------------
<S>                                                        <C>            <C>          <C>           <C>
                                                                            JAN. 1,
                                                                             1996      JAN. 1, 1995  JAN. 1, 1994
                                                           AUG., 6 1996       TO            TO            TO
                                                                TO          AUG. 5,      DEC. 31,      DEC. 31,
                                                           DEC. 31, 1996     1996          1995          1994
                                                           -------------  -----------  ------------  ------------
Service cost-benefits earned during the year.............    $   2,630     $   4,480    $    6,080    $    6,980
Interest cost on projected benefit obligation............        5,430         7,550        12,010        11,280
Actual return on assets..................................       (1,690)       (8,410)      (16,540)        5,870
Net amortization and deferral............................       (3,750)          970         3,540       (22,550)
                                                                ------    -----------  ------------  ------------
Net periodic pension cost................................    $   2,620     $   4,590    $    5,090    $    1,580
                                                                ------    -----------  ------------  ------------
                                                                ------    -----------  ------------  ------------
</TABLE>

                                       32
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. EMPLOYEE RETIREMENT PLANS (CONTINUED)
    Major assumptions used in accounting for the Company's pension plans are as
follows:

<TABLE>
<CAPTION>
                                                                                   COMPANY          PREDECESSOR
                                                                               ---------------  --------------------
<S>                                                                            <C>              <C>        <C>
                                                                                    1996          1995       1994
                                                                               ---------------  ---------  ---------
Discount rate for obligations................................................      7.50%-7.75%      7.25%       8.5%
Rate of increase in compensation levels......................................             5.0%       5.0%       5.0%
Expected long-term rate of return on plan assets.............................            10.0%      11.0%      12.0%
</TABLE>

    The funded status of the Company's pension plans at December 31 is
summarized as follows:
<TABLE>
<CAPTION>
                                                                            COMPANY            PREDECESSOR
                                                                          ------------  --------------------------
<S>                                                                       <C>           <C>           <C>
                                                                              1996                 1995
                                                                          ------------  --------------------------

<CAPTION>
                                                                          ACCUMULATED      ASSETS     ACCUMULATED
                                                                            BENEFITS       EXCEED       BENEFITS
                                                                             EXCEED     ACCUMULATED      EXCEED
                                                                             ASSETS       BENEFITS       ASSETS
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
Actuarial present value of benefit obligations:
  Vested benefit obligation.............................................   $  150,770    $   19,560    $  126,660
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Accumulated benefit obligation..........................................   $  153,360    $   20,090    $  130,040
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Projected benefit obligation............................................   $  184,940    $   20,870    $  159,810
Assets at fair value....................................................      134,820        20,640       114,350
                                                                          ------------  ------------  ------------
Projected benefit obligation in excess of plan assets...................      (50,120)         (230)      (45,460)
Reconciling items:
  Unrecognized net loss (gain)..........................................       22,340         3,970        33,980
  Unrecognized prior service cost.......................................          360           330        13,870
  Unrecognized net (asset) obligation at transition.....................       (1,310)       (1,540)       (7,830)
  Requirement to recognize minimum liability............................       (4,720)       --           (10,250)
                                                                          ------------  ------------  ------------
(Accrued)/prepaid pension cost..........................................   $  (33,450)   $    2,530    $  (15,690)
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
</TABLE>

                                       33
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                                          FOREIGN
                                                                 ADDITIONAL              CURRENCY        TOTAL
                                                       COMMON     PAID-IN    RETAINED   TRANSLATION  SHAREHOLDER'S
                                                        STOCK     CAPITAL    EARNINGS   ADJUSTMENT      EQUITY
                                                      ---------  ----------  ---------  -----------  -------------
<S>                                                   <C>        <C>         <C>        <C>          <C>
Balance at August 5, 1996...........................  $  --      $   --      $  --       $  --        $   --
Contribution of businesses from FII.................     --         421,050     --          --            421,050
Net income..........................................     --          --         31,270      --             31,270
Foreign exchange....................................     --          --         --           1,040          1,040
                                                      ---------  ----------  ---------  -----------  -------------
Balance at December 31, 1996........................  $  --      $  421,050  $  31,270   $   1,040    $   453,360
                                                      ---------  ----------  ---------  -----------  -------------
                                                      ---------  ----------  ---------  -----------  -------------
</TABLE>

11. MASCO CORPORATION NET INVESTMENT AND ADVANCES TO PREDECESSOR

<TABLE>
<CAPTION>
                                                                          PREDECESSOR
                                                                   --------------------------
<S>                                                                <C>           <C>
                                                                     DEC. 31,      DEC. 31,
                                                                       1995          1994
                                                                   ------------  ------------
Balance, beginning of period.....................................   $1,633,110    $1,557,600
Net income (loss)................................................      (16,240)      (23,770)
Additional net investment and advances...........................        4,170        99,280
                                                                   ------------  ------------
Balance, end of period...........................................   $1,621,040    $1,633,110
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>

    Investment and advances of the Predecessor reflect the accumulation of
transactions between the Group and Masco. These transactions include operating
results, management fees, advances and other intercompany transactions.

    Interest on funds advanced by Masco was charged to the Group based on
interest rates which approximated the bank prime rate, adjusted monthly. Such
interest rates approximated 8.8% and 7.1% percent in 1995 and 1994,
respectively. The outstanding balance of funds advanced by Masco, including
accrued interest, at December 31, 1995 and 1994 approximated $1,195.0 million
and $1,192.0 million, respectively.

                                       34
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES

<TABLE>
<CAPTION>
                                                                 COMPANY                  PREDECESSOR
                                                              --------------  ------------------------------------
                                                               AUG. 6, 1996   JAN. 1, 1996       DECEMBER 31,
                                                                    TO             TO        ---------------------
                                                              DEC. 31, 1996   AUG. 5, 1996     1995        1994
                                                              --------------  -------------  ---------  ----------
<S>                                                           <C>             <C>            <C>        <C>
Income (loss) before income taxes:
    Domestic................................................    $   48,640      $    (350)   $  (9,410) $  (35,020)
    Foreign.................................................          (530)          (810)         150      17,300
                                                                   -------    -------------  ---------  ----------
                                                                $   48,110      $  (1,160)   $  (9,260) $  (17,720)
                                                                   -------    -------------  ---------  ----------
                                                                   -------    -------------  ---------  ----------
Provision (credit) for income taxes:
    Currently payable:
      Federal--U.S. income (losses).........................    $   16,240      $   3,680    $  (4,820) $   (7,060)
            --Certain foreign earnings......................         1,640          2,510        3,030      10,640
      State and local.......................................         3,840          1,950        3,200       5,050
      Foreign...............................................         1,010          1,300        1,010         680
    Deferred:
      Federal...............................................        (5,890)        (2,600)       4,560      (3,290)
      Foreign...............................................        --                (10)      --              30
                                                                   -------    -------------  ---------  ----------
                                                                $   16,840      $   6,830    $   6,980  $    6,050
                                                                   -------    -------------  ---------  ----------
                                                                   -------    -------------  ---------  ----------
</TABLE>

<TABLE>
<CAPTION>
                                                                                         COMPANY     PREDECESSOR
                                                                                       ------------  ------------
                                                                                       DECEMBER 31,  DECEMBER 31,
                                                                                           1996          1995
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
Deferred tax assets:
    Inventories......................................................................   $    7,830    $    6,670
    Accrued liabilities..............................................................       37,260        10,710
    Alternative minimum tax..........................................................       --               860
                                                                                       ------------  ------------
Gross deferred tax assets:...........................................................       45,090        18,240
                                                                                       ------------  ------------
Deferred tax liabilities:
    Property and equipment...........................................................       23,560        69,220
    Other............................................................................        1,280         1,280
                                                                                       ------------  ------------
      Gross deferred tax liabilities.................................................       24,840        70,500
                                                                                       ------------  ------------
Net deferred tax asset (liability) before valuation allowance:.......................       20,250       (52,260)
                                                                                       ------------  ------------
Valuation allowance..................................................................       (8,390)       --
                                                                                       ------------  ------------
Net deferred tax asset (liability):..................................................   $   11,860    $  (52,260)
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>

                                       35
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES (CONTINUED)
    The following is a reconciliation of tax computed at the U.S. federal
statutory rate to the provision for income taxes allocated to income (loss)
before income taxes:

<TABLE>
<CAPTION>
                                                                  COMPANY                   PREDECESSOR
                                                               --------------  -------------------------------------
                                                                AUG. 6, 1996                        DECEMBER 31,
                                                                     TO        JAN. 1, 1996 TO  --------------------
                                                               DEC. 31, 1996    AUG. 5, 1996      1995       1994
                                                               --------------  ---------------  ---------  ---------
<S>                                                            <C>             <C>              <C>        <C>
U.S. federal statutory rate..................................           35%             35%           35%        35%
Tax (credit) at U.S. federal statutory rate..................    $   16,840       $    (410)    $  (3,240) $  (6,200)
Higher taxes on foreign earnings.............................         2,870           4,080         4,050      5,330
Amortization in excess of tax................................           140           2,620         4,460      4,450
State and local taxes, net of federal tax benefit............         1,820           1,270         2,080      3,280
Reduction from tax sharing agreement.........................        (4,970)         --            --         --
Other........................................................           140            (730)         (370)      (810)
                                                                    -------          ------     ---------  ---------
    Income taxes.............................................    $   16,840       $   6,830     $   6,980  $   6,050
                                                                    -------          ------     ---------  ---------
                                                                    -------          ------     ---------  ---------
</TABLE>

    The Company is included in the consolidated federal tax return of FII.
Pursuant to the Company's tax sharing agreement with FII, the Company will be
required to make tax sharing payments to FII with respect to the Company's pro
rata share of consolidated federal and combined state and local income tax
liabilities.

    Under Statement of Financial Accounting Standards No. 109, deferred income
taxes are provided to recognize the effect of temporary differences between
financial reporting and income tax reporting. Realization of deferred tax assets
is dependent upon the ability to carryback reversing deductible temporary
differences to offset actual taxable income in the carryback period or to offset
taxable temporary differences as scheduled reversals are projected to occur.
Management has established a partial valuation allowance relating to deferred
tax assets which will reverse in periods in which realization is not assured.

    The Predecessor was included in the consolidated federal and state tax
returns of Masco. Accordingly, substantially all income tax-related assets and
liabilities were due to or from Masco. Income taxes and credits were computed on
a separate return basis.

13. RELATED PARTY TRANSACTIONS

    As part of the Acquisition, FII and the Company entered into a Management
Agreement pursuant to which FII provides to the Company executive management,
corporate support, administrative, data processing, human resources, legal,
environmental, audit, treasury, tax and other management-related services. The
Company compensates FII in an amount equal to FII's actual cost of providing
such services. Those costs approximated $6.6 million for the period August 6,
1996 to December 31, 1996, of which approximately $1.5 million was included in
accrued liabilities at December 31, 1996.

    The Company sells furniture and accessories to certain distribution
businesses owned by FII. For the period August 6, 1996 to December 31, 1996, the
Company's sales to FII were $21.2 million. At December 31, 1996, the Company had
accounts receivable totaling $13.6 million as a result of these sales
transactions.

                                       36
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. ENVIRONMENTAL REGULATIONS

    In the ordinary course of business, the Company may become exposed to
potential liabilities resulting from spills and releases of hazardous materials
at its manufacturing facilities. The Company also has been named as a
potentially responsible party at a total of seven non-owned contaminated sites,
including Superfund sites. The Company does not believe that the costs related
to these sites or those costs associated with investigating or remediating these
releases will have a material adverse effect on the Company's financial
condition, cash flows, operating expenses or earnings. Furthermore, Masco has
agreed to indemnify the Company for certain liabilities in excess of specified
amounts relating to the existence of hazardous substances at certain of the
Company's manufacturing facilities. Actual resolution of these matters, however,
could differ from management's estimates and assumptions.

15. GEOGRAPHIC INFORMATION

    The Company is engaged principally in one line of business -- the
manufacture and sale of home furnishings products including quality furniture,
fabrics and other home furnishings.

    The following tables present information about the Company by geographic
area:

<TABLE>
<CAPTION>
                                                                               NET SALES (1)
                                                           ------------------------------------------------------
<S>                                                        <C>           <C>           <C>           <C>
                                                             COMPANY
                                                           ------------                PREDECESSOR
                                                           AUG. 6, 1996  ----------------------------------------
                                                                TO       JAN. 1, 1996
                                                             DEC. 31,         TO
                                                               1996      AUG. 5, 1996      1995          1994
                                                           ------------  ------------  ------------  ------------
United States............................................   $  769,000   $  1,030,000  $  1,761,000  $  1,673,000
Pacific Rim..............................................       58,000         76,000       141,000       126,000
European Union and other foreign countries...............       30,000         42,000        91,000        98,000
                                                           ------------  ------------  ------------  ------------
        Total............................................   $  857,000   $  1,148,000  $  1,993,000  $  1,897,000
                                                           ------------  ------------  ------------  ------------
                                                           ------------  ------------  ------------  ------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          OPERATING PROFIT (LOSS)
                                                           ------------------------------------------------------
<S>                                                        <C>           <C>           <C>           <C>
                                                             COMPANY
                                                           ------------                PREDECESSOR
                                                           AUG. 6, 1996  ----------------------------------------
                                                                TO       JAN. 1, 1996
                                                             DEC. 31,         TO
                                                               1996      AUG. 5, 1996      1995          1994
                                                           ------------  ------------  ------------  ------------
United States............................................   $   67,000   $     55,000  $     91,000  $     72,000
Pacific Rim..............................................       13,000         12,000        22,000        22,000
European Union and other foreign countries...............        1,000         (3,000)       (3,000)       (5,000)
                                                           ------------  ------------  ------------  ------------
        Total............................................       81,000         64,000       110,000        89,000
                                                           ------------  ------------  ------------  ------------
Other expense, net.......................................      (27,000)       (56,000)     (103,000)      (94,000)
General corporate expense................................       (6,000)        (9,000)      (16,000)      (13,000)
                                                           ------------  ------------  ------------  ------------
    Income (loss) before income taxes....................   $   48,000   $     (1,000) $     (9,000) $    (18,000)
                                                           ------------  ------------  ------------  ------------
                                                           ------------  ------------  ------------  ------------
</TABLE>

                                       37
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
                                                                      ASSETS AT DECEMBER 31
                                                                    --------------------------
<S>                                                                 <C>           <C>
                                                                      COMPANY     PREDECESSOR
                                                                    ------------  ------------

<CAPTION>
                                                                        1996          1995
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
United States.....................................................  $    921,000  $  1,606,000
Pacific Rim.......................................................       212,000       243,000
European Union and other foreign countries........................        58,000        55,000
                                                                    ------------  ------------
        Total.....................................................  $  1,191,000  $  1,904,000
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

    (1) After elimination of intracompany sales between geographic areas of:

<TABLE>
<CAPTION>
                                                                                           PREDECESSOR
                                                                    COMPANY     ---------------------------------
                                                                  ------------    JAN. 1,
                                                                  AUG. 6, 1996     1996
                                                                       TO           TO
                                                                    DEC. 31,      AUG. 5,
                                                                      1996         1996        1995       1994
                                                                  ------------  -----------  ---------  ---------
<S>                                                               <C>           <C>          <C>        <C>
United States...................................................   $    6,000    $   5,000   $  12,000  $  13,000
Pacific Rim.....................................................      112,000      144,000     289,000    267,000
European Union and other foreign countries......................       --           --           1,000      1,000
</TABLE>

16. GUARANTOR FINANCIAL STATEMENTS

    In connection with the issuance of the Senior Subordinated Notes, the
Guarantor Subsidiaries fully and unconditionally guaranteed the Company's
performance under the Notes on a joint and several basis. The Guarantor
Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.
The remaining subsidiaries are direct or indirect subsidiaries of the Guarantor
Subsidiaries. There are no restrictions under the Company's financing
arrangements on the ability of the Guarantor Subsidiaries to distribute funds to
the Company in the form of cash dividends, loans or advances. The following
combined financial data provides information regarding the financial position,
results of operations and cash flows of the Guarantor Subsidiaries (condensed
consolidated/combined financial data). Separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented because
management has determined that such information would not be material to the
holders of the Notes.

    For purposes of the consolidated financial data, the Guarantor Subsidiaries
include substantially all domestic subsidiaries of the Company (other than the
Receivables Subsidiary and certain subsidiaries with substantially no assets or
operations). The Guarantor Subsidiaries account for their investments in the
non-guarantor subsidiaries on the equity method. The Company also accounts for
its investments in the Guarantor Subsidiaries and the Receivables Subsidiary on
the equity method. The principal elimination entries are to eliminate the
investments in subsidiaries and intercompany balances and transactions.

                                       38
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                    COMPANY
                     CONDENSED CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                             NON-
                                                             GUARANTOR     GUARANTOR
                                                 COMPANY    SUBSIDIARIES  SUBSIDIARIES ELIMINATIONS  CONSOLIDATED
                                                ----------  ------------  -----------  ------------  ------------
<S>                                             <C>         <C>           <C>          <C>           <C>
ASSETS
Current Assets:
    Cash and cash investments.................  $   --      $      4,510   $  17,890    $   --        $   22,400
    Trade receivables.........................      --            17,060      64,750        --            81,810
    Other receivables.........................      --            24,070      22,210        --            46,280
    Investment in Receivables Trust...........      --           --           51,120        --            51,120
    Prepaid expenses..........................      --            15,100       7,590        --            22,690
    Inventories...............................      --           431,910      94,390        --           526,300
    Deferred income taxes.....................      --            11,440       2,640        --            14,080
    Intercompany account......................      --           245,140      12,500      (257,640)       --
                                                ----------  ------------  -----------  ------------  ------------
        Total current assets..................      --           749,230     273,090      (257,640)      764,680
Property and equipment, net...................      --           265,190      84,140        --           349,330
Notes receivable..............................      --             7,620      --            --             7,620
Other assets..................................      --            55,430      13,670        --            69,100
Investments in affiliates.....................     453,360        44,790      --          (498,150)       --
                                                ----------  ------------  -----------  ------------  ------------
        Total assets..........................  $  453,360  $  1,122,260   $ 370,900    $ (755,790)   $1,190,730
                                                ----------  ------------  -----------  ------------  ------------
                                                ----------  ------------  -----------  ------------  ------------

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
    Notes payable.............................  $   --      $     17,350   $   1,620    $   --        $   18,970
    Accounts payable..........................      --            71,230      21,800        --            93,030
    Accrued liabilities.......................      --           109,950      43,180        --           153,130
    Intercompany account......................      --            12,500     245,140      (257,640)       --
                                                ----------  ------------  -----------  ------------  ------------
        Total current liabilities.............      --           211,030     311,740      (257,640)      265,130
Long-term debt................................      --           424,430       1,220        --           425,650
Other long-term liabilities...................      --            35,670      10,920        --            46,590
                                                ----------  ------------  -----------  ------------  ------------
        Total liabilities.....................      --           671,130     323,880      (257,640)      737,370
Shareholder's equity..........................     453,360       451,130      47,020      (498,150)      453,360
                                                ----------  ------------  -----------  ------------  ------------
        Total liabilities and shareholder's
          equity..............................  $  453,360  $  1,122,260   $ 370,900    $ (755,790)   $1,190,730
                                                ----------  ------------  -----------  ------------  ------------
                                                ----------  ------------  -----------  ------------  ------------
</TABLE>

                                       39
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                  PREDECESSOR
                       CONDENSED COMBINING BALANCE SHEET
                               DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                          GUARANTOR    NON-GUARANTOR
                                                         SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS    COMBINED
                                                         ------------  --------------  ------------  ------------
<S>                                                      <C>           <C>             <C>           <C>
ASSETS
Current Assets:
  Cash and cash investments............................  $      4,540    $   12,770     $   --       $     17,310
  Receivables..........................................       253,940        73,390         (1,910)       325,420
  Inventories..........................................       429,880       130,060         --            559,940
  Prepaid expenses.....................................        14,340        12,030         --             26,370
  Deferred income taxes................................        17,000        --             --             17,000
  Company account......................................       161,420        21,980       (183,400)       --
                                                         ------------  --------------  ------------  ------------
      Total current assets.............................       881,120       250,230       (185,310)       946,040
                                                         ------------  --------------  ------------  ------------
Property and equipment, net............................       373,370       110,730         --            484,100
Excess of cost over acquired net assets................       394,100         8,180         --            402,280
Notes receivable.......................................         4,540        26,470         --             31,010
Investments in affiliates..............................       394,720        --           (394,720)       --
Other assets...........................................        23,670        22,210         (5,400)        40,480
                                                         ------------  --------------  ------------  ------------
      Total assets.....................................  $  2,071,520    $  417,820     $ (585,430)  $  1,903,910
                                                         ------------  --------------  ------------  ------------
                                                         ------------  --------------  ------------  ------------
LIABILITIES AND MASCO NET INVESTMENT AND ADVANCES
Current Liabilities:
  Notes payable........................................  $        220    $   25,280     $   --       $     25,500
  Accounts payable.....................................        67,540        26,690         (1,880)        92,350
  Accrued liabilities..................................        64,070        23,230         --             87,300
  Intercompany account.................................        21,980       161,420       (183,400)       --
                                                         ------------  --------------  ------------  ------------
      Total current liabilities........................       153,810       236,620       (185,280)       205,150
                                                         ------------  --------------  ------------  ------------
Long-term debt.........................................         1,910           240         --              2,150
Deferred income taxes and other........................        69,350         6,220         --             75,570
                                                         ------------  --------------  ------------  ------------
      Total liabilities................................       225,070       243,080       (185,280)       282,870
                                                         ------------  --------------  ------------  ------------
Masco net investment and advances......................     1,846,450       174,740       (400,150)     1,621,040
                                                         ------------  --------------  ------------  ------------
      Total liabilities and Masco net investment and
        advances.......................................  $  2,071,520    $  417,820     $ (585,430)  $  1,903,910
                                                         ------------  --------------  ------------  ------------
                                                         ------------  --------------  ------------  ------------
</TABLE>

                                       40
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                    COMPANY
                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
               FOR THE PERIOD AUGUST 6, 1996 TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                              NON-
                                                             GUARANTOR      GUARANTOR
                                                COMPANY     SUBSIDIARIES   SUBSIDIARIES ELIMINATIONS  CONSOLIDATED
                                              -----------  --------------  -----------  ------------  ------------
<S>                                           <C>          <C>             <C>          <C>           <C>
Net sales...................................   $  --         $  774,540     $ 200,490    $ (117,540)   $  857,490
Cost of sales...............................      --            590,190       165,490      (117,540)      638,140
                                              -----------  --------------  -----------  ------------  ------------
  Gross profit..............................      --            184,350        35,000        --           219,350
Selling, general and administrative
  expenses..................................      --            123,850        20,730        --           144,580
                                              -----------  --------------  -----------  ------------  ------------
  Operating profit..........................      --             60,500        14,270        --            74,770
Other expense, net..........................     (31,270)        16,880         8,650        32,400        26,660
                                              -----------  --------------  -----------  ------------  ------------
  Income (loss) before income taxes.........      31,270         43,620         5,620       (32,400)       48,110
Income taxes................................      --             14,580         2,260        --            16,840
                                              -----------  --------------  -----------  ------------  ------------
  Net income (loss).........................   $  31,270     $   29,040     $   3,360    $  (32,400)   $   31,270
                                              -----------  --------------  -----------  ------------  ------------
                                              -----------  --------------  -----------  ------------  ------------
</TABLE>

                                       41
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                              FOR THE PERIOD JANUARY 1, 1996 TO AUGUST 5, 1996
                                                            -----------------------------------------------------
<S>                                                         <C>           <C>          <C>           <C>
                                                                             NON-
                                                             GUARANTOR     GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES ELIMINATIONS    COMBINED
                                                            ------------  -----------  ------------  ------------
Net sales.................................................  $  1,014,270   $ 294,360    $ (160,740)  $  1,147,890
Cost of sales.............................................       780,000     251,390      (160,740)       870,650
                                                            ------------  -----------  ------------  ------------
  Gross profit............................................       234,270      42,970        --            277,240
Selling, general and administrative expenses..............       182,510      39,720        --            222,230
                                                            ------------  -----------  ------------  ------------
  Operating profit........................................        51,760       3,250        --             55,010
Other expense, net........................................        44,570       9,280         2,320         56,170
                                                            ------------  -----------  ------------  ------------
  Income (loss) before income taxes.......................         7,190      (6,030)       (2,320)        (1,160)
Income taxes (credit).....................................         8,910      (2,080)       --              6,830
                                                            ------------  -----------  ------------  ------------
  Net income (loss).......................................  $     (1,720)  $  (3,950)   $   (2,320)  $     (7,990)
                                                            ------------  -----------  ------------  ------------
                                                            ------------  -----------  ------------  ------------
</TABLE>

<TABLE>
<CAPTION>
                                                             FOR THE PERIOD JANUARY 1, 1995 TO DECEMBER 31, 1995
                                                            -----------------------------------------------------
<S>                                                         <C>           <C>          <C>           <C>
                                                                             NON-
                                                             GUARANTOR     GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES ELIMINATIONS    COMBINED
                                                            ------------  -----------  ------------  ------------
Net sales.................................................  $  1,728,250   $ 580,000    $ (315,640)  $  1,992,610
Cost of sales.............................................     1,317,550     486,500      (303,060)     1,500,990
                                                            ------------  -----------  ------------  ------------
  Gross profit............................................       410,700      93,500       (12,580)       491,620
Selling, general and administrative expenses..............       313,260      97,380       (12,850)       397,790
                                                            ------------  -----------  ------------  ------------
  Operating profit........................................        97,440      (3,880)          270         93,830
Other expense, net........................................        65,000      23,680        14,410        103,090
                                                            ------------  -----------  ------------  ------------
  Income (loss) before income taxes.......................        32,440     (27,560)      (14,140)        (9,260)
Income taxes (credit).....................................        16,170      (9,190)       --              6,980
                                                            ------------  -----------  ------------  ------------
  Net income (loss).......................................  $     16,270   $ (18,370)   $  (14,140)  $    (16,240)
                                                            ------------  -----------  ------------  ------------
                                                            ------------  -----------  ------------  ------------
</TABLE>

<TABLE>
<CAPTION>
                                                             FOR THE PERIOD JANUARY 1, 1994 TO DECEMBER 31, 1994
                                                            -----------------------------------------------------
<S>                                                         <C>           <C>          <C>           <C>
                                                                             NON-
                                                             GUARANTOR     GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES ELIMINATIONS    COMBINED
                                                            ------------  -----------  ------------  ------------
Net sales.................................................  $  1,640,060   $ 551,740    $ (294,320)  $  1,897,480
Cost of sales.............................................     1,256,440     462,800      (285,210)     1,434,030
                                                            ------------  -----------  ------------  ------------
  Gross profit............................................       383,620      88,940        (9,110)       463,450
Selling, general and administrative expenses..............       301,020      95,410        (9,630)       386,800
                                                            ------------  -----------  ------------  ------------
  Operating profit........................................        82,600      (6,470)          520         76,650
Other expense, net........................................        58,170      16,230        19,970         94,370
                                                            ------------  -----------  ------------  ------------
  Income (loss) before income taxes.......................        24,430     (22,700)      (19,450)       (17,720)
Income taxes (credit).....................................        15,940      (9,890)       --              6,050
                                                            ------------  -----------  ------------  ------------
  Net income (loss).......................................  $      8,490   $ (12,810)   $  (19,450)  $    (23,770)
                                                            ------------  -----------  ------------  ------------
                                                            ------------  -----------  ------------  ------------
</TABLE>

                                       42
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                    COMPANY
                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
               FOR THE PERIOD AUGUST 6, 1996 TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                 COMPANY    SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                               -----------  -----------  --------------  -------------  ------------
<S>                                            <C>          <C>          <C>             <C>            <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:...   $  --        $ 128,940     $  (23,160)     $  --         $  105,780
                                               -----------  -----------  --------------       ------    ------------
INVESTING ACTIVITIES:
  Acquisition of businesses, net of cash
    acquired.................................      --         (645,430)        --             --           (645,430)
  Investments in Receivables Trust...........      --           --            (51,120)        --            (51,120)
  Capital expenditures.......................      --          (11,250)        (2,570)        --            (13,820)
  Collection of note receivable..............      --            1,670         --             --              1,670
  Other, net.................................      --            3,200         --             --              3,200
                                               -----------  -----------  --------------       ------    ------------
      Net cash (used for) investing
        activities...........................      --         (651,810)       (53,690)        --           (705,500)
                                               -----------  -----------  --------------       ------    ------------
FINANCING ACTIVITIES:
  Proceeds from long-term debt...............      --          525,000         --             --            525,000
  Net proceeds from sale of account
    receivable...............................      --           --            167,000         --            167,000
  Capital contribution.......................      --           76,400         --             --             76,400
  Deferred financing costs...................      --          (37,590)        --             --            (37,590)
  Net repayments of long-term debt...........      --          (85,350)       (23,340)        --           (108,690)
  Intercompany accounts, net.................      --           48,920        (48,920)        --             --
                                               -----------  -----------  --------------       ------    ------------
        Net cash provided by (used for)
          financing activities...............      --          527,380         94,740         --            622,120
                                               -----------  -----------  --------------       ------    ------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period...........      --            4,510         17,890         --             22,400
Balance, beginning of period.................      --           --             --             --             --
                                               -----------  -----------  --------------       ------    ------------
Balance, end of period.......................   $  --        $   4,510     $   17,890      $  --         $   22,400
                                               -----------  -----------  --------------       ------    ------------
                                               -----------  -----------  --------------       ------    ------------
</TABLE>

                                       43
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENTS OF CASH FLOWS
                FOR THE PERIOD JANUARY 1, 1996 TO AUGUST 5, 1996

<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   COMBINED
                                                            -----------  --------------  ------------  -----------
<S>                                                         <C>          <C>             <C>           <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:................   $  21,890     $   20,110     $   (2,350)   $  39,650
                                                            -----------       -------    ------------  -----------
INVESTING ACTIVITIES:
  Capital expenditures....................................     (14,130)        (2,390)        --          (16,520)
  Collection of notes receivable, net.....................       1,450          1,340         --            2,790
  Other, net..............................................      (4,530)         7,290         (5,400)      (2,640)
                                                            -----------       -------    ------------  -----------
      Net cash (used for) provided by investing
        activities........................................     (17,210)         6,240         (5,400)     (16,370)
                                                            -----------       -------    ------------  -----------
FINANCING ACTIVITIES:
  (Decrease) in Masco investment and advances.............      (4,900)       (25,450)         7,750      (22,600)
  Proceeds from long-term debt............................         800         86,960         --           87,760
  Net repayments of short-term debt.......................        (800)       (86,290)        --          (87,090)
                                                            -----------       -------    ------------  -----------
      Net cash (used for) financing activities............      (4,900)       (24,780)         7,750      (21,930)
                                                            -----------       -------    ------------  -----------
CASH AND CASH INVESTMENTS:
(Decrease) Increase for the period........................        (220)         1,570         --            1,350
Balance, beginning of period..............................       4,540         12,770         --           17,310
                                                            -----------       -------    ------------  -----------
Balance, end of period....................................   $   4,320     $   14,340     $   --        $  18,660
                                                            -----------       -------    ------------  -----------
                                                            -----------       -------    ------------  -----------
</TABLE>

                                       44
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENTS OF CASH FLOWS
              FOR THE PERIOD JANUARY 1, 1995 TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   COMBINED
                                                            -----------  --------------  ------------  -----------
<S>                                                         <C>          <C>             <C>           <C>
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:.....   $  87,030     $  (38,600)    $  (14,110)   $  34,320
                                                            -----------  --------------  ------------  -----------
INVESTING ACTIVITIES:
  Capital expenditures....................................     (42,550)       (18,480)        --          (61,030)
  Issuance of notes receivable............................      (1,480)        (8,780)        --          (10,260)
  Collection of notes receivable, net.....................       3,000          2,020         --            5,020
  Other, net..............................................      (4,600)        (1,070)        14,460        8,790
                                                            -----------  --------------  ------------  -----------
      Net cash (used for) investing activities............     (45,630)       (26,310)        14,460      (57,480)
                                                            -----------  --------------  ------------  -----------
FINANCING ACTIVITIES:
  Decrease (Increase) in Masco Corp. investment and
    advances..............................................     (41,530)        45,160           (350)       3,280
  Increase in other debt..................................         120         16,080         --           16,200
  Payment of other debt...................................      (2,290)        (1,430)        --           (3,720)
                                                            -----------  --------------  ------------  -----------
      Net cash (used for) provided by financing
        activities........................................     (43,700)        59,810           (350)      15,760
                                                            -----------  --------------  ------------  -----------
CASH AND CASH INVESTMENTS:
(Decrease) for the year...................................      (2,300)        (5,100)        --           (7,400)
Balance, beginning of period..............................       6,840         17,870         --           24,710
                                                            -----------  --------------  ------------  -----------
Balance, end of period....................................   $   4,540     $   12,770     $   --        $  17,310
                                                            -----------  --------------  ------------  -----------
                                                            -----------  --------------  ------------  -----------
</TABLE>

                                       45
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENTS OF CASH FLOWS
              FOR THE PERIOD JANUARY 1, 1994 TO DECEMBER 31, 1994

<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   COMBINED
                                                            -----------  --------------  ------------  ----------
<S>                                                         <C>          <C>             <C>           <C>
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:.....   $  33,900     $  (15,130)    $  (19,450)  $     (680)
                                                            -----------  --------------  ------------  ----------
INVESTING ACTIVITIES:
  Capital expenditures....................................     (57,140)       (11,650)        --          (68,790)
  Issuance of notes receivable............................      --             (1,000)        --           (1,000)
  Collection of notes receivable, net.....................       3,130            580         --            3,710
  Other, net..............................................     (15,340)        11,380         16,930       12,970
                                                            -----------  --------------  ------------  ----------
      Net cash provided by (used for) investing activities     (69,350)          (690)        16,930      (53,110)
                                                            -----------  --------------  ------------  ----------
FINANCING ACTIVITIES:
  Increase in Masco Corp. investment and advances.........      73,110         24,200          2,520       99,830
  Increase in other debt..................................      --              5,360         --            5,360
  Payment of other debt...................................     (34,720)       (17,370)        --          (52,090)
                                                            -----------  --------------  ------------  ----------
      Net cash provided by financing activities...........      38,390         12,190          2,520       53,100
                                                            -----------  --------------  ------------  ----------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the year..........................       2,940         (3,630)        --             (690)
Balance, beginning of period..............................       3,900         21,500         --           25,400
                                                            -----------  --------------  ------------  ----------
Balance, end of period....................................   $   6,840     $   17,870     $   --       $   24,710
                                                            -----------  --------------  ------------  ----------
                                                            -----------  --------------  ------------  ----------
</TABLE>

                                       46
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

17. PRO FORMA SUPPLEMENTARY DATA (UNAUDITED)

    The following pro forma supplementary data for the years ended December 31,
1996 and 1995 give effect to the acquisition transactions as if they had
occurred on January 1, 1995. The pro forma supplementary data is provided for
informational purposes only and should not be construed to be indicative of the
Company's results of operations had the transactions been consummated on the
dates assumed and do not project the Company's results of operations for any
future date. (See Notes 1 The Acquisition and 2 Basis of Presentation and
Accounting Policies)

<TABLE>
<CAPTION>
                                                                           YEAR ENDED
                                                                   --------------------------
<S>                                                                <C>           <C>
                                                                     DEC. 31,      DEC. 31,
                                                                       1996          1995
                                                                   ------------  ------------
Net sales........................................................   $  2,005.4    $  1,975.1
Gross profit.....................................................        502.0         496.5
Operating profit.................................................        147.9         125.2
Net income.......................................................         48.4          28.3
</TABLE>

    The primary adjustments applied to the historical predecessor financial
statements to arrive at the pro forma presentation include the following:

a)  Adjustment to reflect elimination of goodwill amortization of approximately
    $14.2 million on an annualized basis.

b)  Adjustment of approximately $15.9 million on an annual basis to reflect
    decreased depreciation for writedown of property and equipment from the
    allocation of the estimated fair value of the net assets.

c)  Adjustment to reflect the reduction of interest expense due to the
    elimination of interest expense on Masco net advances offset by the impact
    of interest expense on the financing arrangements incurred at the
    acquisition.

d)  Adjustment to eliminate the operating results of businesses acquired by FII
    from Masco but not contributed to the Company.

                                       47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.

                                 Not Applicable

                                       48
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required to be presented in this Item 10 will be contained in an
amendment to this Form 10-K to be filed not later than 120 days after the end of
the fiscal year covered by this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required to be presented in this Item 11 will be contained in an
amendment to this Form 10-K to be filed not later than 120 days after the end of
the fiscal year covered by this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required to be presented in this Item 12 will be contained in an
amendment to this Form 10-K to be filed not later than 120 days after the end of
the fiscal year covered by this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required to be presented in this Item 13 will be contained in an
amendment to this Form 10-K to be filed not later than 120 days after the end of
the fiscal year covered by this Form 10-K.

                                       49
<PAGE>
                                    PART IV

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

       (a) Exhibits:

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                              DESCRIPTION OF EXHIBITS
-----------  ---------------------------------------------------------------------------------------------------------
<C>          <S>
       3.1   Certificate of Incorporation of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company")(Incorporated by
             reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (No. 333-11905))
       3.2   By-Laws of the Company (Incorporated by reference to Exhibit 3.25 to the Company's Registration Statement
             on Form S-4 (No. 333-11905))
       4.1   Indenture between the Company and IBJ Schroder Bank & Trust Company, as Trustee, dated August 5, 1996
             (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
       4.2   Supplemental Indenture dated December 20, 1996*
      10.1   Acquisition Agreement between FURNISHINGS INTERNATIONAL INC. and Masco Corporation
             dated as of March 29, 1996 (Incorporated by reference to Exhibit 10.1 to the
             Company's Registration Statement on Form S-4 (No. 333-11905))
      10.2   Amendment No. 1 to Acquisition Agreement dated as of June 21, 1996 (Incorporated by
             reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
      10.3   Amendment No. 2 to Acquisition Agreement dated as of August 5, 1996 (Incorporated by
             reference to Exhibit 10.3 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
      10.4   Credit Agreement dated as of August 5, 1996 among FURNISHINGS INTERNATIONAL INC.,
             the Company, the subsidiary borrowers named therein, the lenders named therein and
             The Chase Manhattan Bank, as Swingline Lender, Administrative Agent and Collateral
             Agent, Chase Manhattan Bank Delaware as Issuing Bank (the "Credit Agreement")
             (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement
             on Form S-4 (No. 333-11905))
      10.5   First Amendment to Credit Agreement dated as of January 30, 1997 (Amendment No. 1 to
             "Credit Agreement")*
      10.6   Purchase Agreement, dated as of January 29, 1997, with respect to Series 1997-1 Term
             Certificates*
      10.7   Amended and Restated Pooling Agreement, dated as of February 4, 1997, among LFI
             Receivables Corporation, LFI Servicing Corporation and The Chase Manhattan Bank, as
             Trustee*
      10.8   Series 1997-1 Supplement to the Amended and Restated Pooling Agreement, dated as of
             February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation and
             The Chase Manhattan Bank, as Trustee*
      10.9   Series 1997-2 Supplement to the Amended and Restated Pooling Agreement, dated as of
             February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation, The
             Chase Manhattan Bank as Agent and as Initial Purchaser and The Chase Manhattan Bank
             as Trustee*
     10.10   Amended and Restated Servicing Agreement, dated as of February 4, 1997, among LFI
</TABLE>

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

*   Filed herewith

                                       50
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                   DESCRIPTION OF EXHIBITS
-----------  ------------------------------------------------------------------------------------
<C>          <S>                                                                                   <S>
             Receivables Corporation, LFI Servicing Corporation, as Master Servicer, each of the Servicers party
             thereto and The Chase Manhattan Bank, as Trustee*
     10.11   Amended and Restated Receivables Sale Agreement, dated as of February 4, 1997, among LFI Receivables
             Corporation, the Sellers named therein and the Servicers named therein*
     10.12   Stockholders' Agreement, dated as of August 5, 1996, among Masco Corporation, FURNISHINGS INTERNATIONAL
             INC., 399 Venture Partners, Inc., Associate Madison Companies, Inc., and the other stockholders named
             therein (the "Stockholders Agreement") (Incorporated by reference to Exhibit 10.10 to the Company's
             Registration Statement on Form S-4 (No. 333-11905))
     10.13   Amendment No. 1 to the Stockholder's Agreement dated as of December 17, 1996*
     10.14   Amendment No. 2 to the Stockholder's Agreement dated as of March 26, 1997*
     10.15   Registration Rights Agreement, dated as of August 5, 1996, among Masco Corporation, FURNISHINGS
             INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison Companies, Inc., and the other
             stockholders named therein (Incorporated by reference to Exhibit 10.11 to the Company's Registration
             Statement on Form S-4 (No. 333-11905))
     10.16   Management Agreement, dated as of August 5, 1996, by and between FURNISHINGS INTERNATIONAL INC. and the
             Company (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-4
             (No. 333-11905))
     10.17   Tax Sharing Agreement, dated as of the 5th day of August 1996, by and between FURNISHINGS INTERNATIONAL
             INC., Simmons Upholstered Furniture Corporation, the Company and LFI Receivables Corporation
             (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
     10.18   Transition Services Agreement, dated as of August 5, 1996, among FURNISHINGS INTERNATIONAL INC. and Masco
             Corporation (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form
             S-4 (No. 333-11905))
     10.19   12.0% Senior Pay-in-Kind Note of FURNISHINGS INTERNATIONAL INC. dated August 5, 1996 (Incorporated by
             reference to Exhibit 10.15 to the Company's Registration Statement on Form S-4 (No. 333-11905))
     10.20   Purchase Agreement dated July 31, 1996 between the Company, Chase Securities Inc., Merrill Lynch, Pierce,
             Fenner & Smith Incorporated, and the Guarantors named therein (Incorporated by reference to Exhibit 10.16
             to the Company's Registration Statement on Form S-4 (No. 333-11905))
     10.21   Company's Retirement Benefit Restoration Plan*
     10.22   Restricted Stock Plan of FURNISHINGS INTERNATIONAL INC.*
        21   Subsidiaries of the Company*
        27   Financial Data Schedule*
             (b) Financial Statement Schedule
                    1. Financial Statement Schedule filed herewith:
                            Schedule II Valuation and Qualifying Accounts
</TABLE>

<TABLE>
<C>          <S>
             (c) Reports on Form 8-K
                    No reports on Form 8-K were filed by the registrant during the three months
                   ended December 31, 1996.
</TABLE>

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

*   Filed herewith

                                       51
<PAGE>
                                   SIGNATURES

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

                                LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                                BY:  /s/ WAYNE B. LYON
                                     -----------------------------------------
                                     Wayne B. Lyon
                                     Chairman of the Board,
                                     President and Chief Executive Officer

March 31, 1997

    Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons in the capacities and on the date
indicated.

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

                                Chairman of the Board,         March 31, 1997
/s/ WAYNE B. LYON               President and Chief
------------------------------  Executive Officer
Wayne B. Lyon                   (principal executive
                                officer)

                                Vice President, Treasurer      March 31, 1997
/s/ RONALD J. HOFFMAN           and Chief Financial Officer
------------------------------  (principal financial and
Ronald J. Hoffman               accounting officer)

/s/ RICHARD M. CASHIN, JR.      Director                       March 31, 1997
------------------------------
Richard M. Cashin, Jr.

/s/ ROBERT L. GEORGE            Director                       March 31, 1997
------------------------------
Robert L. George

/s/ ROBERT C. LARSON            Director                       March 31, 1997
------------------------------
Robert C. Larson

/s/ DAVID F. THOMAS             Director                       March 31, 1997
------------------------------
David F. Thomas

/s/ MARTIN D. WALKER            Director                       March 31, 1997
------------------------------
Martin D. Walker

                                       52
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.:

Our report on the consolidated financial statements of LIFESTYLE FURNISHINGS
INTERNATIONAL LTD. and subsidiaries and the combined financial statements of the
Masco Home Furnishings Group is included on page 23 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 51 of this
Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

Coopers & Lybrand, L.L.P.
Greensboro, North Carolina
February 18, 1997

                                       53
<PAGE>
                      LIFESTYLE FURNISHINGS INTERNATIONAL
                 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                           COLUMN B
COLUMN A                                                  ADDITIONS                 COLUMN C         COLUMN D       COLUMN E
----------------------------------------------  ------------------------------  -----------------  -------------  -------------
<S>                                             <C>              <C>            <C>                <C>            <C>
                                                  BALANCES AT     CHARGED TO         CHARGED                       BALANCE AT
                                                 BEGINNING OF      COSTS AND      (CREDITED) TO                      END OF
                                                    PERIOD         EXPENSES      OTHER ACCOUNTS     DEDUCTIONS       PERIOD
                                                ---------------  -------------  -----------------  -------------  -------------
Allowance for doubtful accounts, deducted from
  accounts receivables in the balance sheet
Aug. 6 to Dec. 31, 1996.......................     $     9.3       $     1.6        $    (5.6)       $     0.5      $     4.8
                                                         ---             ---            -----              ---            ---
                                                         ---             ---            -----              ---            ---
Jan. 1, 1996 to Aug. 5, 1996..................     $     9.0       $     2.3        $  --            $     2.0      $     9.3
                                                         ---             ---            -----              ---            ---
                                                         ---             ---            -----              ---            ---
Year ended December 31, 1995..................     $     7.7       $     6.6        $  --            $     5.3      $     9.0
                                                         ---             ---            -----              ---            ---
                                                         ---             ---            -----              ---            ---
Year ended December 31, 1994..................     $     9.9       $     5.7        $  --            $     7.9      $     7.7
                                                         ---             ---            -----              ---            ---
                                                         ---             ---            -----              ---            ---
</TABLE>

                                       54
<PAGE>
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                             DESCRIPTION OF EXHIBITS
-----------  --------------------------------------------------------------------------------------------------------
<C>          <S>
       3.1   Certificate of Incorporation of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company")(Incorporated by
             reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (No. 333-11905))
       3.2   By-Laws of the Company (Incorporated by reference to Exhibit 3.25 to the Company's Registration
             Statement on Form S-4 (No. 333-11905))
       4.1   Indenture between the Company and IBJ Schroder Bank & Trust Company, as Trustee, dated August 5, 1996
             (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
       4.2   Supplemental Indenture dated December 20, 1996*
      10.1   Acquisition Agreement between FURNISHINGS INTERNATIONAL INC. and Masco Corporation dated as of March 29,
             1996 (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4 (No.
             333-11905))
      10.2   Amendment No. 1 to Acquisition Agreement dated as of June 21, 1996 (Incorporated by reference to Exhibit
             10.2 to the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.3   Amendment No. 2 to Acquisition Agreement dated as of August 5, 1996 (Incorporated by reference to
             Exhibit 10.3 to the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.4   Credit Agreement dated as of August 5, 1996 among FURNISHINGS INTERNATIONAL INC., the Company, the
             subsidiary borrowers named therein, the lenders named therein and The Chase Manhattan Bank, as Swingline
             Lender, Administrative Agent and Collateral Agent, Chase Manhattan Bank Delaware as Issuing Bank (the
             "Credit Agreement") (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement
             on Form S-4 (No. 333-11905))
      10.5   First Amendment to Credit Agreement dated as of January 30, 1997 (Amendment No. 1 to "Credit
             Agreement")*
      10.6   Purchase Agreement, dated as of January 29, 1997, with respect to Series 1997-1 Term Certificates*
      10.7   Amended and Restated Pooling Agreement, dated as of February 4, 1997, among LFI Receivables Corporation,
             LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee*
      10.8   Series 1997-1 Supplement to the Amended and Restated Pooling Agreement, dated as of February 4, 1997,
             among LFI Receivables Corporation, LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee*
      10.9   Series 1997-2 Supplement to the Amended and Restated Pooling Agreement, dated as of February 4, 1997,
             among LFI Receivables Corporation, LFI Servicing Corporation, The Chase Manhattan Bank as Agent and as
             Initial Purchaser and The Chase Manhattan Bank as Trustee*
      10.10  Amended and Restated Servicing Agreement, dated as of February 4, 1997, among LFI Receivables
             Corporation, LFI Servicing Corporation, as Master Servicer, each of the Servicers party thereto and The
             Chase Manhattan Bank, as Trustee*
      10.11  Amended and Restated Receivables Sale Agreement, dated as of February 4, 1997, among LFI Receivables
             Corporation, the Sellers named therein and the Servicers named therein*
</TABLE>

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

*   Filed herewith
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                             DESCRIPTION OF EXHIBITS
-----------  --------------------------------------------------------------------------------------------------------
<C>          <S>
      10.12  Stockholders' Agreement, dated as of August 5, 1996, among Masco Corporation,
             FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison
             Companies, Inc., and the other stockholders named therein (the "Stockholders
             Agreement") (Incorporated by reference to Exhibit 10.10 to the Company's
             Registration Statement on Form S-4 (No. 333-11905))
      10.13  Amendment No. 1 to the Stockholder's Agreement dated as of December 17, 1996*
      10.14  Amendment No. 2 to the Stockholder's Agreement dated as of March 26, 1997*
      10.15  Registration Rights Agreement, dated as of August 5, 1996, among Masco Corporation,
             FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison Compa-
             nies, Inc., and the other stockholders named therein (Incorporated by reference to
             Exhibit 10.11 to the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.16  Management Agreement, dated as of August 5, 1996, by and between FURNISHINGS
             INTERNATIONAL INC. and the Company (Incorporated by reference to Exhibit 10.12 to
             the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.17  Tax Sharing Agreement, dated as of the 5th day of August 1996, by and between
             FURNISHINGS INTERNATIONAL INC., Simmons Upholstered Furniture Corporation, the
             Company and LFI Receivables Corporation (Incorporated by reference to Exhibit 10.13
             to the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.18  Transition Services Agreement, dated as of August 5, 1996, among FURNISHINGS INTER-
             NATIONAL INC. and Masco Corporation (Incorporated by reference to Exhibit 10.14 to
             the Company's Registration Statement on Form S-4 (No. 333-11905))
      10.19  12.0% Senior Pay-in-Kind Note of FURNISHINGS INTERNATIONAL INC. dated August 5, 1996
             (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement
             on Form S-4 (No. 333-11905))
      10.20  Purchase Agreement dated July 31, 1996 between the Company, Chase Securities Inc.,
             Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the Guarantors named therein
             (Incorporated by reference to Exhibit 10.16 to the Company's Registration Statement
             on Form S-4 (No. 333-11905))
      10.21  Company's Retirement Benefit Restoration Plan*
      10.22  Restricted Stock Plan of FURNISHINGS INTERNATIONAL INC.*
      21     Subsidiaries of the Company*
      27     Financial Data Schedule*
</TABLE>

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

*   Filed herewith