<PAGE>   1

================================================================================

                                  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

For the Fiscal Year Ended December 31, 1998    Commission File Number: 333-11905

                                   -----------

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
             (Exact Name of Registrant as Specified in its Charter)

               Delaware                                 56-1977928
       (State of Incorporation)             (I.R.S. Employer Identification No.)
  4000 Lifestyle Court, High Point, NC                    27265
(Address of Principal Executive Offices)               (Zip Code)

       Registrant's telephone number, including area code: (336) 878-7000

        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 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, 1999:

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

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                                TABLE OF CONTENTS

Item                                                                    Page No.
----                                                                    --------

                                     PART I
1.  Business...............................................................  1
2.  Properties.............................................................  12
3.  Legal Proceedings......................................................  12
4.  Submission of Matters to a Vote of Security Holders....................  13

                                     PART II
5.  Market for Registrant's Common Equity and Related Stockholder Matters..  14
6.  Selected Historical Financial Data.....................................  15
7.  Management's Discussion and Analysis of Financial Condition and
      Results of Operations................................................  17
8.  Financial Statements...................................................  27
9.  Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure.................................................  57

                                    PART III
10. Directors and Executive Officers of the Registrant.....................  58
11. Executive Compensation.................................................  60
12. Security Ownership of Certain Beneficial Owners and Management.........  62
13. Certain Relationships and Related Transactions.........................  65

                                     PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........  66
15. Signatures.............................................................  69

                          FINANCIAL STATEMENT SCHEDULE

LIFESTYLE FURNISHINGS INTERNATIONAL LTD. Financial Statement Schedule......  71
<PAGE>   3

                                     PART I

Item 1. BUSINESS

General

      LIFESTYLE FURNISHINGS INTERNATIONAL LTD. ("LifeStyle") is the largest
manufacturer and marketer of home furnishings (fine furniture, including
decorative accessories, and decorative home furnishings fabrics) in the U.S.,
with 1998 net sales of $2.0 billion. Fine furniture represented approximately
87% of LifeStyle's net sales in 1998 and decorative home furnishing fabrics
represented approximately 13%. LifeStyle attributes its market leadership
position to the following key factors:

      o     Fashionable and innovative product designs with an emphasis on
            style, quality and value

      o     Comprehensive product offerings that provide retailers and consumers
            with a broad range of price points and styles

      o     Multi-channel distribution to a customer base of over 50,000
            accounts, providing LifeStyle's products to consumers wherever they
            choose to shop

      o     Established brand names, such as Henredon(R) and Drexel Heritage(R),
            as well as partnerships with leading fashion designers, brands and
            artists, such as Ralph Lauren, Nautica and Bob Timberlake

      o     Commitment to improving retailer and consumer satisfaction levels
            with the home furnishings buying experience

      o     An experienced and innovative management team with significant
            equity ownership and a commitment to continuous improvement

      LifeStyle is restructuring its manufacturing base, reengineering its
manufacturing and business processes and incorporating technology into its
product design and business processes in order to achieve sustainable operating
efficiencies, dramatically shorten order-to-ship times and enhance LifeStyle's
ability to satisfy its customers and consumers. Once implemented, LifeStyle
expects these restructuring and reengineering initiatives to increase operating
margins, reduce working capital, increase market share, improve retailer
profitability and strengthen LifeStyle's leadership position in the home
furnishings industry.

      Fine Furniture. LifeStyle 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(R), Drexel
Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a
wide range of furniture accessories under the Maitland-Smith(TM) and La Barge(R)
brand names.

      Decorative Home Furnishing Fabrics. LifeStyle 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(R).

      FURNISHINGS INTERNATIONAL INC. ("Holdings"), LifeStyle's parent, has filed
a Registration Statement on Form S-1 (File No. 333-58655) relating to the
initial public offering of its common stock (the "Offerings"). In connection
with the Offerings, LifeStyle will be merged with and into Holdings, which will
then change its name to LifeStyle Furnishings International Ltd. In addition,
LifeStyle has commenced a cash tender offer to acquire all of its outstanding
subordinated notes. For a further discussion of the initial public offering and
related transactions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."


                                       1
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Products

      LifeStyle believes it offers the most comprehensive product line in the
home furnishings industry, including bedroom, dining room, living room, family
room and home-office case goods; stationary upholstered products such as sofas,
love seats, sectionals and chairs; upholstered recliners, motion furniture and
sleep sofas; occasional furniture such as home entertainment centers, lamps,
chairs, tables, mirrors and other accent items; outdoor furniture; and
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 furnishings.
LifeStyle 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(R), Drexel Heritage(R),
Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a wide range of
specialty furniture and accessories under the Maitland-Smith(TM) and La Barge(R)
brand names. LifeStyle 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, Transitional, Casual, Mission, Arts and Crafts, Contemporary,
Oriental, Home Office, Youth and Outdoor.

         The following table illustrates the product and price category coverage
of LifeStyle'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/
                                  Case Goods           Upholstery            Recliner           Occasional
        ------------------------------------------------------------------------------------------------------------
        <S>                   <C>                   <C>                   <C>                    <C>
        Premium               Henredon(R)           Beacon Hill(R)                               Henredon(R)
                              Maitland-Smith(TM)    Henredon(R)                                  La Barge(R)
                                                                                                 Maitland-Smith(TM)
        ------------------------------------------------------------------------------------------------------------
        Best                  Drexel Heritage(R)    Beacon Hill(R)        Drexel Heritage(R)     Drexel Heritage(R)
                              Henredon(R)           Drexel Heritage(R)                           Henredon(R)
                              Maitland-Smith(TM)    Henredon(R)                                  La Barge(R)
                                                                                                 Maitland-Smith(TM)
        ------------------------------------------------------------------------------------------------------------
        Better                Drexel Heritage(R)    BenchCraft(R)         BenchCraft(R)          Drexel Heritage(R)
                              Lexington(R)          Drexel Heritage(R)    Berkline(R)            Lexington(R)
                              Universal(R)          Lexington(R)          Drexel Heritage(R)
                                                    Universal(R)
        ------------------------------------------------------------------------------------------------------------
        Good                  Lexington(R)          BenchCraft(R)         BenchCraft(R)          Universal(R)
                              Universal(R)          Universal(R)          Berkline(R)
        ------------------------------------------------------------------------------------------------------------
        Promotional           Universal(R)          BenchCraft(R)         BenchCraft(R)          Universal(R)
                                                                          Berkline(R)
        ------------------------------------------------------------------------------------------------------------
</TABLE>

         Shaded area indicates product category does not exist.


                                       2
<PAGE>   5

     Henredon(R)

      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.
Henredon's product line is designed to appeal largely to the "replacement"
market, where customers typically trade up in price as they seek top quality
materials and craftsmanship. Product design and development represent an
important element of Henredon's success, and its name is considered to be one of
the premier brands in the industry. Henredon currently markets 18 collections
(including the Ralph Lauren Home Collection(TM) and Henredon Registry(TM)), each
aimed at a specific segment of the upper end market. In order to stay current
with developing lifestyles, Henredon introduces approximately four new
collections each year. Current product offerings cover all major categories,
including Anglo Traditional, European Traditional, Contemporary, Transitional
and Casual. Since 1993, Henredon has manufactured and marketed a line of
products for the Ralph Lauren Home Collection(TM) under an exclusive licensing
arrangement with The Ralph Lauren Home Collection, Inc. This comprehensive
collection provides an excellent complement to the regular Henredon line. Recent
successful new introductions include Alfresco(TM) (Euro traditional),
Carlyle(TM) (Anglo traditional) and the launch of the Henredon Leather
Company(TM).

     Drexel Heritage(R)

      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. Drexel Heritage(R)
products are primarily marketed and distributed through dedicated, independently
owned Drexel Heritage Home Inspirations(R) stores and Drexel Heritage Galleries.
Drexel Heritage currently produces 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, Mission, Contemporary and
Transitional. Drexel Heritage licenses two branded collections--the Pinehurst
Collection(TM) (case goods and upholstery) and Lillian August(R)
(upholstery)--and has an exclusive endorsement agreement with Golden Bear Golf,
Inc. to furnish all country club and resort developments associated with
Nicklaus Design. Drexel Heritage also produces furniture for sale to the
hospitality and government markets. Recent successful new introductions include
the comprehensive Pinehurst Collection(TM) (sophisticated yet casual--a
lifestyle collection) and Solutions Contemporary(TM) and Solutions Casual(TM)
(contemporary, casual, functional, youth-oriented with a point of view).

     Lexington(R)

      Lexington designs and manufactures wood, upholstered, occasional, wicker
and metal furniture for the bedroom, dining room, living room, family room, home
entertainment, home office, youth and casual dining market segments. Lexington's
product line provides a comprehensive diversified assortment of furniture in the
"good" and "better" price categories. LifeStyle believes that Lexington's
marketing and design teams, which consistently win industry awards, represent an
integral part of Lexington's success. With the introduction of Lynn Hollyn at
Home(TM) in 1989, Lexington pioneered "lifestyle" and designer
collections--full-line collections of eclectic (rather than matching) designs
that draw inspiration from a recognized brand name or lifestyle theme. Current
lifestyle collections include The World of Bob Timberlake(R), The Palmer Home
Collection, Weekend Retreat(TM) and Seaside Retreat(TM), Vestiges(TM), Atlantic
Overtures(TM), American Mix(TM), Nautica Home collection, Warren Kimble's
America(TM), and Bob Timberlake's newest success story, An Arts and Crafts
Collection(TM) from Bob Timberlake(R). Style categories include American and
European Traditional, Eighteenth Century, Transitional and both Sophisticated
and Relaxed Country and Casual. Lexington's line of approximately 50 collections
includes lifestyle collections, youth collections and several home entertainment
and home office programs. Recent successful new introductions include Nautica
Home (contemporary, Caribbean-inspired, featuring mixed materials), Betsy
Cameron's Storybook(TM) (female youth), and Seaside Retreat(TM) (casual,
coastal-inspired).


                                       3
<PAGE>   6

     Universal(R)

      Universal's products include dining room, bedroom, upholstered and
occasional furniture in the "promotional," "good" and "better" price categories.
A substantial portion of Universal products are manufactured in Asia, where
LifeStyle is the only U.S.-based manufacturer with significant manufacturing
operations. Universal also has access to a highly skilled, low-cost work force,
expert in such areas as intricate veneering and hand carving, and to scarce raw
materials such as Chinese oak, wicker, rattan and certain exotic woods.
Universal currently sells approximately 60 collections of furniture, including
styles such as Eighteenth Century, Traditional, Transitional, Oriental and
Country, and introduces approximately four to six new collections a year.
Universal's Alexander Julian Home Colours(R) and American Generations(R)
collections are among the industry's best selling "mega collections." Recent
successful new introductions include Habitat(TM) (functional, decorative kitchen
and bedroom products), Decorum(TM) (Regency-influenced traditional) and American
Heirlooms(TM) (innovative transitional dining room and bedroom).

     Berkline(R)

      A specialist in "motion" products, Berkline designs and manufactures a
wide range of reclining chairs, reclining sofas and loveseats, reclining
sectionals and modular seating and sleep sofas, primarily in the "good" and
"better" price categories. Berkline is an industry leader and the Berkline(R)
brand name is well known in the growing market for upholstered modular and
motion furniture and freestanding recliners. Berkline offers a wide range of
styles, fabrics and leathers for these products, as well as popular innovative
features such as massage mechanisms, hidden cup holders and built-in tables.
Successful new product introductions include Room Solutions(TM) (motion
upholstery and correlated occasional tables); sleeker, smaller scale recliners;
and innovative "shiatsu" and "whisper quiet" massage recliners.

     BenchCraft(R)

      BenchCraft designs and manufactures a comprehensive line of upholstered
furniture, including leather, stationary, motion, wicker and rattan products.
BenchCraft competes in the "promotional," "good" and "better" price categories,
and its products are marketed as fashionable, affordable furniture for "casual
living." Successful new product introductions include new leather styles and
contemporary lifestyle sofas as well as more fashionable new motion sofas and
table correlates.

     Maitland-Smith(TM)

      Maitland-Smith is the leading designer and manufacturer of an innovative
line of "best" and "premium" hand-crafted, antique-inspired furniture,
accessories and lighting, utilizing a wide range of unique materials, including
distinctive leather, fancy faced veneer, stone and hand-painted metal.
Maitland-Smith also manufactures signature pieces and intricately carved chairs
for other LifeStyle divisions at its factories in the Philippines and Indonesia.
Successful new introductions include more than 500 product additions across
Maitland-Smith's eclectic lines, including the London Explorer Club(TM)
collection featuring British expatriate design inspiration.

     La Barge(R)

      La Barge designs and sells decorative mirrors, occasional tables, bedroom
and dining room statement pieces, decorative lighting and related accessories in
the "best" and "premium" price categories under four brand names: La Barge(R),
Marbro(TM), entree(TM) and Magellan(TM). La Barge designs its products, and
contracts their manufacture with highly skilled artisans around the world who
produce high quality, specialty decorative products.


                                       4
<PAGE>   7

Decorative Home Furnishing Fabrics

      LifeStyle designs, manufactures, sources, markets and sells a
comprehensive range of decorative fabrics to a broad array of customers under
the well-known industry brands of Beacon Hill(R), Ramm, Son & Crocker(TM),
Sunbury(TM), Robert Allen(TM) and Ametex(TM). The fabrics group consists of The
Robert Allen Group, Sunbury, and LifeStyle Fabrics Europe, each creating
exclusive fabric designs for targeted segments of the market. The following
table illustrates the price category coverage of LifeStyle's decorative home
furnishing fabric brands:

<TABLE>
<CAPTION>
      --------------------------------------------------------------
      Price Category                    Brand
      --------------------------------------------------------------
      <S>                               <C>
      Premium                           Beacon Hill(R)
                                        Ramm, Son & Crocker(TM)
      --------------------------------------------------------------
      Best                              Beacon Hill(R)
                                        Ramm, Son & Crocker(TM)
                                        Robert Allen(TM)
                                        Sunbury(TM)
      --------------------------------------------------------------
      Better                            Ametex(TM)
                                        Robert Allen(TM)
                                        Sunbury(TM)
      --------------------------------------------------------------
      Good                              Ametex(TM)
      --------------------------------------------------------------
</TABLE>

The Robert Allen Group

      The Robert Allen Group is the largest designer and marketer of home
furnishing fabrics to the North American design community. The Robert Allen
Group designs, markets and sells a wide range of textiles under the Beacon
Hill(R), Robert Allen(TM) and Ametex(TM) brands.

      Beacon Hill(R) is a classic, stylish line of luxurious fabrics, using the
finest quality materials and advanced manufacturing techniques. Fabrics are
organized in collections by color or fabric type. Many of the Beacon Hill(R)
fabrics are sourced overseas, offering distinctive looks to the U. S. market.
The Beacon Hill(R) collections are sold exclusively through high-end interior
designers, architects and LifeStyle's own Beacon Hill(R) showrooms. Combined
marketing programs for Beacon Hill(R) fabrics and furniture have made the brand
a powerful name in the high-end design community.

      The Robert Allen(R) line includes an extensive collection of home
furnishings fabrics cut to order on a just-in-time basis for designers,
decorators and specialty retailers. Robert Allen markets its over 24,000 fabrics
to more than 30,000 customers in four key collections: Color Library(TM),
Essentials(TM), Editions(TM) and Passementerie(TM). Color Library(TM) is a color
coordinated collection of upholstery and multi-purpose fabrics that create a
total look for the home, updated each spring and fall with the latest colors and
constructions. Essentials(TM) delivers fabric basics such as sheers, velvets and
stripes in fashionable and affordable collections. Editions(TM) arranges print
and woven fabrics into lifestyle collections. Passementerie(TM) is an extensive
collection of decorative trim products used to accessorize upholstery and
drapery.

      The Ametex(TM) product line includes a broad array of printed and woven
fabrics in the "good" and "better" price points. These designs are developed in
Ametex's in-house design studio, and manufactured by a global network of
contractors. Ametex sells its products to furniture manufacturers, window and
bedding product manufacturers, fabric retailers and ancillary industries. Ametex
employs a computer-aided design system to customize fabrics to customer needs.
Over the past year, Ametex has repositioned its product line to focus on
lifestyle collections in the "better" price points.


                                       5
<PAGE>   8

Sunbury(TM)

      Sunbury designs, manufactures and markets a comprehensive line of
proprietary decorative upholstery fabrics in the "better" and "best" price
categories. It is recognized as a leader in quality, service and design. Sunbury
sells fabrics principally to furniture manufacturers and fabrics distributors.
Sunbury's jacquard weaving operation employs advanced computer-aided design and
manufacturing equipment. All of Sunbury's products are woven to customer order,
which allows it to maintain smaller inventories and reduce obsolescence costs.
In addition, Sunbury's ability to create exclusive designs for sale in small
quantities sets it apart from the competition.

LifeStyle Fabrics Europe

      LifeStyle Fabrics Europe, based in the United Kingdom, is the European
distribution network for the Beacon Hill(R), Robert Allen(TM) and Ametex(TM)
brands. In addition, it utilizes its own design studio and extensive fabric
archive to create upper-end products under the Ramm, Son & Crocker(TM) name
tailored to the European marketplace.

Distribution

      LifeStyle distributes its fine furniture products through an extensive
worldwide distribution network that includes (i) more than 22,000 independent
retail locations, including national and regional chains; (ii) department
stores; (iii) specialty stores and more than 1,500 galleries
(LifeStyle-dedicated floor space) within retail stores; (iv) more than 80
independent stores selling LifeStyle products exclusively; (v) hospitality,
government, model home and other contract distribution channels; and (vi) 13
LifeStyle-operated Beacon Hill(R) designer-exclusive showrooms. Worldwide,
LifeStyle sells its fine furniture products primarily through approximately 580
commissioned independent representatives. LifeStyle has recently begun offering
product information through non-traditional channels such as the Internet. In
addition, LifeStyle is participating in the non-traditional direct mail channel
with Sharper Image Home Collection(TM), Neiman-Marcus(R) and Horchow(R).

      LifeStyle distributes over 25,000 different decorative home furnishing
fabrics through numerous distribution channels, including its Beacon Hill(R)
showrooms, to an extensive customer base consisting of over 30,000 retailers,
decorators and designers worldwide. LifeStyle also sells decorative home
furnishing fabrics to furniture manufacturers.

      LifeStyle's extensive distribution network permits it to offer home
furnishings products to consumers wherever they choose to shop.

      LifeStyle has also been actively pursuing mutually beneficial partnership
arrangements and alliances with selected retailers for several years, most
recently with HomeLife (formerly Sears HomeLife). LifeStyle expects that these
arrangements will permit it to capitalize on the ongoing concentration of the
retailer distribution base and the growth of large regional and national
furniture retailers.

      In 1998, LifeStyle's 20 largest customers represented approximately 20% of
net sales, with no single customer representing as much as 4.0%. LifeStyle
believes it has more active accounts than any other manufacturer in the home
furnishings industry.

     Fine Furniture

      LifeStyle 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 many furniture retailers, whether local, regional or national
in scope. This, in turn, enables LifeStyle to secure additional display space
from retailers, who increasingly are relying on a smaller number of larger
suppliers. LifeStyle offers substantial services to retailers to support their
marketing efforts, including national advertising, merchandising and display
programs. LifeStyle also displays its fine furniture products at the semi-annual
International Home Furnishings Market in High Point, North Carolina.


                                       6
<PAGE>   9

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

<TABLE>
<CAPTION>
                                           Distribution Channel
       --------------------------------------------------------------------------------------------------
       Independent Retailers            Galleries           Dedicated Stores        Designer Showrooms
       ----------------------      ---------------------   --------------------   -----------------------
       <S>                         <C>                     <C>                    <C>    
       BenchCraft(R)               Berkline(R)             Drexel Heritage(R)     Beacon Hill(R)
       Berkline(R)                 Drexel Heritage(R)                             Drexel Heritage(R)
       Drexel Heritage(R)          Henredon(R)                                    Henredon(R)
       Henredon(R)                 La Barge(R)                                    La Barge(R)
       La Barge(R)                 Lexington(R)                                   Lexington(R)
       Lexington(R)                Maitland-Smith(TM)                             Maitland-Smith(TM)
       Maitland-Smith(TM)
       Universal(R)
</TABLE>

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

      LifeStyle has developed gallery programs for its Henredon(R), Drexel
Heritage(R), Lexington(R), Berkline(R), Maitland-Smith(TM) and La Barge(R)
product lines, and has approximately 1,500 galleries in total. 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. LifeStyle believes
that stores with galleries result in higher sales per square foot than furniture
stores without galleries.

      LifeStyle also sells its products through more than 80 independently owned
and operated stores that offer LifeStyle's products exclusively. Drexel
Heritage(R) products are sold through Drexel Heritage(R) showcase stores and
Drexel Heritage Home Inspirations(TM) stores. 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. Henredon's Ralph Lauren Home Collection(TM) products are sold
through specialty retail stores owned or licensed by the Polo Ralph Lauren
Corporation.

      Beacon Hill(R) showrooms comprise a national network of 13 showrooms,
principally in design centers in major U.S. cities, dedicated to marketing and
selling furniture, accessories and fabric exclusively to interior designers and
architects, primarily in the "best" and "premium" price categories. Beacon Hill
is one of only two national networks of designer-exclusive furniture showrooms,
and has approximately 213,000 square feet of space dedicated to furniture and
accessories, and 75,000 square feet dedicated to fabrics. Approximately 45% of
furniture sales at the showrooms consist of LifeStyle products, principally
Henredon(R), Maitland-Smith(TM), La Barge(R) and Drexel Heritage(R). The balance
is from other well respected companies in the upper-end of the market, including
Kindel, John Widdicomb and Guy Chaddock. In 1998, Beacon Hill added furniture
from the Ralph Lauren Home Collection(TM).


                                       7
<PAGE>   10

     Decorative Home Furnishing Fabrics

      LifeStyle distributes its Robert Allen(TM) products through numerous
distribution channels, including its own showroom and more than 70 commissioned
independent representatives, to over 30,000 retailers, decorators and designers
worldwide. LifeStyle sells its Ametex(TM) products through over 10 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 U.S. and Canada by eight commissioned sales representatives.
LifeStyle's decorative home furnishing fabrics are also sold to decorators and
designers through LifeStyle's Beacon Hill(R) Showrooms, which offer Robert
Allen(TM) and Ramm, Son & Crocker(TM) fabrics on a commission basis. Fabrics
Europe, based in the United Kingdom, is the European distribution network for
the Beacon Hill(R), Robert Allen(TM) and Ametex(TM) brands.

Marketing and Advertising

      In partnership with its selected retailers, LifeStyle works to strengthen
its brand equity with consumers and increase their purchases of LifeStyle
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
LifeStyle'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 LifeStyle 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 LifeStyle
products 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.

      LifeStyle builds brand equity and increases awareness among consumers and
designers through television advertising, advertising in newspapers and leading
shelter magazines, as well as editorial coverage. Targeting specific consumer
demographics, advertisements are placed in publications that include
Architectural Digest, Country Home, Country Living, Elle Decor, House Beautiful,
House & Garden, Martha Stewart Living, Metropolitan Home, Traditional Home,
Southern Accents and Victoria. The combined volume of advertising from all
product lines gives LifeStyle 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
and designers at no cost to LifeStyle.

      Responding to consumers' desire for home furnishings information,
LifeStyle has created interactive sites on the Internet which allow users to
browse its product lines, learn more about LifeStyle and be directed to local
retailers. Purchasing and design professionals in the hospitality, government,
model home and other contract markets receive specialized services through
LifeStyle's Contract division. From initial presentation through project
completion, LifeStyle's Contract division supports these customers with a global
sales and marketing network, extensive cataloging, customized products and
specialized delivery services.


                                       8
<PAGE>   11

Manufacturing

      LifeStyle operates 71 strategically located, well equipped facilities in
North America, Asia, and Europe, with over 23 million square feet of
manufacturing and distribution space. During the past five years, LifeStyle
invested approximately $234 million in its facilities in order to meet
anticipated demand, reduce operating costs and maximize operating flexibility.
As the largest U.S. furniture manufacturer in Asia, LifeStyle also has access to
a highly skilled, low-cost workforce, expert in such areas as intricate
veneering and hand carving, and to scarce raw materials such as Chinese oak,
wicker, rattan and certain exotic woods. LifeStyle believes that its global
facilities enable it to serve its worldwide customer base efficiently and to
allocate capacity to best meet its manufacturing requirements. Because of
LifeStyle's recent modernization, and the productivity enhancements that it is
currently implementing, LifeStyle does not expect to incur significant increases
in its capital expenditures during the next several years.

      LifeStyle is implementing "short-cycle" management methodologies and is
committed to a continuous improvement work ethic enterprise-wide. Implementation
of short-cycle management methodologies requires a reexamination,
rationalization and reengineering of LifeStyle's operations and business
systems, with a focus on eliminating non-value-added activities. Across all of
LifeStyle's furnishings companies, approximately one-third of the products are
currently shipped in two to three weeks, and the majority of all order-to-ship
times are expected to attain these levels over the next 12 to 24 months. More
than 50% of LifeStyle's plants are now implementing short-cycle management
methodologies, and these "best practices" will be implemented enterprise-wide.
When implemented, these methodologies are expected to dramatically reduce
manufacturing and administrative throughput times, resulting in efficient
order-to-ship cycles, quality enhancements and a better value for LifeStyle's
customers. LifeStyle's continuous improvement initiatives are multi-faceted, and
include:

      o     Process mapping and re-layout

      o     Quick change tooling and setups

      o     Converting from "push," or batch manufacturing, to more efficient
            "pull," or assemble-to-order processing

      o     Implementation of "cellular" manufacturing, "just-in-time" logistics
            and other modern production methods

      o     Company-wide product design and development software

      o     Enterprise-wide, Oracle-based software platform

      LifeStyle utilizes certain specialized facilities dedicated to
manufacturing a limited number of products, as well as carefully selected
sub-contract manufacturing facilities. LifeStyle also promotes inter-company
sourcing of products and components. These steps help LifeStyle balance its
global manufacturing capacity and increase its operating efficiency.

      LifeStyle's fine furniture lines are produced and distributed in domestic
manufacturing and distribution facilities located in North Carolina, Tennessee,
Mississippi, South Carolina, and California, and internationally in facilities
located in Canada, China, Hong Kong, Indonesia, Malaysia, the Philippines,
Taiwan, Thailand and several European countries. Substantially all of
LifeStyle's Robert Allen(TM) and Ramm, Son & Crocker(TM) decorative home
furnishing fabrics are manufactured for LifeStyle by third parties.

      At the end of 1997, LifeStyle completed an in-depth evaluation of its
global manufacturing and distribution base, and recorded a $58.5 million charge
to rationalize and restructure its worldwide operations, focusing principally on
its Universal Furniture business unit. The majority of Universal Furniture's
restructuring activity occurred in Asia, where facilities with approximately 1.3
million square feet of manufacturing and distribution space have been
eliminated, as production has been consolidated into existing, lower-cost Asian
facilities.


                                       9
<PAGE>   12

Raw Materials and Suppliers

      LifeStyle sources globally, and the principal raw materials used by
LifeStyle 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 LifeStyle's products are purchased both domestically and
internationally. Management believes that its supply sources of those materials
are adequate. LifeStyle has ongoing relationships with numerous suppliers of raw
materials, and believes that there are a number of reliable vendors available,
contributing to its ability to obtain competitive pricing for raw materials.
LifeStyle is also actively pursuing partnership arrangements with suppliers in
order to reduce long lead times and ultimately to improve customer satisfaction
levels.

Competition

      The furniture and home furnishing fabrics industries are highly
competitive, and include a large number of domestic and foreign manufacturers.
These industries are highly fragmented, and no one company is dominant.
Competition is generally based on product quality, brand name recognition,
price, timeliness of delivery and service. LifeStyle's furniture products
compete with products made by a number of furniture manufacturers, including
Furniture Brands International, Inc., La-Z-Boy Incorporated, Klaussner Furniture
Industries Inc., Ethan Allen, Ashley, 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, timeliness
of delivery and quality, and competitors include Schumacher/Waverly, P/Kaufmann,
Richloom and Mastercraft.

Employees

      As of December 31, 1998, LifeStyle employed approximately 30,000 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. LifeStyle believes it has good relations with its employees.

Intellectual Property

      LifeStyle considers its intellectual property rights to be among its most
valuable assets. These rights include trademarks, trade names, copyrights,
patents and rights licensed from third parties. LifeStyle believes that these
intellectual property rights are important to LifeStyle because they are well
recognized and associated with quality and value in the home furnishings
industry. LifeStyle aggressively protects its intellectual property rights.

Environmental Matters and Governmental Regulations

      LifeStyle is subject to a wide and frequently changing range of federal,
state, local and foreign environmental and worker health and safety laws and
regulations, including those relating to the storage, handling, generation,
treatment, emission, release, discharge and disposal of certain substances and
wastes and the clean up of contamination in soil or groundwater. Breaches of
such laws or regulations can result in the imposition of fines and penalties
(any of which may be material) or the cessation of operations of the affected
facility. Based on currently available information, LifeStyle does not
anticipate making any material capital expenditures for environmental control
facilities in the reasonably foreseeable future.

      LifeStyle may also be subject to liability, due to its current or past
ownership or operation of real property or disposal of hazardous waste, for the
cost of cleaning up or removing contamination caused by hazardous or toxic
materials. Such liability may be imposed without regard to fault or the legality
of the original actions, and may be joint and several with other parties.


                                       10
<PAGE>   13

      As a result of historical operations, spills and releases of hazardous
substances may have occurred at or near several of LifeStyle's sites and
facilities. These sites and facilities may in the future undergo investigation,
including soil and groundwater sampling, to determine if there are any hazardous
substances in the soil or groundwater which LifeStyle could be required to
investigate and remediate. Based on currently available information, LifeStyle
does not believe that the costs associated with investigating or remediating
these releases will have a material adverse effect on LifeStyle's financial
condition, operating expenses or earnings. There can be no assurance, however,
that material costs relating to these matters will not be incurred in the
future.

      LifeStyle has been named as a potentially responsible party at a number of
non-owned contaminated sites, including Superfund sites. LifeStyle presently
believes that any potential liability relating to these sites will not have a
material adverse effect on LifeStyle's earnings, capital expenditures or
competitive position. However, there can be no assurance that material
liabilities or costs relating to such matters will not be incurred in the
future.

Other Government Regulations

      LifeStyle'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 LifeStyle's sales or
operations.

Backlog

      The combined backlog of LifeStyle as of December 31, 1998 aggregated
approximately $327 million, compared to approximately $314 million as of
December 31, 1997.


                                       11
<PAGE>   14

Item 2. PROPERTIES

      The following list includes LifeStyle's principal manufacturing facilities
by location as of December 31, 1998:

<TABLE>
<CAPTION>
           <S>                     <C>    
           California              City of Industry and Whittier
           Mississippi             Baldwin, Blue Mountain, New Albany and Ripley(2)
           North Carolina          Black Mountain, Drexel, Goldsboro, Hickory, High Point(3), Hildebran(2),
                                   Lexington(5), Linwood, Longview, Marion(2), Mocksville, Morganton(4), 
                                   Mt. Airy, Shelby, and Spruce Pine(2)
           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.)          Chang Chung, Guangzhou and Tianjin
           Great Britain           Silsden, England; and Aberdare, Wales
           Indonesia               Semarang
           Malaysia                Johor and Kedah(2)
           Philippines             Cebu
           Sweden                  Skene
           Taiwan                  Kaohsiung, Ping Tung and Tao Yuan Hsian
</TABLE>

      Note: The parentheticals denote multiple facilities in that location.

      LifeStyle operates manufacturing and distribution facilities, showrooms,
and retail and office space with a total area of approximately 26 million square
feet. LifeStyle owns approximately 19 million square feet and leases
approximately 7 million square feet.

      LifeStyle's corporate headquarters is currently located in High Point,
North Carolina and is leased by the Company.

      LifeStyle'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

      LifeStyle is involved in various routine legal proceedings incident to the
ordinary course of its business. LifeStyle believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on the consolidated financial condition or results of operations of
LifeStyle.


                                       12
<PAGE>   15

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

      None


                                   -----------


                                       13
<PAGE>   16

                                     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 LifeStyle.

      As of December 31, 1998, Holdings was the only holder of the common stock
of LifeStyle. 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.

      On November 13, 1998, LifeStyle declared a cash dividend, payable January
1999, of $16.5 million to Holdings.

      Holdings has filed a Registration Statement on Form S-1 (File No.
333-58655) relating to the initial public offering of its common stock. In
connection with the Offerings, LifeStyle will be merged with and into Holdings,
which will then change its name to LifeStyle Furnishings International Ltd. In
addition, LifeStyle has commenced a cash tender offer to acquire all of its
outstanding subordinated notes. For a further discussion of the initial public
offering and related transactions, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."


                                       14
<PAGE>   17

Item 6.  SELECTED HISTORICAL FINANCIAL DATA

                                           Selected Historical Financial Data
                                                      (In millions)

<TABLE>
<CAPTION>
                                                              LifeStyle                                   Predecessor(1)
                                              ----------------------------------------     ---------------------------------------
                                                     Year Ended               Period         Period             Year Ended
                                                     December 31,              from           from              December 31,
                                              -------------------------      8/6/96 to     to 1/1/96      ------------------------
                                                 1998           1997         12/31/96        8/5/96         1995           1994
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>       
Statement of Operations Data:
Net sales ................................    $  2,001.9     $  1,959.8     $    857.5     $  1,147.9     $  1,992.6     $  1,897.5
Cost of sales ............................       1,510.6        1,453.8          638.2          870.7        1,501.0        1,434.0
Restructuring charge(2) ..................        --               14.5         --             --             --             --
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
   Gross profit ..........................         491.3          491.5          219.3          277.2          491.6          463.5
Selling, general, and
   administrative(3) .....................         354.4          347.5          144.5          222.2          397.8          386.8
Restructuring charge(2) ..................        --               44.0         --             --             --             --
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
   Operating profit ......................         136.9          100.0           74.8           55.0           93.8           76.7
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
Interest expense .........................          31.6           41.9           20.0           52.7           94.8           87.1
Other, net(4) ............................          11.3           15.1            6.7            3.5            8.2            7.3
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
   Income (loss) before income
      taxes and extraordinary
      item ...............................          94.0           43.0           48.1           (1.2)          (9.2)         (17.7)
Income taxes .............................          23.5           13.8           16.8            6.8            7.0            6.1
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
   Income (loss) before
      extraordinary item .................          70.5           29.2           31.3           (8.0)         (16.2)         (23.8)
Extraordinary item(5) ....................        --              (11.6)        --             --             --             --
                                              ----------     ----------     ----------     ----------     ----------     ---------- 
Net income (loss) ........................    $     70.5     $     17.6     $     31.3     $     (8.0)    $    (16.2)    $    (23.8)
                                              ==========     ==========     ==========     ==========     ==========     ========== 
Other Financial Data:
EBITDA, as defined(6) ....................    $    174.3     $    178.1     $     87.7     $     91.8     $    160.1     $    139.5
EBITDA margin ............................           8.7%           9.1%          10.2%           8.0%           8.0%           7.4%
Adjusted EBITDA, as defined(7) ...........    $    210.8     $    198.5     $     87.7     $     91.8     $    160.1     $    139.5
Adjusted EBITDA margin ...................          10.5%          10.1%          10.2%           8.0%           8.0%           7.4%
Adjusted operating profit(7) .............    $    173.4     $    158.5     $     74.8     $     55.0     $     93.8     $     76.7
Adjusted operating profit margin .........           8.7%           8.1%           8.7%           4.8%           4.7%           4.0%
Depreciation & amortization(8) ...........    $     39.3     $     38.4     $     15.4     $     39.3     $     67.9     $     66.4
Capital expenditures .....................          41.4           32.7           13.8           16.5           61.0           68.8
Fabric sample book expenditures ..........          18.5           14.3            3.3            9.2           15.0           14.1
Cash provided by operating
   activities ............................         154.2          139.8          109.0           48.8           49.3           13.4
Cash used for investing
   activities ............................         (87.3)         (50.2)        (708.8)         (25.6)         (72.5)         (67.2)
Cash provided by (used for)
   financing activities ..................         (63.2)        (107.8)         622.1          (21.9)          15.8           53.1
Balance Sheet Data:
Working capital(9) .......................    $    449.9     $    440.8     $    496.1                    $    732.1     $    723.4
Total assets .............................       1,126.3        1,140.0        1,190.7                       1,903.9        1,907.5
Total debt ...............................         314.7          354.6          444.6                          27.7           15.2
Total liabilities ........................         636.7          702.6          737.4                         282.9          274.4
Masco net investment &
   advances(10) ..........................          --             --             --                         1,621.0        1,633.1
Stockholder's equity .....................         489.6          437.4          453.4                          --             --
</TABLE>

----------
                                                   (footnotes on following page)


                                       15
<PAGE>   18

Footnotes to Selected Historical Financial Data:

1.    LifeStyle acquired the Masco Home Furnishings Group, the Predecessor, as
      of August 5, 1996.

2.    As a result of LifeStyle's evaluation of its global manufacturing and
      distribution base, LifeStyle incurred a $58.5 million charge in 1997 to
      rationalize and restructure its worldwide operations principally focusing
      on its Universal business unit. See Note 7 to the Financial Statements.

3.    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 $9.4 million for the period January 1, 1996 to August 5, 1996, $16.0
      million and $12.7 million in 1995 and 1994, respectively.

4.    Other, net includes receivables securitization costs of $9.1 million, $9.8
      million and $4.4 million and amortization of deferred financing costs of
      $2.2 million, $3.9 million and $1.7 million for the years ended December
      31, 1998 and 1997 and the period August 6, 1996 to December 31, 1996,
      respectively.

5.    An extraordinary loss of $19.4 million ($11.6 million net of tax) was
      recorded in connection with the August 1997 replacement of LifeStyle's
      former revolving credit facility, Tranche A term loan and Tranche B term
      loan with LifeStyle's current $400.0 million senior secured revolving
      credit facility. The loss consisted of the write-off of unamortized
      deferred financing costs related to the early extinguishment of debt.

6.    EBITDA is defined as net income (loss) before interest expense,
      receivables securitization costs, income taxes, depreciation and
      amortization expense (including amortization of fabric sample book
      expenditures), extraordinary items, and certain other non-cash charges and
      is computed as follows:

<TABLE>
<CAPTION>
                                                      LifeStyle                                Predecessor
                                         ------------------------------------     --------------------------------------
                                            Year Ended               Period        Period             Year Ended
                                           December 31,               from          from              December 31,
                                         ----------------------     8/6/96 to     1/1/96 to      -----------------------
                                           1998          1997        12/31/96       8/5/96         1995           1994
                                         --------      --------      -------       -------       --------       --------
        <S>                              <C>           <C>           <C>           <C>           <C>            <C>      
        Net income (loss) .......        $   70.5      $   17.6      $  31.3       $  (8.0)      $  (16.2)      $  (23.8)
        Interest expense ........            31.6          41.9         20.0          52.7           94.8           87.1
        Income taxes ............            23.5          13.8         16.8           6.8            7.0            6.1
        Depreciation and
           amortization .........            39.3          38.4         15.4          39.3           67.9           66.4
        Extraordinary item ......            --            11.6         --            --             --             --
        Receivables
           securitization costs .             9.1           9.8          4.4          --             --             --
        Other non-cash ..........             0.3          45.0         (0.2)          1.0            6.6            3.7
                                         --------      --------      -------       -------       --------       --------
        EBITDA ..................        $  174.3      $  178.1      $  87.7       $  91.8       $  160.1       $  139.5
                                         ========      ========      =======       =======       ========       ========
</TABLE>

      (a)   The $45.0 million non-cash item in 1997 includes a non-cash
            restructuring charge of $38.1 million, a non-cash loss on foreign
            currency remeasurement of $7.0 million and certain other non-cash
            items.

      LifeStyle 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.

7.    Adjusted EBITDA for the year ended December 31, 1997 excludes the $20.4
      million cash portion of the restructuring charges and adjusted operating
      profit for 1997 excludes the $58.5 million of restructuring charges.
      Adjusted EBITDA and adjusted operating profit for the year ended December
      31, 1998 exclude $30.0 million of transition costs related to the
      restructuring and reengineering initiatives, $4.0 million of costs related
      to the development and implementation of Year 2000 compliance measures and
      $2.5 million of costs related to the computer system implementation at The
      Robert Allen Group. See "Management's Discussion and Analysis of Financial
      Condition and Results of Operations." LifeStyle utilizes adjusted EBITDA
      and adjusted operating profit when interpreting operating trends and
      results of operations of its core business operations. Accordingly,
      LifeStyle believes that these measures provide additional information for
      understanding and evaluating our financial condition, results of
      operations and cash flows. However, adjusted EBITDA and adjusted operating
      profit do not represent, and should not be considered as alternatives to,
      net income, cash flow from operations or operating profit as determined by
      generally accepted accounting principles, and do not necessarily indicate
      whether cash flow will be sufficient to meet cash requirements. Not every
      company calculates adjusted EBITDA or adjusted operating profit in exactly
      the same fashion. As a result, adjusted EBITDA and adjusted operating
      profit as presented above may not necessarily be comparable to similarly
      titled measures of other companies.

8.    Depreciation and amortization includes depreciation of property and
      equipment, amortization of fabric sample books and amortization of
      deferred financing costs.

9.    Working capital is defined as total current assets (excluding cash and
      cash investments and deferred taxes) less total current liabilities
      (excluding current maturities of long-term debt).

10.   Advances from Masco were $1,195.0 and $1,192.0 at December 31, 1995 and
      1994, respectively.


                                       16
<PAGE>   19

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

      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. LifeStyle's actual
results could differ materially from those anticipated by any such
forward-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 LifeStyle on its managerial, manufacturing and sales and marketing
personnel. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following discussion and
analysis of the consolidated financial condition and results of operations
should be read in conjunction with the Financial Statements.

General

      LifeStyle is the largest manufacturer and marketer of home furnishings
(fine furniture, including decorative accessories, and decorative home
furnishing fabrics) in the U.S., with 1998 net sales of $2.0 billion. Fine
furniture represented approximately 87% of LifeStyle's net sales in 1998 and
decorative home furnishing fabrics represented approximately 13%.

      On August 5, 1996, Holdings acquired the Predecessor from Masco for
approximately $1.1 billion. 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, LifeStyle's financial statements for
periods subsequent to the acquisition are not comparable to the Predecessor's
financial statements for periods prior to the acquisition. See Note 2 to the
Financial Statements.

      At the time of the acquisition from Masco, LifeStyle embraced a strategic
vision designed to dramatically improve the satisfaction of its customers and
consumers with their home furnishings buying experience. LifeStyle also
recognized that there were significant opportunities to improve its performance
by rationalizing its substantial asset base and by making major improvements in
its business processes. LifeStyle redirected its previous financial objective of
maximizing sales growth to focus on enhancing cash flow, reducing operating
costs and increasing profitability. LifeStyle also added senior managers with
diverse manufacturing, marketing and other relevant expertise, including a
number from outside the furniture industry, to complement LifeStyle's
industry-experienced management team.

      LifeStyle adopted at the time of the acquisition an initial $28.3 million
restructuring plan. This plan, which was substantially implemented in 1997,
included the reduction of LifeStyle's manufacturing and distribution facilities
from 89 to 82, provisions for severance costs associated with the closure of
these facilities and the elimination of certain product lines that did not meet
performance targets. 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 of approximately $28.3 million was
included as part of the purchase price allocation for LifeStyle's acquisition.
LifeStyle also introduced coordinated, company-wide purchasing practices,
improved its working capital management and reduced capital expenditure levels
in light of significant previous investments.

      At the end of 1997, LifeStyle completed an in-depth evaluation of its
global manufacturing and distribution base, and recorded a $58.5 million charge
to rationalize and restructure its worldwide operations, focusing principally on
LifeStyle's Universal Furniture business unit. The majority of Universal
Furniture's restructuring activity occurred in Asia, where facilities with
approximately 1.3 million square feet of manufacturing and distribution space
have been eliminated, as production has been consolidated into existing,
lower-cost Asian facilities. As a result of the restructuring, significant
non-recurring costs have been incurred to sever lease obligations, provide for
employee severance, and provide for the impairment of inventory and fixed
assets. The restructuring initiatives included a reduction in workforce,
eliminating approximately 3,000 positions by the end of 1998. The positions
eliminated consist primarily of production and supervisory personnel.

      The activities discontinued consist of furniture and component parts
manufacturing plants that supply other manufacturing operations. The activities
previously performed at these facilities have been shifted to other facilities
where 


                                       17
<PAGE>   20

existing production capacity can be more efficiently utilized. As such, the
operations discontinued did not have separately identifiable revenues or
operating income.

      As a result of the restructuring, inventory with a carrying value of $14.5
million was written off. Property and equipment, consisting primarily of real
property, machinery and equipment at facilities to be closed, were written down,
resulting in an impairment loss of $17.6 million. The fair value of these assets
was determined based upon independent appraisals and analysis of comparable
sales in the affected regions.

      This restructuring is expected to provide cost savings in future periods
through reduced employee compensation and other operating costs, although no
assurances can be given with regard to financial performance in any future
period. These savings will continue to be offset for the next several quarters
by production inefficiencies and other costs related to the restructuring and
reengineering initiatives discussed below.

      Operating profit for 1997 included total non-recurring charges of $58.5
million, including the $14.5 million of inventory write-offs referred to above
which are included in gross profit. The following table presents LifeStyle's
restructuring activities for the periods indicated (in millions):

<TABLE>
<CAPTION>
                                    Asset         Contractual      Employee
                                 write-downs      obligations      severance        Other               Total
                                -------------    -------------    ----------      ---------          ---------
<S>                              <C>               <C>              <C>              <C>              <C>    
December 31, 1997 ...            $  38.1           $  9.8           $  8.8           $  1.8           $  58.5
Activity during 1998:
     Non-cash items .              (38.1)             --               --               --              (38.1)
     Cash items .....               --               (8.5)            (8.8)            (1.8)            (19.1)
                                 -------           ------           ------           ------           -------
December 31, 1998 ...            $  --             $  1.3           $  --            $  --            $   1.3
                                 =======           ======           ======           ======           =======
</TABLE>

      Further, in pursuit of LifeStyle's strategic vision and its goal of
becoming its customers' and consumers' "favorite" home furnishings company,
LifeStyle has undertaken a comprehensive reexamination of its methods of
production, marketing, distribution and customer fulfillment with the objective
of becoming operationally excellent by fundamentally improving the way orders
are processed and goods are manufactured and delivered to customers. The key
focus of these reengineering initiatives involves converting the furniture
industry's historic "cuttings" or batch processing methodology into the more
efficient make-to-order (or "Pull") methodology. Overall, these reengineering
initiatives are designed to cut order-to-ship cycles dramatically - with a goal
of being able to ship product in two weeks or less - as well as to reduce
inventory, eliminate waste (add value) and improve product quality. LifeStyle
has also implemented enhanced coordination across business units, including
purchasing, manufacturing, marketing and technology.

      Principally as a result of these actions, LifeStyle improved its EBITDA
margin from 8.0% in 1995 to 9.0% in 1996 and 9.1% in 1997 (10.1% in 1997 after
adjustment to exclude restructuring charges). In 1998, LifeStyle significantly
accelerated the reengineering-driven conversion of its manufacturing and
business processes, which necessarily caused temporary disruption at certain
plants and resulted in additional costs. Despite order growth of approximately
5.3% in 1998, LifeStyle's net sales increased by only 2.1% and its EBITDA margin
declined from 9.1% to 8.7% as compared with 1997, primarily because of the
reengineering initiatives described above. Exclusive of transition costs related
to its restructuring and reengineering initiatives, costs related to the
development and implementation of Year 2000 compliance measures and costs
related to the computer system implementation at The Robert Allen Group,
however, LifeStyle's adjusted EBITDA margin increased to 10.5% for 1998 from
10.1% for 1997. Further, LifeStyle's cash flow from operating activities
increased from $49.3 million in 1995 to $154.2 million in 1998.

      In addition, from August 1996 through December 31, 1998, LifeStyle reduced
working capital by $81.1 million to $449.9 million primarily through improved
management of its inventories and accounts payable. This reduction in working
capital, together with LifeStyle's operating cash flow, enabled it to reduce
long-term debt by $238.7 million through 1998.

      Across all of LifeStyle's furnishings companies, approximately one-third
of its products are currently shipped in two to three weeks, and the majority of
all order-to-ship times are expected to attain these levels over the next 12 to
24 months. More than 50% of LifeStyle's plants are now implementing short-cycle
management methodologies, and these "best practices" will 


                                       18
<PAGE>   21

be implemented enterprise-wide. LifeStyle believes that, once implemented, these
reengineering initiatives will reduce manufacturing costs, significantly
increase customer satisfaction and result in higher market share, sales and
margins.

      As certain of these operational initiatives are implemented, they
temporarily negatively impact existing manufacturing and business processes,
resulting in additional costs and time inefficiencies. However, as the resultant
benefits are realized, they increasingly come to exceed transition costs and
yield net efficiency gains. The total transition costs related to reengineering
and restructuring initiatives, net of efficiency gains, are expected to be
approximately $48.0 million, of which $30.0 million was incurred during 1998 and
the remaining approximately $18.0 million is expected to be incurred during
1999.

Results of Operations

      The following table has been prepared to set forth certain results of
operations and other data as a percentage of net sales:

<TABLE>
<CAPTION>
                                                        LifeStyle                                 Predecessor
                                         -----------------------------------------       ------------------------------
                                               Year Ended        
                                              December 31,           Period from         Period from       Year Ended
                                         ------------------------     8/6/96 to           1/1/96 to       December 31,
                                           1998          1997          12/31/96             8/5/96            1995
                                         ----------    ----------    -------------       -------------    -------------
<S>                                         <C>           <C>              <C>                 <C>              <C>   
       Statement of Operations Data:
       Net sales.......................     100.0%        100.0%           100.0%              100.0%           100.0%
       Gross profit margin.............      24.5%         25.1%            25.6%               24.1%            24.7%
       Selling, general, and
          administrative expenses......      17.7%         17.7%            16.9%               19.4%            20.0%
       Operating profit margin.........       6.8%          5.1%             8.7%                4.8%             4.7%
       Interest expense................       1.6%          2.1%             2.3%                4.6%             4.8%
       Net income (loss)...............       3.5%          0.9%             3.7%              (0.7)%           (0.8)%
       Other Financial Data:
       Adjusted operating profit(1)....       8.7%          8.1%             8.7%                4.8%             4.7%
       Adjusted EBITDA(1)..............      10.5%         10.1%            10.2%                8.0%             8.0%
</TABLE>

      (1)   Adjusted operating profit and adjusted EBITDA for 1997 exclude
            restructuring charges. Adjusted operating profit and adjusted EBITDA
            for 1998 exclude the transition costs related to the restructuring
            and reengineering initiatives, costs related to the development and
            implementation of Year 2000 compliance measures and costs related to
            the computer system implementation at The Robert Allen Group.
            LifeStyle utilizes adjusted EBITDA and adjusted operating profit
            when interpreting operating trends and results of operations of its
            core business operations. Accordingly, LifeStyle believes that these
            measures provide additional information for understanding and
            evaluating our financial condition, results of operations and cash
            flows. However, adjusted EBITDA and adjusted operating profit do not
            represent, and should not be considered as alternatives to, net
            income, cash flow from operations or operating profit as determined
            by generally accepted accounting principles, and do not necessarily
            indicate whether cash flow will be sufficient to meet cash
            requirements. Not every company calculates adjusted EBITDA or
            adjusted operating profit in exactly the same fashion. As a result,
            adjusted EBITDA and adjusted operating profit as presented above may
            not necessarily be comparable to similarly titled measures of other
            companies.

Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997

      Net sales were $2,001.9 million for the year ended December 31, 1998, an
increase of $42.1 million, or 2.1%, from $1,959.8 million for 1997. Net sales of
fine furniture increased 3.0% to $1,744.7 million for the year ended December
31, 1998 from $1,693.6 million for 1997. Fine furniture orders for the year
ended 1998 increased 6.3% over 1997, reflecting strong demand. While orders were
strong, LifeStyle's net sales of fine furniture were negatively impacted as the
implementation of planned restructuring, reengineering and logistics initiatives
combined to temporarily limit product availability. This negative impact is
likely to continue over the next several quarters, although at a reduced rate.
Net sales of decorative home furnishing fabrics decreased 3.4% to $257.2 million
for the year ended December 31, 1998 from $266.2 million for 1997. Decorative
home furnishing fabric sales were lost due to shipping delays incurred during
the implementation of a more sophisticated computer system at The Robert Allen
Group. This computer system is now on-line and 24 hour order-to-ship
availability with additional functionality is being achieved. In addition,
fabric sales continue to be negatively 


                                       19
<PAGE>   22

impacted by customers migrating to leather, but new fabric product introductions
are expected to recover some of the lost volume.

      Gross profit was $491.3 million for the year ended December 31, 1998,
essentially flat, from $491.5 million for 1997. Gross profit margin decreased to
24.5% for the year ended December 31, 1998 from 25.1% for 1997. Although there
was no non-recurring restructuring charge recorded in 1998 as in 1997, gross
profit margin was negatively impacted by transition costs related to LifeStyle's
restructuring and reengineering initiatives associated with implementation of
"Pull" manufacturing processes, as well as temporary production inefficiencies,
increased expenses associated with the successful introduction of an unusually
large number of new products, inventory reduction programs and the costs related
to the computer system implementation at The Robert Allen Group. LifeStyle is
reengineering its manufacturing processes in order to reduce order-to-ship
cycles, improve product quality and value, reduce inventories and broadly
improve LifeStyle's responsiveness to customers and consumers. Gross profit is
expected to be unfavorably impacted, although at a reduced rate, through the
next several quarters as additional costs continue in support of these
restructuring and reengineering initiatives.

      Selling, general and administrative expenses were $354.4 million for the
year ended December 31, 1998, an increase of $6.9 million, or 2.0%, from $347.5
million for 1997. As a percentage of net sales, selling, general and
administrative expenses were 17.7% for the year ended December 31, 1998, the
same as in 1997. Selling expense was 10.8% of net sales as compared to 10.9% for
1997, and general and administrative expenses were 6.9% of net sales compared to
6.8% in 1997. General and administrative expenses increased due to higher
consulting fees, Year 2000 compliance costs and other administrative costs,
partially offset by reduced bad debt expense.

      Operating profit was $136.9 million for the year ended December 31, 1998,
an increase of $36.9 million, or 36.9%, from $100.0 million for 1997. As a
percentage of net sales, operating profit margin increased to 6.8% for the year
ended December 31, 1998 from 5.1% for 1997. Operating profit was impacted by the
aforementioned planned restructuring and reengineering initiatives, which
necessarily caused disruption at certain plants and resulted in additional costs
in 1998 and the restructuring charge in 1997. In addition, LifeStyle incurred
costs related to Year 2000 compliance measures and the computer system
implementation at The Robert Allen Group during 1998. Operating profit is
expected to be unfavorably impacted, although at a reduced rate, through the
next several quarters as additional costs continue in support of these
restructuring and reengineering initiatives.

      Operating profit for the fine furniture segment increased $39.2 million to
$110.9 million for the year ended December 31, 1998 from $71.7 million for 1997
due primarily to the $58.5 million restructuring charge taken in 1997 (no
comparable charge was taken in 1998) partially offset by the reengineering and
Year 2000 costs incurred in 1998 as discussed above. Operating profit for the
fabric segment decreased $2.3 million to $26.0 million from $28.3 million for
1997 due primarily to the computer system implementation discussed above.

      Exclusive of transition costs related to LifeStyle's restructuring and
reengineering initiatives, Year 2000 compliance costs and costs related to the
computer system implementation at The Robert Allen Group, adjusted operating
profit was $173.4 million, an increase of $14.9 million, or 9.4%, as compared to
the year ended December 31, 1997. As a percentage of net sales, adjusted
operating profit margin increased to 8.7% for the year ended December 31, 1998
from 8.1% for 1997.

      Interest expense was $31.6 million for the year ended December 31, 1998, a
decrease of $10.3 million, or 24.6%, from 1997. This decrease was a result of
lower average debt outstanding during the year ended December 31, 1998 and
reduced interest rates obtained when LifeStyle refinanced its revolving credit
facility in August 1997.

Comparison of the Results of Operations of LifeStyle and the Predecessor

      As a result of LifeStyle's acquisition from Masco and resulting new basis
of accounting, the results of operations of LifeStyle are not directly
comparable to those of the Predecessor. However, LifeStyle believes it is
beneficial to analyze the results of operations for periods with a consistent
number of months because the business continued to be operated by substantially
the same management team as the Predecessor and the principal effects were the
reduction in the carrying value of assets and the corresponding reduction in
post-acquisition depreciation. For purposes of the discussion regarding net
sales, gross profit and selling, general and administrative expenses that
follow, we have combined the results of LifeStyle with those of the Predecessor
to present a 12 month period ended December 31, 1996.


                                       20
<PAGE>   23

Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996

      Net sales were $1,959.8 million for the year ended December 31, 1997, a
decrease of $45.6 million, or 2.3%, from $2,005.4 million for the year ended
December 31, 1996. Net sales of fine furniture decreased 2.3% to $1,693.6
million for the year ended December 31, 1997 from $1,733.3 million for the year
ended December 31, 1996. Fine furniture sales were negatively impacted by
LifeStyle's strategy of exiting less profitable products and by relatively soft
major retailer sales, including reduced shipments to two large customers which
filed for protection under Chapter 11 of the United States Bankruptcy Code. Net
sales of decorative home furnishing fabrics decreased 2.2% to $266.2 million for
the year ended December 31, 1997 from $272.1 million for the year ended December
31, 1996, as the continuing growth of leather as a replacement for fabric in
upholstered furniture negatively impacted fabric sales. Reduced shipments to the
two large customers that filed for protection under Chapter 11 and the
elimination of less profitable products had a short-term negative impact on
sales volume. However, LifeStyle believes that during 1998 it has substantially
replaced the lost sales volume with product sales to other retail customers.

      Gross profit was $491.5 million for the year ended December 31, 1997, a
decrease of $5.0 million, or 1.0%, from $496.5 million for the year ended
December 31, 1996. Excluding the non-recurring restructuring charge of $14.5
million, gross profit increased by $9.5 million or 1.9% to $506.0 million. Gross
profit margin, excluding this restructuring charge, increased to 25.8% in 1997
from 24.8% in 1996. This increase in gross profit margin was primarily
attributable to LifeStyle's continuous improvement initiatives and the benefit
of lower depreciation expense, partially offset by the impact of lower sales
volume.

      Selling, general and administrative expenses were $347.5 million for the
year ended December 31, 1997, a decrease of $19.2 million, or 5.2%, from $366.7
million for the year ended December 31, 1996. The decrease in general and
administrative expenses reflects the benefits of LifeStyle's cost reduction
initiatives, elimination of goodwill amortization, and the net decrease in
general and administrative expenses that LifeStyle has incurred on a stand-alone
basis compared to the management fees previously charged by Masco. These
reductions were partially offset by higher bad debt expenses resulting from the
bankruptcy filings previously mentioned. As a percentage of net sales, selling,
general and administrative expenses improved to 17.7% for the year ended
December 31, 1997 from 18.3% for the year ended December 31, 1996. Selling
expense was 10.9% of net sales as compared to 11.0% for 1996, and general and
administrative expenses decreased to 6.8% of net sales from 7.3% in 1996.

      Operating profit margin was 5.1% for the year ended December 31, 1997,
compared with 8.7% for the period from August 6 through December 31, 1996. The
decrease occurred for the reasons described in the two preceding paragraphs.

      Operating profit margins were 3.9% and 10.2% for the year ended December
31, 1997 compared with 7.6% and 10.5% for the period from August 6 through
December 31, 1996 for the fine furniture segment and the fabric segment,
respectively. The decrease in operating profit margins occurred for the reasons
described above.

      Interest expense was $41.9 million for the year ended December 31, 1997, a
decrease of $30.8 million, or 42.4%, from the year ended December 31, 1996. This
decrease was a result of lower average debt outstanding during the year and
reduced interest rates obtained when LifeStyle refinanced its revolving credit
facility in August 1997.

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 new
product introductions and modest increased industry demand, offset by the
elimination of less profitable product lines. Net sales of decorative home
furnishing 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 


                                       21
<PAGE>   24

segment of the market and improved business conditions, largely offset by lower
demand for printed fabrics and reduced demand as leather increased its market
share.

      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 year ended
December 31, 1995. Gross profit was enhanced from August 6, 1996 to December 31,
1996 by reduced depreciation expense, but this improvement was offset by
increased expenditures which were primarily the result of temporary plant
closings due to bad weather and start-up costs related to substantial new
product introductions. Overall, gross profit margins increased from 24.7% in
1995 to 24.8% in 1996.

      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 year ended December 31, 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
LifeStyle'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 Predecessor by Masco.

      Operating profit margin increased to 4.8% for the period from January 1
through August 5, 1996, compared with 4.7% for the year ended December 31, 1995.
This improvement was achieved primarily for the reasons discussed in the two
preceding paragraphs.

      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 through 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
through December 31, 1996.

Liquidity and Capital Resources

      LifeStyle's liquidity needs arise primarily from debt service, working
capital needs and the funding of capital expenditures. LifeStyle's principal
source of cash to fund its liquidity needs is its net cash from operating
activities and availability of borrowings under its current $400.0 million
Credit Facility.

      During the year ended December 31, 1998, net cash from operating
activities totaled $154.2 million, net cash used for investing activities
totaled $87.3 million, and net cash used for financing activities totaled $63.2
million. For the year ended December 31, 1997, net cash from operating
activities totaled $139.8 million, net cash used for investing activities
totaled $50.2 million, and net cash used for financing activities totaled $107.8
million. Cash dividends of $16.5 million and $23.3 million were paid to Holdings
during January 1999 and 1998, respectively.

      Capital expenditures totaled $41.4 million for the year ended December 31,
1998, compared to $32.7 million for the comparable period of 1997. LifeStyle
believes that no significant increase in capital expenditure levels will be
required during the next several years. Fabric sample book expenditures totaled
$18.5 million for the year ended December 31, 1998, an increase of $4.2 million
over the comparable period of 1997.

      LifeStyle made net principal payments on its long-term debt of $39.9
million during 1998 and $90.1 million during 1997. Total long-term debt
decreased to $314.7 million as of December 31, 1998 as compared to $354.6
million at December 31, 1997. As of December 31, 1998, the amount available
under the Credit Facility was $272.1 million (net of face amount of existing
letters of credit of $15.4 million).


                                       22
<PAGE>   25

      On February 1, 1999, using borrowings under its Credit Facility, LifeStyle
purchased a subordinated note in the principal amount of $35.0 million from HL
Holding Corporation ("HL"), an affiliate of one of Holdings' stockholders, in
connection with HL's acquisition of the HomeLife furniture retailing division of
Sears. The note is unsecured, will accrue interest at an annual rate of 11.0%
(or 11.5% if this interest is paid in kind at the option of HL) and is due in
2004. The note is subordinated in payment to $10.0 million of senior debt of HL,
the guarantee by HL of a $95.0 million credit facility of its subsidiary and any
other guarantee by HL of subsidiary debt. The HomeLife division being acquired
by HL has been a long-time customer of LifeStyle. It is expected that following
this acquisition, LifeStyle and HomeLife will enjoy an enhanced business
relationship on an on-going basis.

      LifeStyle replaced its current receivables securitization facility with a
new facility in 1999. The new facility provides LifeStyle with increased
financial flexibility by providing more favorable terms and conditions,
including higher funding amounts (an increase of approximately $30.0 million),
reduced reserve requirements, and a lower total cost of funds.

      Holdings has filed a Registration Statement on Form S-1 (File No.
333-58655) relating to the initial public offering of its common stock. In
connection with the planned initial public offering of Holdings, LifeStyle will
be merged with and into Holdings, which will then change its name to LifeStyle
Furnishings International Ltd. The timing of the proposed Offerings has not yet
been determined.

      LifeStyle currently has outstanding $200.0 million principal amount of
subordinated notes. In connection with the Offerings, LifeStyle commenced a cash
tender offer to acquire all the subordinated notes. LifeStyle expects to incur
indebtedness to finance the purchase of the subordinated notes. As part of the
Tender Offer, LifeStyle has solicited consents from the holders of the
subordinated notes to remove substantially all of the covenants from the
indenture governing the Subordinated Notes. In connection with the repurchase of
the subordinated notes, LifeStyle expects to incur an extraordinary charge of
approximately $29.0 million after tax.

      Upon completion of the Offerings, Masco has agreed to provide LifeStyle
with a $100.0 million senior unsecured revolving line of credit, bearing
interest at 50 basis points over LifeStyle's borrowing rate from time to time
under its Credit Facility (or any successor facility), and maturing on the third
anniversary of the completion of the Offerings. LifeStyle does not anticipate an
immediate need for these funds.

      In connection with the Offerings, LifeStyle intends to obtain an
additional revolving line of credit prior to the consummation of the Offerings.

      LifeStyle believes that cash generated from operations, together with the
amounts available under the Credit Facility, the new receivables securitization
facility and the new revolving lines of credit, will be adequate to fund its
debt service requirements, working capital needs and capital expenditures for
the foreseeable future, although no assurance can be given in this regard.

      On August 15, 1997, LifeStyle replaced the former revolving credit
facility, Tranche A term loan and Tranche B term loan with its current Credit
Facility. The Credit Facility provides LifeStyle with increased financial
flexibility by eliminating quarterly principal payment requirements, reducing
financing costs and reducing the number of restrictive covenants. In connection
with the repayment of the former revolving credit and term loan facilities,
LifeStyle recorded an extraordinary non-cash charge of $19.4 million ($11.6
million net of tax), consisting of the write-off of unamortized deferred
financing costs.

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


                                       23
<PAGE>   26

Year 2000 Issues

      Year 2000 issues are the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in similar
normal business activities.

      LifeStyle and its operating subsidiaries are evaluating their computerized
systems on an internal basis, and making corrective plans where required. Such
evaluations are designed to cover all financial and operational systems, and
LifeStyle has begun to make the necessary changes. LifeStyle has hired a Year
2000 Project Director who is charged with Year 2000 planning and remediation,
and it has established a committee comprised of senior managers to review its
Year 2000 implementation strategy and to oversee Year 2000 compliance measures.
LifeStyle has also contracted with a computer systems consulting firm to conduct
a review of all of its computer systems and to issue a report on the necessary
compliance measures. LifeStyle intends to complete remediation, testing and
implementation by the middle of 1999. LifeStyle currently anticipates that the
development and implementation of Year 2000 compliance measures will cost
approximately $12 million, all of which will be expensed. In 1998, LifeStyle
incurred and expensed approximately $4 million on these measures. In addition,
during 1997, LifeStyle began implementing a company-wide, Oracle-based software
platform that is designed to be Year 2000 compliant.

      In addition to LifeStyle's internal information technology ("IT") systems,
it also has certain non-IT systems (e.g., machinery and equipment) that utilize
embedded technology such as microcontrollers. LifeStyle does not believe that
its operations depend significantly on the technology contained in any non-IT
systems that are subject to Year 2000 compliance issues. As noted above,
however, LifeStyle has initiated an assessment of its computerized systems that
will cover any material non-IT systems.

      Because of the interdependent nature of business systems, LifeStyle and
its operating subsidiaries could also be materially adversely affected if
utilities, private businesses and governmental entities with which they do
business or from which they obtain essential goods and services are not Year
2000 compliant. In order to determine how LifeStyle would be affected if a third
party failed to resolve its own Year 2000 issues, LifeStyle is communicating
with suppliers, customers and other third parties about the compliance of their
own systems. LifeStyle currently believes that a significant portion of this
third party risk relates to its operations outside the United States.

      If LifeStyle and its business partners fail to achieve Year 2000
compliance on a timely basis, the possible material consequences include, among
other things, temporary plant closings, delays in the delivery of products,
delays in the receipt of supplies, invoice and collection errors, and inventory
and supply obsolescence. As a result of such Year 2000 issues, LifeStyle's
business and its results of operations could be materially adversely affected by
a temporary inability to conduct business in the ordinary course for a period of
time during and around the year 2000. However, LifeStyle believes that its Year
2000 compliance readiness program should significantly reduce the adverse effect
of any such disruptions, and LifeStyle is in the process of developing a
contingency plan to address any such disruptions.

International Operations

      LifeStyle conducts operations in a number of foreign countries including
Canada, China, Hong Kong, Indonesia, Malaysia, the Philippines, Taiwan, Thailand
and several European countries.

      LifeStyle's international operations may be subject to volatility because
of currency fluctuations, inflation and changes in political and economic
conditions in these countries. The financial position and results of operations
of LifeStyle's foreign subsidiaries are remeasured using the U.S. dollar or
translated using the local currency as the functional currency depending on the
nature of the operations. However, LifeStyle's revenue is generated primarily in
the United States and, accordingly, is not significantly impacted by the Asian
devaluation. LifeStyle does not engage in foreign currency hedging.


                                       24
<PAGE>   27

      During 1998, LifeStyle recorded a $2.5 million loss on remeasurement and
foreign currency transactions and a $1.9 million translation adjustment to
stockholder's equity. During 1997, LifeStyle recorded a $7.0 million loss on
remeasurement and foreign currency transactions and a $10.2 million translation
adjustment to stockholder's equity because of the significant devaluation of the
Asian currencies against the U.S. dollar.

      Financial information concerning LifeStyle's foreign operations, including
the net sales and assets that are attributable to LifeStyle's operations in the
United States and in foreign countries, are set forth in Note 15 to the
Financial Statements.

Quantitative and Qualitative Disclosures About Market Risk

      LifeStyle is exposed to a variety of market risks, including the effects
of changes in foreign currency exchange rates, interest rates and commodity
prices. LifeStyle does not engage in foreign currency hedging or the use of
derivatives to manage commodity price fluctuations or for speculative purposes.
LifeStyle is exposed to risks associated with changes in interest rates under
its various debt arrangements and the receivables securitization facility. In
order to manage its exposure to this market risk, LifeStyle maintains interest
rate collar arrangements on $250.0 million of long-term debt. LifeStyle's
exposure to changes in interest rates is summarized as follows:

<TABLE>
<CAPTION>
                                                          Expected maturity Date
                            ------------------------------------------------------------------------------------
                                                                                     2004 and                      Fair
                              1999     2000      2001        2002          2003      Thereafter        Total       Value
                            --------  -------  -------  --------------  ----------  -----------   --------------  --------
                                                                      (in millions)
<S>                         <C>       <C>      <C>      <C>             <C>         <C>           <C>             <C>    
Long term debt:
Variable Rate (Credit
   Facility)............    $   2.5                     $        75.0   $    35.0   $             $       112.5   $ 112.5
Weighted average rate...     8.750%                            5.875%      5.875%                        5.940%
Fixed Rate
   (Subordinated Notes).                                                            $    200.0    $       200.0   $ 221.0
Weighted average rate...                                                               10.875%          10.875%
Interest rate collars:
Notional amount (1).....                                $       250.0                             $       250.0   $ (2.1)
Ceiling/floor...........                                  6.750%/4.885%                             6.750%/4.885%
Off-balance sheet
   financial
   instruments:
Receivables facility....                                $       150.0                             $       150.0   $ 150.0
Weighted average rate...                                       5.789%                                    5.789%
</TABLE>

(1)   The notional amount represents the contract amount, not the amount at
      risk.

Inflation

      LifeStyle 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.

Seasonality

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


                                       25
<PAGE>   28

Recently Issued Statements of Financial Accounting Standards ("SFAS")

      SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," became effective in 1998. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires that enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement requires that LifeStyle report financial and descriptive
information about its reportable operating segments on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Comparative disclosures which include prior period
information have been restated to conform with the provisions of SFAS No. 131.

      SFAS No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits," became effective in 1998. This Statement standardizes
the disclosure requirements for pensions and postretirement benefits and
requires changes in disclosures of benefit obligations and fair values of plan
assets. Comparative disclosures which include prior period information have been
restated to conform with the provisions of SFAS No. 132.

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will become effective for fiscal years beginning after June 15,
1999. This Statement standardizes the disclosure requirements for derivative
instruments and requires that all derivatives be recognized as assets or
liabilities and measured at fair value. LifeStyle does not believe that its
adoption will have a material impact on its financial statements.


                                       26
<PAGE>   29

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 sheets of LIFESTYLE
FURNISHINGS INTERNATIONAL LTD. and subsidiaries ("LifeStyle") as of December 31,
1998 and 1997 and the related consolidated statements of operations,
comprehensive income and cash flows for each of the two years in the period
ended December 31, 1998 and for the period from August 6, 1996 to December 31,
1996. We have also audited the combined statements of operations, comprehensive
income and cash flows of the Masco Home Furnishings Group (certain subsidiaries
of Masco Corporation, as described in Note 2, and the LifeStyle's predecessor)
for the period from January 1, 1996 to August 5, 1996. These financial
statements are the responsibility of the LifeStyle's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LIFESTYLE
FURNISHINGS INTERNATIONAL LTD. and subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998 and for the period
from August 6, 1996 to December 31, 1996, and the combined results of operations
and cash flows of the Masco Home Furnishings Group for the period from January
1, 1996 to August 5, 1996, in conformity with generally accepted accounting
principles.

      As discussed in Note 1 to the financial statements, 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 and are presented on the historical cost basis existing prior to the
acquisition period.

/s/  PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers  LLP
Greensboro, North Carolina
February 1, 1999


                                       27
<PAGE>   30

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                 BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                           December 31,            December 31,
                                                                                               1998                   1997
                                                                                           -----------             -----------
<S>                                                                                        <C>                     <C>        
ASSETS
Current assets:
   Cash and cash investments ..................................................            $     7,740             $     4,140
   Trade receivables ..........................................................                 46,870                  64,480
   Investment in receivables trust ............................................                 92,220                  64,010
   Other receivables ..........................................................                 41,200                  40,710
   Inventories ................................................................                478,940                 510,110
   Prepaid expenses ...........................................................                 39,760                  35,440
   Deferred income taxes ......................................................                 28,010                  38,530
                                                                                           -----------             -----------
        Total current assets ..................................................                734,740                 757,420
Property and equipment, net ...................................................                359,110                 337,390
Other assets ..................................................................                 32,470                  45,160
                                                                                           -----------             -----------
        Total assets ..........................................................            $ 1,126,320             $ 1,139,970
                                                                                           ===========             ===========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
   Long-term debt, current ....................................................            $     3,160             $     2,970
   Accounts payable ...........................................................                137,410                 124,000
   Accrued liabilities ........................................................                111,640                 149,940
                                                                                           -----------             -----------
        Total current liabilities .............................................                252,210                 276,910
Long-term debt ................................................................                311,520                 351,600
Deferred income taxes .........................................................                 21,230                  20,000
Other long-term liabilities ...................................................                 51,780                  54,070
                                                                                           -----------             -----------
        Total liabilities .....................................................                636,740                 702,580
                                                                                           -----------             -----------

Stockholder's equity:
   Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and
      outstanding .............................................................                   --                      --
   Additional paid-in capital .................................................                421,050                 421,050
   Retained earnings ..........................................................                 79,560                  25,510
   Foreign currency translation ...............................................                (11,030)                 (9,170)
                                                                                           -----------             -----------
        Total stockholder's equity ............................................                489,580                 437,390
                                                                                           -----------             -----------
        Total liabilities and stockholder's equity ............................            $ 1,126,320             $ 1,139,970
                                                                                           ===========             ===========
</TABLE>

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


                                       28
<PAGE>   31

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                            STATEMENTS OF OPERATIONS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             LifeStyle                             Predecessor
                                                    -------------------------------------------------------      ---------------
                                                               Year Ended                     Period from          Period from
                                                               December 31,                   Aug. 6, 1996         Jan. 1, 1996
                                                    --------------------------------               to                   to
                                                        1998                 1997             Dec. 31, 1996        Aug. 5, 1996
                                                    -----------          -----------           -----------          ----------- 
<S>                                                 <C>                  <C>                   <C>                  <C>        
Net sales ................................          $ 2,001,930          $ 1,959,780           $   857,490          $ 1,147,890
Cost of sales ............................            1,510,630            1,453,770               638,140              870,650
Restructuring charge .....................                 --                 14,480                  --                   --
                                                    -----------          -----------           -----------          ----------- 
   Gross profit ..........................              491,300              491,530               219,350              277,240
Selling, general and administrative
   expenses ..............................              354,380              347,550               144,580              222,230
Restructuring charge .....................                 --                 44,020                  --                   --
                                                    -----------          -----------           -----------          ----------- 
   Operating profit ......................              136,920               99,960                74,770               55,010
                                                    -----------          -----------           -----------          ----------- 
Other expense, net:
   Interest expense ......................               31,580               41,900                19,930                  970
   Interest expense, Masco ...............                 --                   --                    --                 51,720
   Other, net ............................               11,350               15,110                 6,730                3,480
                                                    -----------          -----------           -----------          ----------- 
                                                         42,930               57,010                26,660               56,170
                                                    -----------          -----------           -----------          ----------- 
   Income (loss) before income taxes and
      extraordinary item .................               93,990               42,950                48,110               (1,160)
Income taxes .............................               23,450               13,750                16,840                6,830
                                                    -----------          -----------           -----------          ----------- 
   Income (loss) before extraordinary item               70,540               29,200                31,270               (7,990)
Extraordinary item - loss on early
   extinguishment of debt (net of income
   taxes of $7,750) ......................                 --                (11,620)                 --                   --
                                                    -----------          -----------           -----------          ----------- 
   Net income (loss) .....................          $    70,540          $    17,580           $    31,270          $    (7,990)
                                                    ===========          ===========           ===========          =========== 
</TABLE>

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


                                       29
<PAGE>   32

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                       STATEMENTS OF COMPREHENSIVE INCOME
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             LifeStyle                             Predecessor
                                                    -------------------------------------------------------      ---------------
                                                               Year Ended                     Period from          Period from
                                                               December 31,                   Aug. 6, 1996         Jan. 1, 1996
                                                    --------------------------------               to                   to
                                                        1998                 1997             Dec. 31, 1996        Aug. 5, 1996
                                                    -----------          -----------           -----------          ----------- 
<S>                                                  <C>                  <C>                   <C>                  <C>        
Net income (loss) .....................              $ 70,540             $ 17,580              $ 31,270             $ (7,990)
Other comprehensive income, net of tax:
  Foreign currency translation ........                (1,860)             (10,210)                1,040                 (830)
                                                     --------             --------              --------             -------- 
Comprehensive income (loss) ...........              $ 68,680             $  7,370              $ 32,310             $ (8,820)
                                                     ========             ========              ========             ======== 
</TABLE>

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


                                       30
<PAGE>   33

                                        LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                                STATEMENTS OF CASH FLOWS
                                                 (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             LifeStyle                             Predecessor
                                                        ---------------------------------------------------      ---------------
                                                                 Year Ended                   Period from          Period from
                                                                 December 31,                 Aug. 6, 1996         Jan. 1, 1996
                                                        ------------------------------             to                   to
                                                           1998                1997           Dec. 31, 1996        Aug. 5, 1996
                                                        ----------          ----------         -----------          ----------- 
<S>                                                     <C>                 <C>                 <C>                 <C>        
Operating Activities:
    Net income (loss) ........................          $  70,540          $   17,580          $   31,270          $   (7,990)
    Adjustments to reconcile net income
      (loss) to net cash provided by
      operating activities:
      Depreciation and amortization ..........             25,650              24,160               9,610              29,790
      Fabric sample book amortization ........             13,660              14,250               5,820               9,470
      Bad debt provision .....................              2,580               6,080               1,580               2,250
      Deferred income taxes ..................             11,750              (6,680)             (5,890)             (2,610)
      Extraordinary loss, net of tax .........               --                11,620                --                  --
      Restructuring charge ...................               --                58,500                --                  --
  Changes in operating assets and liabilities:
      Receivables ............................             13,780              16,570              (3,710)             39,550
      Inventories ............................             31,170               1,710              34,460             (17,480)
      Prepaid expenses and other assets ......              5,390              (5,190)             (9,740)              2,470
      Accounts payable .......................             13,410              30,970               9,420              (1,890)
      Other liabilities ......................            (33,760)            (29,750)             36,220              (4,720)
                                                        ---------           ---------           ---------           ---------
        Net cash provided by operating
           activities ........................            154,170             139,820             109,040              48,840
                                                        ---------           ---------           ---------           ---------
Investing Activities:
   Capital expenditures ......................            (41,410)            (32,650)            (13,820)            (16,520)
   Fabric sample book expenditures ...........            (18,540)            (14,280)             (3,260)             (9,190)
   Net investments in receivables trust ......            (28,210)            (12,890)            (51,120)               --
   Issuance of notes receivable ..............             (1,040)             (3,990)               --                  --
   Collection of notes receivable ............              7,440              16,650               1,670               2,790
   Acquisition of businesses, net of
        cash  acquired .......................               --                  --              (645,430)               --
   Other, net ................................             (5,580)             (3,080)              3,200              (2,640)
                                                        ---------           ---------           ---------           ---------
      Net cash used for investing
           activities ........................            (87,340)            (50,240)           (708,760)            (25,560)
                                                        ---------           ---------           ---------           ---------
Financing Activities:
   Proceeds from long-term debt ..............             47,500             234,000             525,000              87,760
   Repayments of long-term debt ..............            (87,000)           (325,000)           (108,690)            (87,090)
   Net proceeds (repayments) from other
        debt .................................               (390)                950                --                  --
   Net proceeds (repayments) from accounts
          receivable transactions ............               --               (17,000)            167,000                --
   Capital contribution ......................               --                  --                76,400                --
   Deferred financing costs ..................               --                  (790)            (37,590)               --
   Dividends paid ............................            (23,340)               --                  --                  --
   Decrease in Masco net investment and
        advances .............................               --                  --                  --               (22,600)
                                                        ---------           ---------           ---------           ---------
      Net cash provided by (used for)
           financing activities ..............            (63,230)           (107,840)            622,120             (21,930)
                                                        ---------           ---------           ---------           ---------
Cash and Cash Investments:
   Increase (decrease) for the period ........              3,600             (18,260)             22,400               1,350
   Balance, beginning of period ..............              4,140              22,400                --                17,310
                                                        ---------           ---------           ---------           ---------
   Balance, end of period ....................          $   7,740           $   4,140           $  22,400           $  18,660
                                                        =========           =========           =========           =========
Supplemental Disclosure of Cash Flow
   Information:
    Cash paid for:
   Interest ..................................          $  31,830           $  44,450           $   6,200           $  52,700
                                                        =========           =========           =========           =========
   Income taxes ..............................          $  12,050           $  28,300           $   7,000           $  10,000
                                                        =========           =========           =========           =========
</TABLE>

Non-cash transactions:

      On November 13, 1998, LifeStyle declared a cash dividend, payable January
1999, of $16.5 million to Holdings.

      On December 12, 1997, LifeStyle declared a cash dividend, payable January
1998, of $23.3 million to Holdings.

      In addition to the acquisition consideration reflected above, Holdings
issued $285.0 million in notes and $60.0 million in equity securities to Masco
during 1996.

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


                                       31
<PAGE>   34

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                          NOTES TO FINANCIAL STATEMENTS

1. The Company

      LIFESTYLE FURNISHINGS INTERNATIONAL LTD. ("LifeStyle") was formed in May
1996 for the purpose of acquiring (the "acquisition") the Masco Home Furnishings
Group (the "Predecessor") from Masco Corporation ("Masco"). In the formation of
LifeStyle, 100 shares of common stock were issued to FURNISHINGS INTERNATIONAL
INC. ("Holdings"), LifeStyle's sole stockholder. On August 5, 1996, Holdings
acquired the Predecessor from Masco for approximately $1.1 billion and
contributed substantially all of the businesses acquired to LifeStyle, its
wholly owned subsidiary. The purchase price of $1.1 billion was financed by: (i)
senior bank facilities ($325.0 million); (ii) the 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 8 Receivables
Facility and Note 9 Long-Term Debt).

      The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price, which was $650 million less than the
historical carrying amount of the net assets of the Predecessor, 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 the
elimination of goodwill and a reduction of non-current assets, principally
property and equipment.

      As a result of the acquisition and new basis of accounting, LifeStyle'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.

      Holdings has filed a Registration Statement on Form S-1 (File No.
333-58655) relating to the initial public offering of its common stock (the
"Offerings"). In connection with the Offerings, LifeStyle Furnishings
International Ltd. will be merged with and into Furnishings International Inc.,
which will then change its name to LifeStyle Furnishings International Ltd. The
timing of the planned Offerings has not yet been determined.

2. Basis of Presentation and Accounting Policies

      Basis of Presentation. LifeStyle is engaged in the business of
manufacturing and marketing home furnishings, including fine furniture and
decorative home furnishing fabrics. Revenue is recognized when products are
shipped to customers. The Financial Statements include the accounts of LifeStyle
and its subsidiary companies. The Financial Statements presented herein include
those of the Predecessor for the period prior to August 6, 1996 and LifeStyle
subsequent to that date. Intercompany 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
Predecessor was not a legal entity and included certain Masco subsidiaries whose
operations consisted of the manufacture and sale of home furnishings, including
fine furniture and decorative home furnishing fabrics. The results of operations
of the Predecessor, as presented herein, may not be the same as would have
occurred had the Predecessor been an entity independent of Masco.

      In connection with the acquisition, the purchase price allocation resulted
in the elimination of historical goodwill and a reduction of non-current assets,
principally property and equipment. This allocation was a result of the
historical carrying amount of the net assets of the Predecessor being in excess
of the purchase price paid by LifeStyle. Prior to the acquisition and in
accordance with Masco's accounting policy note, Masco periodically assessed
whether there had been an impairment of assets primarily by comparing current
and projected annual sales, operating income and annual cash flows on an
undiscounted basis with the related annual amortization expense. As of December
31, 1995 and through the date of the acquisition by LifeStyle, the goodwill and
property and equipment of the Predecessor had been subjected to an evaluation
for impairment based on this policy. The results of these cash flow tests
indicated that there was no impairment.


                                       32
<PAGE>   35

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

2. Basis of Presentation and Accounting Policies (Continued)

      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 Predecessor by Masco based upon approximately one
percent of sales of most domestic Predecessor operations. 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 Predecessor 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 Predecessor by Masco.

      Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires LifeStyle to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from such estimates and assumptions.

      Cash and Cash Investments. LifeStyle considers all highly liquid
investments with an original maturity of three months or less to be cash and
cash investments.

      Receivables. Trade and other receivables are presented net of aggregate
allowances for doubtful accounts of $2.8 million at December 31, 1998 and $3.9
million at December 31, 1997.

      Deferred Charges. Deferred charges, which consist primarily of debt
issuance costs associated with the acquisition from Masco are amortized over the
terms of the related debt using the effective interest method. Deferred charges
totaling $13.8 million, net of accumulated amortization of $5.2 million, and
$16.0 million, net of accumulated amortization of $3.0 million, were included in
Other Assets in the accompanying balance sheets as of December 31, 1998 and
1997, respectively. In August 1997, LifeStyle wrote off $19.4 million of
unamortized deferred financing costs related to the early extinguishment of
debt.

      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. LifeStyle reviews property and equipment for impairment
and write down to fair value whenever events or circumstances indicate that the
carrying value may not be recoverable through undiscounted cash flows. Fair
value is determined based on comparable market values, when available, or
discounted cash flows.

      Depreciation and Amortization. Depreciation is computed principally using
the straight line method over the estimated useful lives of the assets.
LifeStyle 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.
Purchased software and direct external costs related to the implementation of
the software are capitalized and amortized over a range of three to six years.
Depreciation expense was $23.4 million during 1998, $20.2 million during 1997,
$7.6 million for the period August 6, 1996 to December 31, 1996 and $21.5
million for the period January 1, 1996 to August 5, 1996.

      LifeStyle produces fabric sample books which are used to market some of
its products. LifeStyle 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, 1998 and 1997 aggregated $22.7 million and $17.9 million,
respectively, and the related amounts charged to selling expense were $13.7
million during 1998, $14.3 million during 1997, $5.8 million for the period
August 6, 1996 to December 31, 1996 and $9.5 million for the period January 1,
1996 to August 5, 1996. 


                                       33
<PAGE>   36

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

2. Basis of Presentation and Accounting Policies (Continued)

      Joint Ventures. LifeStyle has investments in several fifty-fifty joint
ventures in Asia which are accounted for on the equity method. At December 31,
1998 and 1997, LifeStyle's investment in these joint ventures totaled $5.5
million and $7.3 million, respectively, and is included in other assets. In
connection with certain of these investments, LifeStyle has guaranteed a minimum
return on investment to its joint venture partners if certain annual financial
targets are not achieved. LifeStyle records a liability for these guarantees
when payment is both probable and estimable.

      Receivables Facility. LifeStyle accounts for its receivables facility in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 allows LifeStyle to derecognize the trade
receivables transferred to LFI Receivables Corporation (Note 8).

      Fair Value of Financial Instruments and Concentrations of Credit Risk. The
carrying value of financial instruments reported in the balance sheets for
current assets and current liabilities approximates fair value. The carrying
values of notes receivable, revolving credit facilities, investment in
receivables trust and the forward contract to sell accounts receivable
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 $221 million and $222 million as
of December 31, 1998 and 1997, respectively, based on quoted market values,
compared to a carrying value of $200.0 million. LifeStyle's residual interest
retained in securitized receivables is presented at cost, which equals the face
amount of the underlying securitized receivables. The fair value of the
investment in receivables trust, representing LifeStyle's residual interest
retained in securitized receivables, approximates cost due to the current nature
of the underlying accounts.

      LifeStyle's interest rate collar arrangements, which result in $250.0
million of LifeStyle's long-term debt being subject to a LIBOR ceiling of 6.75%
and a LIBOR floor of 4.89%, had a fair value of approximately $(2.1) and $(0.4)
million at December 31, 1998 and 1997, respectively, with a carrying value of
zero.

      Foreign Currency Translation. Assets and liabilities of LifeStyle's
foreign subsidiaries, where the local currency is the functional currency, are
translated at the balance sheet date exchange rates and statement of operations
accounts are translated at the average rates prevailing during the year.
Adjustments resulting from the translation are recorded as a separate component
of stockholder's equity.

      The following table reconciles the changes from period to period:

<TABLE>
<CAPTION>
                                                      December 31,
                                                 ----------------------
                                                   1998          1997
                                                 --------      -------- 
        <S>                                      <C>           <C>     
        Balance, beginning of period .......     $ (9,170)     $  1,040
        Translation adjustment .............       (1,860)      (10,210)
        Income tax effect ..................         --            --
                                                 --------      -------- 
        Balance, end of period .............     $(11,030)     $ (9,170)
                                                 ========      ======== 
</TABLE>

      Assets and liabilities of LifeStyle's foreign subsidiaries, where the U.S.
dollar is the functional currency, are remeasured at balance sheet date exchange
rates, except for non-monetary assets and liabilities, which are remeasured
using historical exchange rates. The resulting gains and losses are included in
"Other, net" in the statement of operations.


                                       34
<PAGE>   37

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

2. Basis of Presentation and Accounting Policies (Continued)

      During 1998, LifeStyle recorded a $2.5 million loss on remeasurement and
foreign currency transactions and a $1.9 million translation adjustment to
stockholder's equity. During 1997, LifeStyle recorded a $7.0 million loss on
remeasurement and foreign currency transactions and a $10.2 million translation
adjustment to stockholder's equity because of the significant devaluation of the
Asian currencies against the U.S. dollar.

      Reclassifications. Certain prior period amounts have been reclassified to
conform with current period presentation.

      Recently Issued Accounting Standards. SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," became effective in 1998.
Comparative disclosures which include prior period information have been
restated to conform with the provisions of this Statement. (Note 15)

      SFAS No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits," became effective in 1998. Comparative disclosures
which include prior period information have been restated to conform with the
provisions of this Statement. (Note 10)

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will become effective for fiscal years beginning after June 15,
1999. This Statement standardizes the disclosure requirements for derivative
instruments and requires that all derivatives be recognized as assets or
liabilities and measured at fair value. LifeStyle does not believe that its
adoption will have a material impact on its financial statements.

3. Inventories

<TABLE>
<CAPTION>
                                                     December 31,
                                               -------------------------
                                                 1998             1997
                                               --------         --------
        <S>                                    <C>              <C>     
        Finished goods ...............         $212,730         $216,360
        Raw material .................          192,680          216,010
        Work in process ..............           73,530           77,740
                                               --------         --------
                                               $478,940         $510,110
                                               ========         ========
</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.

4. Property and Equipment

<TABLE>
<CAPTION>
                                                        December 31,
                                                   ---------------------
                                                     1998         1997
                                                   --------     --------
        <S>                                        <C>          <C>     
        Land and improvements ................     $ 36,350     $ 32,600
        Buildings ............................      205,660      204,920
        Machinery and equipment ..............      157,480      121,550
                                                   --------     --------
                                                    399,490      359,070
        Less accumulated depreciation ........       48,580       21,680
                                                   --------     --------
                                                   $350,910     $337,390
                                                   ========     ========
</TABLE>


                                       35
<PAGE>   38

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

4. Property and Equipment (Continued)

      LifeStyle leases various facilities and equipment under non-cancelable
lease arrangements. Rent expense was $16.8 million during 1998, $19.4 million
during 1997, $8.4 million for the period August 6, 1996 to December 31, 1996 and
$12.3 million for the period January 1, 1996 to August 5, 1996.

      At December 31, 1998, future minimum rental commitments for operating
leases with non-cancelable terms in excess of one year are as follows:
1999-$21.3 million; 2000-$18.4 million; 2001-$14.8 million; 2002-$12.0 million;
2003-$10.1 million; and thereafter-$11.9 million.

5. Notes Receivable

      LifeStyle has notes receivable from certain of its customers which are
included in Other Receivables and Other Assets in the accompanying balance
sheets. 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 predominantly on the prevailing prime
rate. Approximately $2.1 million of these notes are due from one customer at
December 31, 1998. Although LifeStyle does not currently foresee a material
credit risk associated with this receivable, repayment is dependent upon the
financial stability of this customer.

      On February 1, 1999, using borrowings under its Credit Facility, LifeStyle
purchased a subordinated note in the principal amount of $35.0 million from HL
Holding Corporation ("HL"), an affiliate of one of Holdings' stockholders, in
connection with HL's acquisition of the HomeLife furniture retailing division of
Sears. The note is unsecured, will accrue interest at an annual rate of 11.0%
(or 11.5% if this interest is paid in kind at the option of HL) and is due in
2004. The note is subordinated in payment to $10.0 million of senior debt of HL,
the guarantee by HL of a $95.0 million credit facility of its subsidiary and any
other guarantee by HL of subsidiary debt.

6. Accrued Liabilities

<TABLE>
<CAPTION>
                                                             December 31,
                                                       -----------------------
                                                         1998           1997
                                                       --------       --------
  <S>                                                  <C>            <C>     
  Salaries, wages and commissions ..............       $ 30,550       $ 26,780
  Employee retirement plans ....................          2,760          8,390
  Interest .....................................         10,370         11,170
  Advertising and sales promotion ..............          9,420          9,550
  Insurance ....................................          5,050          7,120
  Warranty reserve .............................          2,500          2,500
  Property, payroll and other taxes ............          3,660          2,900
  Restructuring ................................          1,300         28,510
  Dividend .....................................         16,490         23,340
  Other ........................................         29,540         29,680
                                                       --------       --------
                                                       $111,640       $149,940
                                                       ========       ========
</TABLE>


                                       36
<PAGE>   39

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

7. Restructuring Initiatives

      At the end of 1997, LifeStyle completed an in-depth evaluation of its
global manufacturing and distribution base, and recorded a $58.5 million charge
to rationalize and restructure its worldwide operations, focusing principally on
LifeStyle's Universal Furniture business unit. The majority of Universal
Furniture's restructuring activity occurred in Asia, where facilities with 1.3
million square feet of manufacturing and distribution space have been
eliminated, as production has been consolidated into existing, lower-cost Asian
facilities. As a result of the restructuring, significant non-recurring costs
have been incurred to sever lease obligations, provide for employee severance,
and provide for the impairment of inventory and property and equipment. The
restructuring initiatives included a reduction in workforce, eliminating
approximately 3,000 positions by the end of 1998. The positions eliminated
consist primarily of production and supervisory personnel.

      The activities discontinued consist of furniture and component parts
manufacturing plants that supply other manufacturing operations. The activities
previously performed at these facilities have been shifted to other facilities
where existing production capacity can be more efficiently utilized. As such,
the operations discontinued did not have separately identifiable revenues or
operating income.

      As a result of the restructuring, inventory with a carrying value of $14.5
million has been written-off. Property and equipment, consisting primarily of
real property, machinery and equipment at facilities to be closed, have been
written down, resulting in an impairment loss of $17.6 million. The fair value
of these assets was determined based upon independent appraisals and analysis of
comparable sales in the affected regions.

      Operating profit for 1997 included total non-recurring charges of $58.5
million, including the $14.5 million of inventory write-offs referred to above
which are included in gross profit. The following represents LifeStyle's
restructuring activities for the periods indicated (in millions):

<TABLE>
<CAPTION>
                                Asset        Contractual    Employee
                             write-downs     obligations    severance        Other           Total
                             -----------     ----------     ----------     ----------     -----------
<S>                          <C>             <C>            <C>            <C>            <C>        
  December 31, 1997 ...      $      38.1     $      9.8     $      8.8     $      1.8     $      58.5
  Activity during 1998:
       Non-cash items .            (38.1)           --             --             --            (38.1)
       Cash items .....             --             (8.5)          (8.8)          (1.8)          (19.1)
                             -----------     ----------     ----------     ----------     -----------
  December 31, 1998 ...      $      --       $      1.3     $      --      $      --      $       1.3
                             ===========     ==========     ==========     ==========     ===========
</TABLE>

      In connection with the August 5, 1996 acquisition of the Predecessor,
management developed a restructuring plan. As permitted by EITF 95-3
"Recognition of Liabilities in Connection with a Purchase Business Combination,"
the total cost of the plan of approximately $28.3 million was included as part
of the purchase price allocation. This restructuring plan which provided 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 was completed in early 1998.

8. Receivables Facility

      In connection with LifeStyle's $200.0 million Receivables Facility, LFI
Receivables Corporation (the "Receivables Subsidiary"), a special-purpose,
bankruptcy remote subsidiary of LifeStyle, purchases, on a revolving basis,
substantially all domestic trade receivables generated by LifeStyle. The
Receivables Subsidiary transfers and assigns all its rights in substantially all
those receivables to the LFI Receivables Master Trust (the "Master Trust").
LifeStyle continues to service the receivables. The servicing assets and
liabilities related to this arrangement are not significant.


                                       37
<PAGE>   40

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

8. Receivables Facility (Continued)

      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, the balance of trade receivables and cash held by the
Master Trust, as well as the fractional, undivided senior and subordinated
interests in the assets of the Master Trust, were as follows:

<TABLE>
<CAPTION>
                                                                            1998          1997
                                                                          --------      --------
      <S>                                                                 <C>           <C>     
      Senior interests sold to Participants ........................      $150,000      $150,000
      Senior interests retained by the Receivables Subsidiary ......        23,900          --
      Subordinated interests retained by the Receivables Subsidiary         68,320        64,010
                                                                          --------      --------
      Balance of trade receivables and cash held by the Master Trust      $242,220      $214,010
                                                                          ========      ========
</TABLE>

      The Senior Investor Certificates bear interest at LIBOR plus .125% to
 .625% and there is a commitment fee of .175% per annum on the unused commitment
under the facility. The cost of this facility amounted to $9.1 million during
1998, $9.8 million during 1997 and $4.4 million for the period August 6, 1996 to
December 31, 1996, and is included in "Other, net" in the accompanying
Statements of Operations.

      This arrangement places certain restrictions on LifeStyle and the
Receivables Subsidiary, including placing liens on LifeStyle's trade
receivables. At December 31, 1998, LifeStyle was in compliance with these
covenants.

9. Long-Term Debt

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

<TABLE>
<CAPTION>
                                                   1998             1997
                                                 --------         --------
      <S>                                        <C>              <C>     
      Revolving credit facility ........         $112,500         $152,000
      Senior subordinated notes ........          200,000          200,000
      Other borrowings .................            2,180            2,570
                                                 --------         --------
                                                  314,680          354,570
      Less current portion .............            3,160            2,970
                                                 --------         --------
                                                 $311,520         $351,600
                                                 ========         ========
</TABLE>

       LifeStyle may periodically guarantee loans, leases or other credit
facilities for its customers and joint venture partners. At December 31, 1998,
the outstanding balance of these guarantees approximated $3.6 million.

       At December 31, 1998, the maturities of long-term debt during each of the
next five years were approximately as follows: 1999-$3.2 million; 2000-$1.5
million; 2001-$0 million; 2002-$75.0 million; 2003 - $35.0 million; and 2004 and
thereafter $200.0 million.


                                       38
<PAGE>   41

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

9. Long-Term Debt (Continued)

      Revolving Credit Facility. On August 15, 1997, LifeStyle replaced the
existing Revolving credit facility, Tranche A term loan and Tranche B term loan
with a six year $400 million senior secured revolving credit facility. The
revolving credit facility provides LifeStyle with increased financial
flexibility by eliminating quarterly principal payment requirements, reducing
financing costs and reducing a number of restrictive covenants. The revolving
credit facility bears interest at a floating rate equal to LIBOR plus an
applicable percentage based upon LifeStyle's debt coverage ratio at the end of
each quarter. In connection with the repayment of the existing revolving credit
and term loan facilities, LifeStyle recorded an extraordinary loss of $19,370
($11,620 net of tax), consisting of the write-off of unamortized deferred
financing costs, related to the early extinguishment of debt.

      The obligation under the revolving credit facility is unconditionally
guaranteed, jointly and severally, by Holdings and substantially all domestic
subsidiaries of LifeStyle, and is collateralized by substantially all the fixed
assets of LifeStyle and the guarantors. The revolving credit facility contains
restrictive covenants including minimum interest coverage ratios, maximum
leverage ratios, and annual capital expenditures limitations. At December 31,
1998, LifeStyle was in compliance with these covenants.

      Senior Subordinated Notes. In connection with the acquisition, LifeStyle
issued, in a private placement, $200 million unsecured senior subordinated notes
maturing August 1, 2006 ("Notes"). Interest on the Notes is payable semiannually
at 10.875% per annum commencing on February 1, 1997. On November 8, 1996,
LifeStyle'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 LifeStyle subsequent to August 1, 2001 at
premiums which begin at 5.438% and decline each year to 0% for redemptions
taking place after August 1, 2004. In addition, at any time prior to August 1,
1999, LifeStyle may redeem up to 33.33% 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 LifeStyle 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, 1998, LifeStyle was in compliance with these covenants.

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

      In 1999, LifeStyle commenced a cash tender offer to acquire all of the
outstanding Notes. In connection with the acquisition of the Notes, LifeStyle
expects to pay a premium of approximately $30.8 million.


                                       39
<PAGE>   42

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

10. Employee Retirement Plans

      LifeStyle sponsors qualified defined benefit and defined contribution
retirement plans for most of its employees. LifeStyle also maintains a
non-qualified, defined benefit retirement plan for certain key executives.
LifeStyle'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. LifeStyle'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 $10.8 million during 1998, $11.1 million during 1997, $4.4 million
for the period August 6, 1996 to December 31, 1996 and $4.0 million for the
period January 1, 1996 to August 5, 1996.

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

<TABLE>
<CAPTION>
                                                                    LifeStyle                           Predecessor
                                              ---------------------------------------------------      -------------
                                                          Year Ended          
                                                         December 31,                Aug. 6, 1996       Jan. 1, 1996
                                              --------------------------------            to                 to
                                                  1998               1997            Dec. 5, 1996       Aug. 5, 1996
                                              -------------      -------------      -------------      -------------
      <S>                                     <C>                <C>                <C>                <C>          
      Service cost-benefits earned during
         the year .......................     $       8,120      $       7,680      $       2,630      $       4,480
      Interest cost on projected benefit
         obligation .....................            13,980             13,500              5,430              7,550
      Actual return on assets ...........           (13,980)           (13,530)            (1,690)            (8,410)
      Net amortization and deferral .....               150                230             (3,750)               970
                                              -------------      -------------      -------------      -------------
      Net periodic pension cost .........     $       8,270      $       7,880      $       2,620      $       4,590
                                              =============      =============      =============      =============
</TABLE>

      Major assumptions used in accounting for LifeStyle's pension plans are as
follows:

<TABLE>
<CAPTION>
                                                                                LifeStyle
                                                              -----------------------------------------------
                                                                   1998            1997            1996
                                                              -------------    -------------    -------------
      <S>                                                          <C>             <C>             <C>  
      Discount rate for obligations ..................             7.25%           7.50%           7.50%
      Rate of increase in compensation levels ........              5.0%            5.0%            5.0%
      Expected long-term rate of return on plan assets             10.0%           10.0%           10.0%
</TABLE>


                                       40
<PAGE>   43

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

10. Employee Retirement Plans (Continued)

      The change in projected benefit obligation, the change in fair value of
plan assets and the funded status of LifeStyle's pension plans at December 31 is
summarized as follows:

<TABLE>
<CAPTION>
                                                                                       Year Ended
                                                                                      December 31,
                                                                            ---------------------------------
                                                                                 1998               1997
                                                                            ---------------     -------------
    <S>                                                                    <C>                 <C>         
    Change in projected benefit obligation:
    Projected benefit obligation at beginning of year...............       $      191,000      $    184,400
    Service cost....................................................                8,120             7,680
    Interest cost...................................................               13,980            13,500
    Actuarial (gain)/loss...........................................                9,230           (5,930)
    Benefits paid...................................................             (11,470)           (8,650)
                                                                            --------------      ------------
       Projected benefit obligation at end of year..................       $      210,860      $    191,000
                                                                            --------------      ------------
    Change in fair value plan assets:
    Fair value of plan assets at beginning of year .................       $      142,330      $    134,820
    Actual return on plan assets....................................               13,030             9,050
    Employer contribution...........................................                7,380             7,110
    Benefits paid...................................................             (11,470)           (8,650)
                                                                            --------------      ------------
       Fair value of plan assets at end of year ....................       $      151,270      $    142,330
                                                                            --------------      ------------
    Funded status...................................................       $     (59,590)      $   (48,670)
    Unrecognized transition asset ..................................                (930)           (1,120)
    Unrecognized net actuarial loss ................................               30,280            20,410
    Unrecognized prior service cost ................................                  290               320
                                                                            --------------      ------------
       Accrued benefit cost.........................................       $     (29,950)      $   (29,060)
                                                                            ==============      ============
</TABLE>

11. Stockholder's Equity

<TABLE>
<CAPTION>
                                                          Additional                   Foreign         Total
                                             Common         Paid-in      Retained     Currency      Stockholder's
                                             Stock          Capital      Earnings    Translation       Equity
                                           -----------    ------------  -----------  ------------   -------------
       <S>                                <C>            <C>           <C>          <C>            <C>        
       Balance at August 5, 1996.......   $      --      $       --    $      --    $       --     $        --
          Contribution of businesses
            from Holdings..............          --           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
                                           -----------    ------------  -----------  ------------   -------------
          Net income...................          --              --         17,580          --            17,580
          Dividend declared............          --              --       (23,340)          --          (23,340)
          Foreign exchange.............          --              --           --        (10,210)        (10,210)
                                           -----------    ------------  -----------  ------------   -------------
       Balance at December 31, 1997....          --           421,050       25,510       (9,170)         437,390
                                           -----------    ------------  -----------  ------------   -------------
          Net income...................          --              --         70,540          --            70,540
          Dividend declared............          --              --       (16,490)          --          (16,490)
          Foreign exchange.............          --              --           --         (1,860)         (1,860)
                                           ===========    ============  ===========  ============   =============
       Balance at December 31, 1998....   $      --      $    421,050  $    79,560  $   (11,030)   $     489,580
                                           ===========    ============  ===========  ============   =============
</TABLE>

      On November 13, 1998, LifeStyle declared a cash dividend, payable January
1999, of $16.5 million to Holdings.


                                       41
<PAGE>   44

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

12. Income Taxes

<TABLE>
<CAPTION>
                                                                                    LifeStyle                      Predecessor
                                                             -----------------------------------------------      -------------
                                                                     Year Ended        
                                                                     December 31,              Aug. 6, 1996       Jan. 1, 1996
                                                             --------------------------             to                  to
                                                               1998              1997          Dec. 31, 1996       Aug. 5, 1996
                                                             --------          --------           --------           --------
      <S>                                                    <C>               <C>                <C>                <C>      
      Income (loss) before
         income taxes and
         extraordinary item:
            Domestic ..............................          $ 73,740          $ 76,310           $ 48,640           $   (350)
            Foreign ...............................            20,250           (33,360)              (530)              (810)
                                                             --------          --------           --------           --------
                                                             $ 93,990          $ 42,950           $ 48,110           $ (1,160)
                                                             ========          ========           ========           ======== 
      Provision (credit) for income taxes:
           Currently payable:
              Federal - U.S. income ...............          $  3,580          $  4,820           $ 16,240           $  3,680
                      - Certain foreign earnings ..             5,940             3,360              1,640              2,510
              State and local .....................             1,130             3,650              3,840              1,950
              Foreign .............................             1,900             1,110              1,010              1,300
           Deferred:
              Domestic ............................            10,900             9,190             (5,890)            (2,600)
              Foreign .............................              --              (8,380)              --                  (10)
                                                             --------          --------           --------           --------
                                                             $ 23,450          $ 13,750           $ 16,840           $  6,830
                                                             ========          ========           ========           ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                            ----------------------------------
                                                                                              1998                       1997
                                                                                            -------                    -------
<S>                                                                                         <C>                        <C>    
      Deferred tax assets:
            Inventories ................................................                    $ 9,480                    $ 8,850
            Accrued liabilities ........................................                     34,300                     40,930
                                                                                            -------                    -------
              Gross deferred tax assets ................................                     43,780                     49,780
                                                                                            -------                    -------
      Deferred tax liabilities:
            Property and equipment .....................................                     35,710                     29,960
            Other ......................................................                      1,290                      1,290
                                                                                            -------                    -------
              Gross deferred tax liabilities ...........................                     37,000                     31,250
                                                                                            -------                    -------
      Net deferred tax asset ...........................................                    $ 6,780                    $18,530
                                                                                            =======                    =======
</TABLE>

      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>
                                                                                    LifeStyle                          Predecessor
                                                             --------------------------------------------------       -------------
                                                                     Year Ended        
                                                                     December 31,                 Aug. 6, 1996         Jan. 1, 1996
                                                             ---------------------------               to                   to
                                                               1998               1997            Dec. 31, 1996         Aug. 5, 1996
                                                             --------            --------            --------            --------
      <S>                                                    <C>                <C>                 <C>                 <C>      
      U.S. federal statutory rate .................                35%                 35%                 35%                 35%
      Tax (credit) at U.S. federal statutory rate .          $ 32,900            $ 15,030            $ 16,840            $   (410)
      Higher taxes on foreign earnings ............               750               7,560               2,870               4,080
      Amortization in excess of tax ...............              --                  --                   140               2,620
      State and local taxes, net of federal tax
         benefit ..................................             1,730               3,470               1,820               1,270
      Reduction from tax sharing agreement ........           (12,460)            (12,760)             (4,970)               --
      Other .......................................               530                 450                 140                (730)
            Income taxes ..........................          $ 23,450            $ 13,750            $ 16,840            $  6,830
                                                             ========            ========            ========            ========
</TABLE>


                                       42
<PAGE>   45

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

12. Income Taxes (Continued)

      LifeStyle and its subsidiaries are included in the consolidated federal
tax return of Holdings. Pursuant to LifeStyle's tax sharing agreement with
Holdings, LifeStyle will be required to make tax sharing payments to Holdings
with respect to LifeStyle's pro rata share of consolidated federal and combined
state and local income tax liabilities.

      Under SFAS 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. No valuation allowance was required
at December 31, 1998 or 1997.

      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 a part of the acquisition of the Predecessor, LifeStyle and Holdings
entered into a Management Agreement pursuant to which Holdings provides
LifeStyle certain executive management, corporate support, administrative, data
processing, human resources, legal, environmental, audit, treasury, tax and
other management-related services. Those costs approximated $20.7 million during
1998, $15.9 million during 1997 and $6.6 for the period August 6, 1996 to
December 31, 1996, or which approximately $6.6 million and $1.5 million was
included in accrued liabilities at December 31, 1998 and 1997, respectively.

      LifeStyle sells furniture and accessories to certain distribution
businesses owned by Holdings. LifeStyle's sales to Holdings were $49.8 million
during 1998, $38.6 million during 1997 and $21.2 million for the period August
6, 1996 to December 31, 1996. As a result of these sales transactions, LifeStyle
had accounts receivable totaling $14.7 million and $15.0 million at December 31,
1998 and 1997, respectively.

14. Commitments and Contingencies

      In the ordinary course of business, LifeStyle may become exposed to
potential liabilities resulting from spills and releases of hazardous substances
at its sites and facilities. LifeStyle also has been named as a potentially
responsible party at a number of non-owned contaminated sites, including
Superfund sites. LifeStyle does not believe that costs associated with
investigating or remediating these releases or costs related to these sites will
have a material adverse effect on LifeStyle's financial condition, cash flows,
operating expenses or earnings. However, there can be no assurance that material
costs relating to these matters will not be incurred in the future.

      From time to time, LifeStyle is a party to various legal actions in the
normal course of its business. LifeStyle 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 LifeStyle.


                                       43
<PAGE>   46

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

15. Operating Segments

      Effective December 31, 1998, LifeStyle adopted SFAS No.131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises report information
about operating segments. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect LifeStyle's results of operations or
financial position.

      LifeStyle is the largest manufacturer and marketer of home furnishings in
the U.S. It generates revenue from two operating segments: fine furniture
(including decorative accessories) and decorative home furnishings fabrics.
Management has determined these to be LifeStyle's operating segments based on
the nature of their products. The fine furniture segment is principally involved
in the manufacture, sale and distribution of home furnishing products to
independent and franchised retailers. These products consist of casegoods,
upholstered products, accessories, casual furniture and indoor/outdoor
furniture. The decorative home furnishings fabrics segment is principally
involved in the manufacture and sale of woven and printed fabrics to jobbers and
furniture manufacturers.

      The accounting policies of the segments are the same as those described in
Note 2. LifeStyle evaluates performance based on operating profit or loss.
Revenues from transactions between operating segments are not material.
LifeStyle allocates corporate overhead to each segment.

      The following represents selected financial information for LifeStyle's
operating segments for the periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                           LifeStyle                      Predecessor
                                                     -------------------------------------------------   -------------
                                                               Year Ended               
                                                              December 31,              Aug. 6, 1996     Jan. 1, 1996
                                                     --------------------------------        to               to
                                                         1998              1997        Dec. 31, 1996     Aug. 5, 1996
                                                     --------------   ---------------  ---------------   -------------
<S>                                                 <C>              <C>              <C>               <C>          
  Net sales:
     Fine furniture...............................  $    1,871,000   $     1,814,000  $       803,000   $   1,070,000
     Fabric.......................................         268,000           277,000          119,000         163,000
     Intrasegment elimination and other...........       (137,000)         (131,000)         (65,000)        (85,000)
                                                     --------------   ---------------  ---------------   -------------
  Total net sales.................................  $    2,002,000   $     1,960,000  $       857,000   $   1,148,000
                                                     ==============   ===============  ===============   =============

  Net sales to external customers:
     Fine furniture...............................  $    1,745,000   $     1,694,000  $       741,000   $     991,000
     Fabric.......................................         257,000           266,000          116,000         157,000
                                                     --------------   ---------------  ---------------   -------------
  Total net sales to external customers...........  $    2,002,000   $     1,960,000  $       857,000   $   1,148,000
                                                     ==============   ===============  ===============   =============

  Operating profit (loss):
     Fine furniture...............................  $      115,000   $        71,000  $        63,000   $      54,000
     Fabric.......................................          26,000            28,000           13,000          13,000
     Intrasegment elimination and other...........         (4,000)             1,000          (1,000)        (12,000)
                                                     --------------   ---------------  ---------------   -------------
  Total operating profit..........................  $      137,000   $       100,000  $        75,000   $      55,000
                                                     ==============   ===============  ===============   =============

  Depreciation and amortization expense:
     Fine furniture...............................  $       21,000   $        17,000  $         9,000   $      17,000
     Fabric.......................................          17,000            16,000            7,000          12,000
     Intrasegment elimination and other...........            --                --               --             2,000
                                                     --------------   ---------------  ---------------   -------------
  Total depreciation and amortization expense.....  $       38,000   $        33,000  $        16,000   $      31,000
                                                     ==============   ===============  ===============   =============
</TABLE>


                                       44
<PAGE>   47

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)


15. Operating Segments

<TABLE>
<CAPTION>
                                                                      LifeStyle                        Predecessor
                                                   -------------------------------------------------   -------------
                                                             Year Ended                                  
                                                            December 31,              Aug. 6, 1996     Jan. 1, 1996
                                                   --------------------------------        to               to
                                                       1998              1997        Dec. 31, 1996     Aug. 5, 1996
                                                   --------------   ---------------  ---------------   -------------
<S>                                               <C>              <C>              <C>               <C>          
Additions to long-lived assets:
   Fine furniture...............................  $       38,000   $        30,000  $        13,000   $      13,000
   Fabric.......................................          22,000            17,000            4,000          12,000
   Intrasegment elimination and other...........               -                 -                -           1,000
                                                   --------------   ---------------  ---------------   -------------
Total additions to long-lived assets............  $       60,000   $        47,000  $        17,000   $      26,000
                                                   ==============   ===============  ===============   =============
</TABLE>

<TABLE>
<CAPTION>
                                                                               LifeStyle
                                                                    --------------------------------
                                                                    Dec. 31, 1998     Dec. 31, 1997
                                                                    ---------------  ---------------
<S>                                                                <C>              <C>            
Total assets:
   Fine furniture...............................                   $       898,000  $       935,000
   Fabric.......................................                           153,000          147,000
   Intrasegment elimination and other...........                            75,000           58,000
                                                                    ---------------  ---------------
Total assets....................................                   $     1,126,000  $     1,140,000
                                                                    ===============  ===============
</TABLE>

      The following geographic information represents LifeStyle's trade revenues
after elimination of intercompany sales based on product shipment location and
total assets based on physical location for the regions and for the periods
indicated (in thousands):

<TABLE>
<CAPTION>
                                                                      LifeStyle                          Predecessor
                                                  -------------------------------------------------    ---------------
                                                             Year Ended                 
                                                             December 31,          
                                                  ---------------------------------   Aug. 6, 1996      Jan. 1, 1996
                                                                                           to                 to      
                                                       1998              1997         Dec. 31, 1996     Aug. 5, 1996
                                                  --------------   ----------------   -------------    ---------------
<S>                                               <C>              <C>                <C>              <C>            
United States...................................  $    1,848,000   $      1,770,000   $     769,000    $     1,030,000
Pacific Rim.....................................          87,000            115,000          58,000             76,000
European Union and other foreign countries......          67,000             75,000          30,000             42,000
                                                   --------------   ----------------   -------------    ---------------
           Total  net sales.....................  $    2,002,000   $      1,960,000   $     857,000    $     1,148,000
                                                   ==============   ================   =============    ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                               LifeStyle
                                                                   --------------------------------
                                                                     Dec. 31, 1998    Dec. 31, 1997
                                                                   ----------------   -------------
<S>                                                               <C>                <C>           
Total assets:
United States...................................                  $         936,000  $      906,000
Pacific Rim.....................................                            151,000         193,000
European Union and other foreign countries......                             39,000          41,000
                                                                   ----------------   -------------
           Total  assets........................                  $       1,126,000  $    1,140,000
                                                                   ================   =============
</TABLE>


                                       45
<PAGE>   48

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements

      In connection with the issuance of its 10 7/8% Senior Subordinated Notes
due 2006 (the "Notes"), the Company's domestic operating subsidiaries
("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
financial data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed consolidating
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 condensed consolidating financial data, the Guarantor
Subsidiaries include substantially all domestic subsidiaries of the Company
(other than special purpose subsidiaries formed in connection with the Company's
receivables financing facility (the "Receivables Subsidiaries") 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 Subsidiaries on the equity method.
The principal elimination entries are to eliminate the investments in
subsidiaries and intercompany balances and transactions.


                                       46
<PAGE>   49

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
                      Condensed Consolidating Balance Sheet
                                December 31, 1998

<TABLE>
<CAPTION>
                                                                                       Non-
                                                                    Guarantor       Guarantor
                                                      Company      Subsidiaries    Subsidiaries     Eliminations    Consolidated
                                                     -----------   -------------  ---------------  ---------------  --------------
<S>                                                <C>           <C>             <C>              <C>              <C>           
                     Assets
Current assets:
      Cash and cash investments..........          $       --    $      (1,960)  $         9,700  $          --    $        7,740
      Trade receivables..................                  --             7,880           38,990             --            46,870
      Investment in receivables trust....                  --              --             92,220             --            92,220
      Other receivables..................                  --            25,530           15,670             --            41,200
      Inventories........................                  --           418,870           60,070             --           478,940
      Prepaid expenses...................                  --            34,170            5,590             --            39,760
      Deferred income taxes..............                  --            21,970            6,040             --            28,010
      Intercompany account...............                  --           245,410             --          (245,410)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total current assets..........                  --           751,870          228,280        (245,410)         734,740
Property and equipment, net..............                  --           282,110           77,000             --           359,110
Other assets.............................                  --            41,410            6,980         (15,920)          32,470
Investments in affiliates................               489,580        (49,090)             --          (440,490)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total assets..................          $    489,580  $    1,026,300  $       312,260  $     (701,820)  $    1,126,320
                                                     ===========   =============  ===============  ===============  ==============

      Liabilities and Stockholder's Equity
Current liabilities:
      Long-term debt, current............          $       --    $        3,140  $            20  $          --    $        3,160
      Accounts payable...................                  --           111,620           25,790             --           137,410
      Accrued liabilities................                  --            76,120           35,520             --           111,640
      Intercompany account...............                  --              --            245,410        (245,410)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total current liabilities.....                  --           190,880          306,740        (245,410)         252,210
Long-term debt...........................                  --           311,520             --               --           311,520
Deferred income taxes....................                  --            37,150             --           (15,920)          21,230
Other long-term liabilities..............                  --            49,740            2,040             --            51,780
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total liabilities.............                  --           589,290          308,780        (261,330)         636,740
Stockholder's equity.....................               489,580         437,010            3,480        (440,490)         489,580
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total liabilities and stockholder's
              equity.....................          $    489,580  $    1,026,300  $       312,260  $     (701,820)  $    1,126,320
                                                     ===========   =============  ===============  ===============  ==============
</TABLE>


                                       47
<PAGE>   50

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)


16. Guarantor Financial Statements (Continued)

                                    LifeStyle
                      Condensed Consolidating Balance Sheet
                                December 31, 1997

<TABLE>
<CAPTION>
                                                                                       Non-
                                                                    Guarantor       Guarantor
                                                      Company      Subsidiaries    Subsidiaries     Eliminations    Consolidated
                                                     -----------   -------------  ---------------  ---------------  --------------
<S>                                                <C>           <C>             <C>              <C>              <C>           
                     Assets
Current assets:
      Cash and cash investments..........          $       --    $      (7,050)  $        11,190  $          --    $        4,140
      Trade receivables..................                  --            23,860           40,620             --            64,480
      Investment in receivables trust....                  --              --             64,010             --            64,010
      Other receivables..................                  --            30,540           10,170             --            40,710
      Inventories........................                  --           444,140           65,970             --           510,110
      Prepaid expenses...................                  --            23,170           12,270             --            35,440
      Deferred income taxes..............                  --            28,700            9,830             --            38,530
      Intercompany account...............                  --           257,070             --          (257,070)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total current assets..........                  --           800,430          214,060        (257,070)         757,420
Property and equipment, net..............                  --           265,440           71,950             --           337,390
Other assets.............................                  --            54,510            1,900         (11,250)          45,160
Investments in affiliates................               437,390        (79,830)             --          (357,560)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total assets..................          $    437,390  $    1,040,550  $       287,910  $     (625,880)  $    1,139,970
                                                     ===========   =============  ===============  ===============  ==============

      Liabilities and Stockholder's Equity
Current liabilities:
      Long-term debt, current............          $       --    $        2,200  $           770  $          --    $        2,970
      Accounts payable...................                  --           103,180           20,820             --           124,000
      Accrued liabilities................                  --           102,920           47,020             --           149,940
      Intercompany account...............                  --              --            257,070        (257,070)            --
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total current liabilities.....                  --           208,300          325,680        (257,070)         276,910
Long-term debt...........................                  --           351,600             --               --           351,600
Deferred income taxes....................                  --            31,250             --           (11,250)          20,000
Other long-term liabilities..............                  --            51,890            2,180             --            54,070
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total liabilities.............                  --           643,040          327,860        (268,320)         702,580
Stockholder's equity.....................               437,390         397,510         (39,950)        (357,560)         437,390
                                                     -----------   -------------  ---------------  ---------------  --------------
           Total liabilities and stockholder's
              equity.....................          $    437,390  $    1,040,550  $       287,910  $     (625,880)  $    1,139,970
                                                     ===========   =============  ===============  ===============  ==============
</TABLE>


                                       48
<PAGE>   51

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
    Condensed Consolidating Statement of Operations and Comprehensive Income
                      for the Year Ended December 31, 1998

<TABLE>
<CAPTION>
                                                               Guarantor       Non-Guarantor
                                              Company         Subsidiaries     Subsidiaries      Eliminations      Consolidated
                                           ---------------   ---------------   --------------   ---------------   ---------------
<S>                                      <C>                <C>               <C>              <C>               <C>            
Net sales..............................  $           --     $     1,851,340   $      549,470   $     (398,880)   $     2,001,930
Cost of sales..........................              --           1,425,670          479,130         (394,170)         1,510,630
                                           ---------------   ---------------   --------------   ---------------   ---------------
   Gross profit........................              --             425,670           70,340           (4,710)           491,300
Selling, general and administrative
   expenses............................              --             314,670           39,710              --             354,380
                                           ---------------   ---------------   --------------   ---------------   ---------------
   Operating profit....................              --             111,000           30,630           (4,710)           136,920
Other (income) expense, net............          (75,260)            34,070         (14,270)            98,390            42,930
                                           ---------------   ---------------   --------------   ---------------   ---------------
   Income before income taxes..........            75,260            76,930           44,900         (103,100)            93,990
Income taxes...........................              --              14,390            9,060              --              23,450
                                           ---------------   ---------------   --------------   ---------------   ---------------
    Net income.........................            75,260            62,540           35,840         (103,100)            70,540
                                           ---------------   ---------------   --------------   ---------------   ---------------

Other comprehensive income, net of tax:
    Foreign currency translation.......              --                --           (10,060)              --            (10,060)
                                           ---------------   ---------------   --------------   ---------------   ---------------
    Comprehensive income...............   $        75,260   $        62,540   $       25,780   $     (103,100)   $        60,480
                                           ===============   ===============   ==============   ===============   ===============
</TABLE>


                                       49
<PAGE>   52

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
    Condensed Consolidating Statement of Operations and Comprehensive Income
                      for the Year Ended December 31, 1997

<TABLE>
<CAPTION>
                                                              Guarantor       Non-Guarantor
                                              Company       Subsidiaries       Subsidiaries      Eliminations      Consolidated
                                           --------------   --------------    ---------------   ---------------   ---------------
<S>                                      <C>               <C>               <C>               <C>               <C>            
Net sales.............................   $          --     $    1,777,970    $       439,180   $     (257,370)   $     1,959,780
Cost of sales.........................              --          1,342,540            368,600         (257,370)         1,453,770
Restructuring charge..................              --               --               14,480              --              14,480
                                           --------------   --------------    ---------------   ---------------   ---------------
   Gross profit.......................              --            435,430             56,100                             491,530
Selling, general and administrative
   expenses...........................              --            297,970             49,580              --             347,550
Restructuring charge..................              --              9,000             35,020              --              44,020
                                           --------------   --------------    ---------------   ---------------   ---------------
   Operating profit...................              --            128,460           (28,500)              --              99,960
Other, net............................          (17,580)           98,980            (4,680)          (19,710)            57,010
                                           --------------   --------------    ---------------   ---------------   ---------------
Income (loss) before income taxes and
   extraordinary item.................            17,580           29,480           (23,820)            19,710            42,950
Income taxes..........................              --              7,910              5,840              --              13,750
                                           --------------   --------------    ---------------   ---------------   ---------------
   Income (loss) before extraordinary
      item............................            17,580           21,570           (29,660)            19,710            29,200
Extraordinary item-loss on early
      extinguishment of debt (net of
      income taxes of $7,750).........              --           (11,620)               --                --            (11,620)
                                           --------------   --------------    ---------------   ---------------   ---------------
   Net income (loss)..................            17,580            9,950           (29,660)            19,710            17,580
                                           --------------   --------------    ---------------   ---------------   ---------------
Other comprehensive income (loss), net of tax:
    Foreign currency translation.......             --                --            (10,210)              --            (10,210)
                                           --------------   --------------    ---------------   ---------------   ---------------
    Comprehensive income (loss)........   $       17,580   $         9,950   $      (39,870)   $        19,710   $         7,370
                                           ==============   ===============   ===============   ===============   ===============
</TABLE>


                                       50
<PAGE>   53

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
    Condensed Consolidating Statement of Operations and Comprehensive Income
               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 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, net..........................           (31,270)           16,880                8,650            32,400              26,660
                                        ----------------   --------------    -----------------    --------------    ----------------
   Income before income taxes.......             31,270           43,620                5,620          (32,400)              48,110
Income taxes........................               --             14,580                2,260              --                16,840
                                        ----------------   --------------    -----------------    --------------    ----------------
   Net income.......................             31,270           29,040                3,360          (32,400)              31,270
                                        ----------------   --------------    -----------------    --------------    ----------------
Other comprehensive income (loss), 
   net of tax:
    Foreign currency translation....               --               --                  1,040               --                1,040
                                        ----------------   --------------    -----------------    --------------    ----------------
    Comprehensive income (loss).....   $         31,270   $       29,040     $          4,400     $     (32,400)   $         32,310
                                        ================   ==============     ================     ==============   ================
</TABLE>


                                       51
<PAGE>   54

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                   Predecessor
                  Condensed Combining Statements of Operations
                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 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, 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 loss.............................            (1,720)             (3,950)            (2,320)          (7,990)
                                            ----------------     ---------------    ---------------   --------------
Other comprehensive income (loss), 
   net of tax:
    Foreign currency translation.......                --                  (830)              --               (830)
                                            ----------------     ---------------    ---------------   --------------
    Comprehensive income (loss)........    $        (1,720)     $        (4,780)   $       (2,320)    $      (8,820)
                                            ================     ================   ===============    ==============
</TABLE>


                                       52
<PAGE>   55

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
                 Condensed Consolidating Statement of Cash Flows
                      for the Year Ended December 31, 1998

<TABLE>
<CAPTION>
                                                      Guarantor         Non-Guarantor
                                     Company        Subsidiaries         Subsidiaries        Eliminations      Consolidated
                                  --------------   ----------------    -----------------    ---------------    --------------
<S>                             <C>               <C>                 <C>                  <C>                <C>           
Net Cash Provided By
   Operating Activities:.....   $        --       $         96,720    $          57,450    $       --         $      154,170
                                  --------------   ----------------    -----------------    ---------------    --------------
Investing Activities:
Capital expenditures.........            --               (33,150)              (8,260)            --               (41,410)
Fabric sample book
   expenditures..............            --               (18,540)                 --              --               (18,540)
Net investments in
   receivables trust.........            --                   --               (28,210)            --               (28,210)
Issuance of notes receivable.            --                (1,040)                 --              --                (1,040)
Collection of notes
   receivable................            --                  7,440                 --              --                  7,440
Other, net...................            --                  4,480             (10,060)            --                (5,580)
                                  --------------   ----------------    -----------------    ---------------    --------------
      Net cash used for
        investing activities.            --               (40,810)             (46,530)            --               (87,340)
                                  --------------   ----------------    -----------------    ---------------    --------------
Financing Activities:
Proceeds from long-term debt.            --                 47,500                 --              --                 47,500
Repayments of long-term debt.            --               (87,000)                 --              --               (87,000)
Net proceeds (repayments) of
   other debt................            --                    360                (750)            --                  (390)
Dividends paid...............            --               (23,340)                 --              --               (23,340)
Intercompany accounts, net...            --                 11,660             (11,660)            --                   --
                                  --------------   ----------------    -----------------    ---------------    --------------
      Net cash used for
        financing activities.            --               (50,820)             (12,410)            --               (63,230)
                                  --------------   ----------------    -----------------    ---------------    --------------
Cash and Cash Investments:
Increase (decrease) for the
   period....................            --                  5,090              (1,490)            --                  3,600
Balance, beginning of period.            --                (7,050)               11,190            --                  4,140
                                  --------------   ----------------    -----------------    ---------------    --------------
Balance, end of period.......   $        --       $        (1,960)    $           9,700    $       --         $        7,740
                                  ==============   ================    =================    ===============    ==============
</TABLE>


                                       53
<PAGE>   56

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
                 Condensed Consolidating Statement of Cash Flows
                      for the Year Ended December 31, 1997

<TABLE>
<CAPTION>
                                                             Guarantor        Non-Guarantor
                                           Company         Subsidiaries       Subsidiaries       Eliminations     Consolidated
                                         -------------     --------------    ----------------    -------------    -------------
<S>                                    <C>               <C>               <C>                <C>               <C>           
Net Cash Provided By Operating
   Activities:.......................   $     --          $       89,700    $         50,120   $      --         $     139,820
                                         -------------     --------------    ----------------    -------------    -------------
Investing Activities:
      Capital expenditures...........         --                (26,970)             (5,680)          --              (32,650)
      Fabric sample book expenditures         --                (14,280)               --             --              (14,280)
      Net investments in receivables
        trust........................         --                   --               (12,890)          --              (12,890)
      Issuance of notes receivable...         --                 (3,990)                              --               (3,990)
      Collection of notes receivable.         --                  16,650               --             --                16,650
      Other, net.....................         --                   7,130            (10,210)          --               (3,080)
                                         -------------     --------------    ----------------    -------------    -------------
        Net cash used for investing
           activities................         --                (21,460)            (28,780)          --              (50,240)
                                         -------------     --------------    ----------------    -------------    -------------
Financing Activities:
      Proceeds from long-term debt...         --                 234,000               --             --               234,000
      Repayments of long-term debt...         --               (322,930)             (2,070)          --             (325,000)
      Net proceeds of other debt.....         --                     950               --             --                   950
      Net repayments of accounts
        receivable transactions......         --                   --               (17,000)          --              (17,000)
      Deferred financing costs.......         --                   (790)               --             --                 (790)
      Intercompany accounts, net.....         --                   8,970             (8,970)          --                 --
                                         -------------     --------------    ----------------    -------------    -------------
        Net cash used for financing
           activities................         --                (79,800)            (28,040)          --             (107,840)
                                         -------------     --------------    ----------------    -------------    -------------
Cash and Cash Investments:
Decrease for the period..............         --                (11,560)             (6,700)          --              (18,260)
Balance, beginning of period.........         --                   4,510              17,890          --                22,400
                                         -------------     --------------    ----------------    -------------    -------------
Balance, end of period...............   $     --          $      (7,050)    $         11,190    $     --         $       4,140
                                         =============     ==============    ================    =============    =============
</TABLE>


                                       54
<PAGE>   57

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                    LifeStyle
                 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 (Used For)
   Operating Activities:................    $      --       $      132,200   $      (23,160)    $     --        $     109,040
                                             ------------    --------------   ---------------    -------------   -------------
Investing Activities:
   Capital expenditures.................           --             (11,250)           (2,570)          --             (13,820)
   Fabric sample book expenditures......           --              (3,260)             --             --              (3,260)
   Net investments in receivables trust.           --                --             (51,120)          --             (51,120)
   Collection of notes receivable.......           --                1,670             --             --                1,670
   Acquisition of businesses, net of
      cash acquired.....................           --            (645,430)             --             --            (645,430)
   Other, net...........................           --                3,200             --             --                3,200
                                             ------------    --------------   ---------------    -------------   -------------
        Net cash used for investing
           activities...................           --            (655,070)          (53,690)          --            (708,760)
                                             ------------    --------------   ---------------    -------------   -------------
Financing Activities:
   Proceeds from long-term debt.........           --              525,000             --             --              525,000
   Repayments of long-term debt.........           --             (85,350)          (23,340)          --            (108,690)
   Net proceeds from accounts
      receivable transactions...........           --                --              167,000          --              167,000
   Capital contribution.................           --               76,400             --             --               76,400
   Deferred financing costs.............           --             (37,590)             --             --             (37,590)
   Intercompany accounts, net...........           --               48,920          (48,920)          --                --
                                             ------------    --------------   ---------------    -------------   -------------
           Net cash provided by
              financing activities......           --              527,380            94,740          --              622,120
                                             ------------    --------------   ---------------    -------------   -------------
Cash and Cash Investments:
Increase for the period.................           --                4,510            17,890          --               22,400
Balance, beginning of period............           --                --                --             --                --
                                             ------------    --------------   ---------------    -------------   -------------
Balance, end of period..................    $      --       $        4,510   $        17,890    $     --        $      22,400
                                             ============    ==============   ===============    =============   =============
</TABLE>


                                       55
<PAGE>   58

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Statements (Continued)

                                   Predecessor
                   Condensed Combining Statement 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:.......   $      31,080    $       20,110     $    (2,350)     $    48,840
                                                     -------------    --------------     ------------     -----------
Investing Activities:
   Capital expenditures..........................        (14,130)           (2,390)            --           (16,520)
   Fabric sample book expenditures...............         (9,190)             --               --            (9,190)
   Collection of notes receivable................           1,450             1,340            --              2,790
   Other, net....................................         (4,530)             7,290          (5,400)         (2,640)
                                                     -------------    --------------     ------------     -----------
        Net cash provided by (used for)
           investing activities..................        (26,400)             6,240          (5,400)        (25,560)
                                                     -------------    --------------     ------------     -----------
Financing Activities:
   Proceeds from long-term debt..................             800            86,960            --             87,760
   Repayments of short-term debt.................           (800)          (86,290)            --           (87,090)
   Decrease in Masco Corporation net investment
      and advances...............................         (4,900)          (25,450)            7,750        (22,600)
                                                     -------------    --------------     ------------     -----------
        Net cash used for financing activities...         (4,900)          (24,780)            7,750        (21,930)
                                                     -------------    --------------     ------------     -----------
Cash and Cash Investments:
Increase (decrease) 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>


                                       56
<PAGE>   59

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

                                 Not Applicable


                                       57
<PAGE>   60

                                    PART III

Item 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

      The following table sets forth certain information as of December 31, 1998
concerning the directors and executive officers of LifeStyle:

<TABLE>
<CAPTION>
             Name                          Age             Position
             ----                          ---             --------

         <S>                                <C>         <C>                                                            
         Wayne B. Lyon.................     66          Chairman of the Board, President and Chief Executive Officer
         Donald L. Barefoot............     44          Executive Vice President--Operations
         Douglas C. Barnard............     40          Vice President, General Counsel and Secretary
         Alan D. Cole..................     49          Executive Vice President
         Ronald J. Hoffman.............     54          Vice President, Treasurer and Chief Financial Officer
         Richard M. Cashin, Jr.........     45          Director
         David L. Johnston.............     57          Director
         Robert C. Larson..............     64          Director
         David F. Thomas...............     49          Director
         Martin D. Walker..............     66          Director
</TABLE>

      Mr. Lyon has been Chairman of the Board, President and Chief Executive
Officer of LifeStyle since 1996. He has been a director of Masco for more than
the past five years, and was Masco's President and Chief Operating Officer until
retiring in 1996. Mr. Lyon is also a director of Comerica Incorporated and Emco
Limited.

      Mr. Barefoot has been Executive Vice President Operations of LifeStyle
since 1997. He was President and Chief Executive Officer of ASC Incorporated
from 1994 to 1997. Previously, Mr. Barefoot was President of the Wiegand
Industrial Division of Emerson Electric Company from 1991 to 1994.

      Mr. Barnard has been Vice President, General Counsel and Secretary of
LifeStyle since 1996. He was an Associate Corporate Counsel of Masco from 1992
to 1996. Previously, Mr. Barnard was a partner at the law firm of Kirkland &
Ellis in Chicago.

      Mr. Cole has been Executive Vice President of LifeStyle since 1997. He was
Group Vice President of LifeStyle's Berkline and BenchCraft units from 1994 to
1997, and President of Berkline from 1991 to 1997. Mr. Cole has served in
various executive marketing and general management positions in the furniture
industry since 1972.

      Mr. Hoffman has been Vice President, Treasurer and Chief Financial Officer
of LifeStyle since 1996. Mr. Hoffman was Vice President and Group Controller of
Masco's Home Furnishings Group from 1993 to 1996, and a Group Controller of
Masco prior to joining the Home Furnishings Group.

      Mr. Cashin has been a Director of LifeStyle since 1996. He has been
President since 1994, and a Managing Director for more than the past five years,
of Citicorp Venture Capital, Ltd. In addition, Mr. Cashin serves as a director
of Cable Systems International, Delco Remy International, Euramax International
plc, Fairchild Semiconductor, Freedom Forge, Gerber Childrenswear, Hoover Group,
Levitz Furniture Incorporated, MSX International, Thermal Engineering and Titan
Wheel International Inc.

      Mr. Johnston has been a Director of LifeStyle since 1997. He has been a
professor of law at McGill University, Montreal, Canada, since 1979, and was the
Principal of McGill from 1979 to 1994. Mr. Johnston is a director of Seagram
Company, Canada Trust, Emco Limited and CGI Ltd.


                                       58
<PAGE>   61

      Mr. Larson has been a Director of LifeStyle since 1997. He has been
Chairman of the Taubman Realty Group, which owns, develops and operates regional
shopping centers, for more than the past five years. In addition, Mr. Larson has
been Vice Chairman of the Board of Directors of Taubman Centers, Inc., the
managing partner of the Taubman Realty Group, since its inception in 1992. Mr.
Larson also serves as non-executive director of Bass plc, the London based group
operating in hotels, leisure retailing and branded drinks.

      Mr. Thomas has been a Director of LifeStyle since 1996. He has been
President of 399 Venture Partners, Inc. since 1994 and has been a Managing
Director of Citicorp Venture Capital, Ltd. for more than the past five years.
Mr. Thomas is a director of American Commercial Lines, L.L.C., Anvil Knitwear,
Inc., Galey & Lord Incorporated, Neenah Corporation, Plainwell Inc. and Stage
Stores, Inc.

      Mr. Walker has been a Director of LifeStyle since 1996. He is Principal of
MORWAL Investments, a private investment firm. Mr. Walker was the Chairman and
Chief Executive Officer of M.A. Hanna Company from 1986 until his retirement in
1997, and has recently reassumed his position. He is a director of Comerica
Incorporated, The Goodyear Tire & Rubber Company, M.A. Hanna Company, Lexmark
International Group, Inc., Meritor Automotive, Inc., The Reynolds & Reynolds
Company, Textron Inc. and The Timken Company.


                                       59
<PAGE>   62

Item 11. EXECUTIVE COMPENSATION

      The following tables and notes summarize the annual and long-term
compensation of LifeStyle's chief executive officer and the other four most
highly paid executive officers (collectively, the "named executive officers")
for the years ended December 31, 1998 and 1997 and the period from August 6,
1996 to December 31, 1996. The named executive officers did not receive any
compensation from LifeStyle prior to August 6, 1996.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                            Annual Compensation                   Long-Term Compensation Awards
                                     ----------------------------------     -------------------------------------------
                                                                                              Restricted
                                                                            Other Annual        Stock       All Other  
       Name and Principal                                                   Compensation        Awards      Compensation
       Position                      Year        Salary       Bonus              (1)             (2)           (3)
       --------------------------    --------    ---------    ---------     --------------    ----------    -----------
      <S>                             <C>       <C>          <C>               <C>           <C>            <C>     
      Wayne B. Lyon                   1998      $519,231     $166,500          $129,078      $     --       $ 33,550
      Chairman of the Board,          1997       500,000      250,000           107,661            --         27,370
        President and Chief Executive 1996       192,308      380,000(4)             --       108,805         14,838
        Officer

      Donald L. Barefoot(5)           1998       369,600       60,300                --        11,840        129,916
      Executive Vice President--      1997       148,077      180,000                --        21,760          2,457
        Operations

      Douglas C. Barnard              1998       193,727       33,300                --            --         10,444
      Vice President, General Counsel 1997       172,150       27,000                --            --         24,509
        and Secretary                 1996        63,462       40,000            15,955        10,880         24,946

      Alan D. Cole(6)                 1998       369,600       60,300                --            --         19,048
      Executive Vice President        1997       324,635      225,000                --         5,440         47,764

      Ronald J. Hoffman               1998       200,335       35,000                --            --         12,246
      Vice President, Treasurer and   1997       177,200       27,750                --            --         11,228
        Chief Financial Officer       1996        65,385       45,000                --        13,600          6,301
</TABLE>

----------
      (1)   This column includes the following: (i) tax reimbursement payments;
            (ii) personal use of the LifeStyle airplane (for 1998: Mr.
            Lyon--$66,451) and (iii) personal use of a LifeStyle automobile.
      (2)   The dollar amounts included in the table are based on an assumed
            value of $5.44 per share, which was the book value per share
            attributable to the Common Stock on August 5, 1996 (or, in the case
            of the 1998 award to Mr. Barefoot, $5.92 per share, which was the
            comparable book value per share on August 31, 1997). The recipients
            of the Restricted Stock are parties to the Stockholders Agreement
            which, among other things, provides that the Restricted Stock will
            vest in increments of 20% per year so long as the holder of such
            stock remains employed by LifeStyle. In certain events, the vesting
            will be accelerated. Dividends, if any, are payable to the holders
            as and when declared and paid. Because Holdings does not have
            publicly-traded capital stock, there has not been any market
            determination of the dollar value of the Restricted Stock as of
            December 31, 1998.
      (3)   This column includes the following: (i) LifeStyle contributions and
            allocations under LifeStyle's defined contribution retirement plans
            for the accounts of each of the named executive officers (for 1998:
            Mr. Lyon--$7,730, Mr. Barefoot--$7,730, Mr. Barnard--$7,730, Mr.
            Cole--$7,730, Mr. Hoffman--$7,730); (ii) LifeStyle contributions to
            the group term life insurance plan for each of the named executive
            officers (for 1998: Mr. Lyon--$8,820, Mr. Barefoot--$714, Mr.
            Barnard--$714, Mr. Cole--$1,218, Mr. Hoffman--$2,016); (iii)
            LifeStyle contributions and allocations under LifeStyle's Benefit
            Restoration Plan (for 1998: Mr. Lyon--$17,000, Mr.
            Barefoot--$10,100, Mr. Barnard--$2,000, Mr. Cole--$10,100 and Mr.
            Hoffman--$2,500); and (iv) in the case of Mr. Barefoot $111,372,
            received in 1998 as reimbursement in connection with his relocation.
      (4)   This figure includes an amount Mr. Lyon received in connection with
            his efforts in securing bank debt, subordinated debt and securitized
            receivables financing for LifeStyle's acquisition in August 1996 of
            the Predecessor.
      (5)   Includes amounts since Mr. Barefoot joined LifeStyle on July 21,
            1997.
      (6)   Includes amounts Mr. Cole received from LifeStyle's Berkline
            subsidiary prior to his joining LifeStyle in his present capacity on
            February 17, 1997. In connection with Mr. Cole's relocation to
            LifeStyle, LifeStyle made a loan to Mr. Cole in the principal amount
            of $160,000, payable on demand; such loan bears interest at a rate
            of 6.0% per annum.


                                       60
<PAGE>   63

Management Stock Ownership

      Approximately 180 of our senior managers currently own approximately 21%
of LifeStyle's Common Stock on a diluted basis (assuming conversion of all
convertible stock and vesting of all management stock).

Pension Plan Table

      The named executive officers participate in pension plans maintained by
LifeStyle for certain of its salaried employees. The following table shows
estimated annual retirement benefits payable for life at age 65 for various
levels of compensation and service under these plans.

<TABLE>
<CAPTION>
                                                                      Years of Service (1)
                                         -----------------------------------------------------------------------------
            Remuneration (2)                5           10            15             20            25           30
            ----------------------       --------    ----------    ----------     ----------    ---------    ---------
                <S>                      <C>           <C>          <C>           <C>           <C>          <C>     
                $100,000                 $ 5,645       $11,290      $ 16,935      $ 22,580      $ 28,225     $ 33,870
                 200,000                  11,290        22,580        33,870        45,161        56,451       67,741
                 300,000                  16,935        33,870        50,806        67,741        84,676      101,611
                 400,000                  22,580        45,161        67,741        90,321       112,902      135,482
                 500,000                  28,225        56,451        84,676       113,902       141,127      169,352
                 600,000                  33,870        67,741       101,611       135,482       169,352      203,223
</TABLE>

(1)   The plans provide credit for employment with LifeStyle and, except for Mr.
      Lyon, for prior employment with Masco and certain affiliates of Masco.
      Vesting occurs after five full years of employment or upon retirement at
      or after attaining age 65. The benefit amounts set forth in the table
      above have been converted from the plans' calculated five-year certain and
      life benefit and are not subject to reduction for Social Security benefits
      or for other offsets, except to the extent that pension or equivalent
      benefits are payable, other than to Mr. Lyon, under a Masco plan or a plan
      of certain affiliates of Masco. The table does not depict limitations
      under the Internal Revenue Code of 1986, as amended (the "Code"), on
      tax-qualified plans because one of the plans is a non-qualified plan
      established by LifeStyle to restore, for certain salaried employees
      (including the named executive officers), benefits that are otherwise
      limited by the Code. For each year of credited service prior to July 1,
      1971, there is an additional annual benefit equal to 0.2% of final average
      earnings in excess of $9,000. Approximate years of credited service for
      the named executive officers participating in the plan are: Mr. Lyon--3;
      Mr. Barefoot--2; Mr. Barnard--7; Mr. Cole--10 and Mr. Hoffman--30.

(2)   For purposes of determining benefits payable, remuneration is equal to the
      average of the highest five consecutive January 1 annual base salary rates
      paid by LifeStyle prior to retirement.

Director Compensation

      The directors of LifeStyle who are officers or employees of LifeStyle do
not presently receive compensation for their services as directors. Directors of
LifeStyle are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof. The directors of LifeStyle who are not
also officers or employees of LifeStyle receive an annual fee of $25,000 plus
$1,000 for each meeting attended. Fees payable by LifeStyle to such firm for
financial advisory services for 1998, and for services provided in connection
with the offerings and other related transactions, total $750,000, plus
expenses.


                                       61
<PAGE>   64

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      LifeStyle's authorized capital stock consists of 3,000 shares of common
stock, par value $.01 per share, 100 shares of which are issued and outstanding
and owned by Holdings.

      Holdings' authorized capital stock consists of 6,000,000 shares of Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") (consisting
of four series, 1,000,000 shares of Series A-1 Common Stock, 1,000,000 shares of
Series A-2 Common Stock, 1,000,000 shares of Series A-3 Common Stock and
3,000,000 shares of Series I Common Stock (which will only be issuable after the
occurrence of a public offering meeting certain criteria as set forth in the
Stockholders Agreement (as defined below) (a "Qualifying Offering"))), 6,000,000
shares of Class B Common Stock, par value $.01 per share (the "Class B Common
Stock") (consisting of four series, 1,000,000 shares of Series B-1 Common Stock,
1,000,000 shares of Series B-2 Common Stock, 1,000,000 shares of Series B-3
Common Stock and 3,000,000 shares of Series II Common Stock (which will only be
issuable after a Qualifying Offering)), 116,100 share of Class C Common Stock,
par value $.01 per share (the "Class C Common Stock," together with the Class A
Common Stock and Class B Common Stock, the "Holdings' Common Stock"), and
4,000,000 share of Preferred Stock, par value $.01 per share, of which the
following has been designated: 1,103,320 shares of Series A-1 Preferred Stock,
stated value $.01 per share (the "Series A-1 Preferred Stock"), 96,681 shares of
Series A-2 Preferred Stock, stated value $.01 per share (the Series A-2
Preferred Stock" together with the Series A-1 Preferred Stock, the "Senior
Preferred Stock"), 303,503 shares of Series B Convertible Preferred Stock,
stated value $6.02 per share (the "Series B Preferred Stock"), and 102,622
shares of Series C Convertible Preferred Stock, stated value $6.02 per share
(the "Series C Preferred Stock," and together with the Series B Preferred Stock,
the "Convertible Preferred Stock"). There is no established public trading
market for the securities of Holdings.

      The stockholders of Holdings are party to a Stockholders Agreement, dated
as of August 5, 1996, as amended (the "Stockholders Agreement"), pertaining to
such matters as (i) the compensation of the board of directors of Holdings; (ii)
corporate governance; and (iii) restrictions on the transfer of such stock.

      The table below sets forth certain information as of December 31, 1998 (i)
by each person known by LifeStyle to own beneficially more than 5% of the
outstanding Class A Common Stock, Class B Common Stock, Series B Convertible
Preferred Stock or Series C Convertible Preferred Stock, (ii) by each director
of LifeStyle, (iii) by each of the named executive officers of LifeStyle, and
(iv) by all executive officers and directors of LifeStyle as a group. Each
holder of Class A Common Stock and each holder of Class B Common Stock holds an
equal number of shares of each series thereof (other than Series I or Series
II). Certain of the securities of Holdings are convertible into other
securities. Except as noted in the footnotes to the table, the information in
the table assumes no such conversion.


                                       62
<PAGE>   65

                           CAPITALIZATION OF HOLDINGS

<TABLE>
<CAPTION>
                                    Class A     Class B    Class C  Series A-1 Series A-2   Series B   Series C
Name and Address                    Common      Common     Common    Preferred  Preferred   Preferred  Preferred
----------------                    ------      ------     ------    ---------  ---------   ---------  ---------
<S>                                 <C>         <C>        <C>        <C>        <C>          <C>       <C>   
399 Venture Partners, Inc. (1)      38,685      198,060       -       436,252       -            -      81,339
  (and certain affiliates)           38.9%       52.4%        -        39.5%        -            -       79.3%
399 Park Avenue
New York, NY

Masco Corporation (2)               15,000      71,490        -       550,090       -         303,503      -
21001 Van Born Road                  15.1%       18.9%        -        49.9%        -         100.0%       -
Taylor, MI

CCT Partners III, L.P. (3)           5,961      30,825        -       67,206        -            -      12,227
399 Park Avenue                      6.0%        8.2%         -        6.1%         -            -       11.9%
New York, NY

Wayne B. Lyon                       32,766      90,561        -       550,090    23,085       303,503      -
  including Common and               33.0%       24.0%        -        49.9%      28.3%       100.0%       -
  Preferred Stock owned by
  Masco Corporation (4)
4000 Lifestyle Court
High Point, NC

Donald L. Barefoot                     -           *        4,000        -          -            -         -
4000 Lifestyle Court                   -           *        3.5%         -          -            -         -
High Point, NC

Douglas C. Barnard                  35,379      54,855     115,168       -          *            -         -
  individually 2nd as voting         35.6%       14.5%     100.0%        -          *            -         -
  trustee for the
  management investors (5)
4000 Lifestyle Court
High Point, NC

Alan D. Cole                           *           *        6,000        -        1,443          -         -
4000 Lifestyle Court                   *           *        5.2%         -        1.8%           -         -
High Point, NC

Ronald J. Hoffman                      *           *        2,500        -          *            -         -
4000 Lifestyle Court                   *           *        2.2%         -          *            -         -
High Point, NC

Richard M. Cashin, Jr. (7)          34,846      180,185       -       392,844       -            -      71,474
399 Park Avenue.                     35.0%       47.7%        -        35.6%        -            -       69.6%
New York, NY

David L. Johnston                      -           *          -          -          *            -         -
3690 Peel Street                       -           *          -          -          *            -         -
Montreal, Quebec Canada

Robert C. Larson (6)                   -           *          -          -          *            -         -
200 East Long Lake Road                -           *          -          -          *            -         -
Bloomfield Hills, MI

David F. Thomas (7)                 34,846      180,185       -       392,844       -            -      71,474
399 Park Avenue                      35.0%       47.7%        -        68.2%        -            -       69.6%
New York, NY

Martin D. Walker                       -           *          -          -          *            -         -
200 Public Square                      -           *          -          -          *            -         -
Suite 36-5000
Cleveland, Ohio

Directors and named                 86,086      311,820    115,168    954,944    26,779       303,503   73,659
  executive officers of              86.6%       82.5%     100.0%      86.6%      32.9%       100.0%     71.8%
  LifeStyle, as a group
  (ten persons)  (8)
</TABLE>

----------
*  Less than 1.0%.                                 (footnotes on following page)


                                       63
<PAGE>   66

Footnotes to Capitalization of Holdings

(1)   399 Venture Partners, Inc. ("399") is a wholly-owned subsidiary of
      Citigroup Inc.

(2)   Masco has advised LifeStyle that Masco is restricted from holding more
      than 19.9% of Holdings' Common Stock.

(3)   CCT Partners III, L.P. ("CCT") is a limited partnership, the partners of
      which consist of Messrs. Cashin and Thomas and other officers and key
      employees of Citigroup Inc. and its subsidiaries, including 399. Shares
      held by CCT are not included in the table as shares beneficially owned by
      399.

(4)   Amounts shown consist of shares of Class A Common Stock and Class B Common
      Stock held by an estate planning trust for the benefit of Mr. Lyon's
      family members, all of which shares may be deemed to be beneficially owned
      by Mr. Lyon. Mr. Lyon disclaims beneficial ownership of all such shares.

(5)   Amounts shown consist of shares held by Mr. Barnard individually and as
      voting trustee for the members of management. Mr. Barnard has no pecuniary
      interest in such shares other than 203 shares of Class A Common Stock, 218
      shares of Class B Common Stock and 2,000 shares of Class C Common Stock.
      In addition, Mr. Barnard holds less than 1.0% of the Series A-2 Preferred
      Stock. Mr. Barnard disclaims beneficial ownership of shares held by
      himself as voting trustee for other management investors.

(6)   Amounts shown consist of shares held by a limited partnership for the
      benefit of Mr. Larson's family members.

(7)   Amounts shown include shares held by 399, which may be deemed to be
      beneficially owned by Messrs. Cashin and Thomas. Messrs. Cashin and Thomas
      disclaim beneficial ownership of such shares. In addition, amounts shown
      for Messrs. Cashin and Thomas include 1,065 shares of Class A Common
      Stock, 5,509 shares of Class B Common Stock, 12,011 shares of Series A-1
      Preferred Stock and 2,185 shares of Series C Convertible Preferred Stock
      held directly by each. Amounts shown for Messrs. Cashin and Thomas exclude
      shares held by CCT, a limited partnership in which each has an indirect
      economic interest as a limited partner.

(8)   Amounts shown include: shares held by 399, which may be deemed to be
      beneficially owned by Messrs. Cashin and Thomas; shares held by Masco and
      by an estate planning trust for the benefit of Mr. Lyon's family members,
      which may be deemed to be beneficially owned by Mr. Lyon, and shares held
      by Mr. Barnard as voting trustee for the management investors, which may
      be deemed to be beneficially owned by Mr. Barnard; Messrs. Cashin and
      Thomas disclaim beneficial ownership of shares held by 399, Mr. Lyon
      disclaims beneficial ownership of shares held by Masco and of shares owned
      by an estate planning trust for the benefit of Mr. Lyon's family members,
      and Mr. Barnard disclaims beneficial ownership of shares held by himself
      as voting trustee for other management investors.


                                       64
<PAGE>   67

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Business Arrangements with Holdings

      As a part of the acquisition of the Predecessor, LifeStyle and Holdings
entered into a Management Agreement pursuant to which Holdings provides
LifeStyle certain executive management, corporate support, administrative, data
processing, human resources, legal, environmental, audit, treasury, tax and
other management-related services. Those costs approximated $20.7 million during
1998, $15.9 million during 1997 and $6.6 for the period August 6, 1996 to
December 31, 1996, or which approximately $6.6 million and $1.5 million was
included in accrued liabilities at December 31, 1998 and 1997, respectively.

      LifeStyle sells furniture and accessories to certain distribution
businesses owned by Holdings. LifeStyle's sales to Holdings were $49.8 million
during 1998, $38.6 million during 1997 and $21.2 million for the period August
6, 1996 to December 31, 1996. As a result of these sales transactions, LifeStyle
had accounts receivable totaling $14.7 million and $15.0 million at December 31,
1998 and 1997, respectively.

Acquisition Arrangements

      Certain provisions of the Acquisition Agreement survive the consummation
of acquisition of the Predecessor and continue for a period as contractual
obligations between Masco and Holdings. The following summarizes the provisions
of the Acquisition Agreement.

      Masco has made various representations, warranties and covenants
respecting the Home Furnishings Group, and the Acquisition Agreement provides
for the indemnification by Masco for periods of one to three years in the event
of any breach of such representations, warranties or covenants. With certain
exceptions, Masco will not be obligated to make payments for the first $15.0
million of indemnifiable claims nor be obligated to make payments of more than
$100.0 million. The Acquisition Agreement provides that Masco has the exclusive
right to undertake certain activities relating to environmental matters
pertaining to LifeStyle for which Masco may be responsible under the
indemnification provisions with the prior written consent of Holdings, such
consent not to be unreasonably withheld. Holdings will cooperate with Masco
regarding these activities and, with certain exceptions, reimburse Masco for
reasonable costs and expenses until Holdings has incurred damages in specified
amounts.

      Masco has agreed that it will not on or prior to August 5, 2001 engage in
the design or manufacture of certain furniture and fabric products (the
"Restricted Activities") or acquire an interest in an entity that would result
in Masco having annual revenues from Restricted Activities that exceed certain
levels.

Purchase of Stock from 399 Venture Partners, Inc.

      In March 1997, pursuant to an option granted by 399 Venture Partners, Inc.
as part of the acquisition of the Predecessor, Holdings acquired (i) 4,842
shares of Class A Common Stock (divided equally among the series thereof) at
$5.44 per share; (ii) 5,199 shares of Class B Common Stock (divided equally
among the series thereof) at $5.44 per share; and (iii) 13,770 shares of Series
A-2 Preferred Stock at $100 per share plus accreted dividends. Such shares were
issued to certain members of management (but not any of the named executive
officers in Item 11) pursuant to a Management Investment Plan.

Tax Sharing Agreement

      Holdings, LifeStyle and its United States subsidiaries are included in the
consolidated United States federal income tax return of Holdings. Holdings,
LifeStyle and certain of LifeStyle's United States subsidiaries have entered
into a Tax Sharing Agreement whereby LifeStyle pays Holdings (or Holdings pays
LifeStyle) its pro rata share of the total tax liability, as set out in the Tax
Sharing Agreement. In the event LifeStyle is included in a joint, combined or
unitary state or local income or franchise tax return with Holdings, LifeStyle
shall make payments to Holdings, and Holdings shall make payments to LifeStyle,
in a matter consistent with that described above for federal tax purposes.
LifeStyle paid $1.2 million and $22.8 million to Holdings pursuant to such
Agreement in 1998 and 1997, respectively.


                                       65
<PAGE>   68

                                     PART IV

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

      (a) Exhibits

Exhibit No.
-----------

3.1         Certificate of Incorporation of LifeStyle Furnishings International
            Ltd. (1).

3.2         By-Laws of LifeStyle Furnishings International Ltd. (1).

4.1         Indenture between LFI and IBJ Schroder Bank & Trust Company, as
            Trustee, dated August 5, 1996(1).

4.2         Supplemental Indenture dated December 20, 1996(2).

10.1        Acquisition Agreement between Furnishings International Inc. and
            Masco Corporation dated as of March 29, 1996(1).

10.2        Amendment No. 1 to Acquisition Agreement dated as of June 21,
            1996(1).

10.3        Amendment No. 2 to Acquisition Agreement dated as of August 5,
            1996(1).

10.4        Restated Credit Agreement dated as of August 15, 1997 among
            Furnishings International Inc., LifeStyle Furnishings International
            Ltd., the subsidiary borrowers named therein, the lenders named
            therein and The Chase Manhattan Bank, as Swingline Lender,
            Administrative Agent and Collateral Agent, The First National Bank
            of Chicago as Issuing Bank and Co-Agent and CIBC, as Co-Agent (the
            "Credit Agreement")(4), First Amendment to the Restated Credit
            Agreement dated as of September 15, 1997(5) and Second Amendment to
            the Restated Credit Agreement dated as of July 23, 1998*, and 
            Consent, Waiver and Restated Agreement dated as of February 12, 
            1999*.

10.5        Receivables Purchase Agreement dated as of March 23, 1999 among LFI
            Receivables Corporation, LFI Servicing Corporation, Blue Ridge Asset
            Funding Corporation and Wachovia Bank, N.A., as Administrator.* 

10.6        Purchase and Sale Agreement dated as of March 23, 1999 between LFI
            Receivables Corporation and the Sellers named therein*.

                                       66
<PAGE>   69

Exhibit No.
-----------


10.11       Stockholders Agreement, dated as of August 5, 1996, among Masco
            Corporation, Furnishings International Inc., 399 Venture Partners,
            Inc., Associated Madison Companies, Inc., and the other stockholders
            named therein (the "Stockholders Agreement")(1).

10.12       Amendment No. 1 to the Stockholders Agreement dated as of December
            17, 1996(2).

10.13       Amendment No. 2 to the Stockholders Agreement dated as of March 26,
            1997(2).

10.14       Amendment No. 3 to the Stockholders Agreement dated as of July 15,
            1997(3).

10.15       Amendment No. 4 to the Stockholders Agreement dated as of July 7,
            1998.*

10.16       Registration Rights Agreement, dated as of August 5, 1996, among
            Masco Corporation, Furnishings International Inc., 399 Venture
            Partners, Inc., Associated Madison Companies, Inc., and the other
            stockholders named therein(1).

10.17       Management Agreement, dated as of August 5, 1996, by and between
            Furnishings International Inc. and LifeStyle Furnishings
            International Ltd.(1).

10.18       Tax Sharing Agreement, dated as of the 5th day of August 1996, by
            and between Furnishings International Inc., LifeStyle Furnishings
            International Ltd. and LFI Receivables Corporation(1).

10.19       Letter Agreement, dated as of April 28, 1997, by and between
            Furnishings International Inc. and Masco Corporation(1).

10.20       12.0% Senior Payment-in-Kind Note of Furnishings International Inc.
            dated August 5, 1996(1).

10.21       Purchase Agreement dated July 31, 1996 between LifeStyle Furnishings
            International Ltd., Chase Securities Inc., Merrill Lynch, Pierce,
            Fenner & Smith Incorporated and the Guarantors named therein(1).

10.22       LifeStyle's Retirement Benefit Restoration Plan(2).

10.23       Restricted Stock Plan(5).

10.24       Management Investment Plan(5).

10.25       Director Investment Plan(5).

21.1        Subsidiaries of LifeStyle Furnishings International Ltd.+

27          Financial Data Schedule.*

* Filed herewith.

(1)   Incorporated by reference to the Registration Statement of LifeStyle
      Furnishings International Ltd. on Form S-4 (No. 333-11905).

(2)   Incorporated by reference to the Annual Report of LifeStyle Furnishings
      International Ltd. on Form 10-K for the year ended December 31, 1996.

(3)   Incorporated by reference to the Form 10-Q of LifeStyle Furnishings
      International Ltd. for the quarter ended June 30, 1997.

(4)   Incorporated by reference to the Form 10-Q of LifeStyle Furnishings
      International Ltd. for the quarter ended September 30, 1997.

(5)   Incorporated by reference to the Annual Report of LifeStyle Furnishings
      International on Form 10-K for the year ended December 31, 1997.

(6)   Incorporated by reference to the Form 10-Q of LifeStyle Furnishings
      International Ltd. for the quarter ended March 31, 1998.



                                       67
<PAGE>   70

      (b) Financial Statement Schedule

      Schedule II--Valuation and Qualifying Accounts.

      Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

      (c) Reports on Form 8-K

      No reports on Form 8-K were filed by the registrant during the three
months ended December 31, 1998.

                                       68
<PAGE>   71

Item 15. SIGNATURES.

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of High Point, State of
North Carolina, March 30, 1999.

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


         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.

<TABLE>
<CAPTION>
            Signature                                  Title                                Date
            ---------                                  -----                                ----
<S>                                <C>                                                    <C>
   /s/ WAYNE B. LYON               
-----------------------------      Chairman of the Board, President and Chief
   Wayne B. Lyon                   Executive Officer (principal executive officer)        March 30, 1999
                                   
   /s/ RONALD J. HOFFMAN           
-----------------------------      Vice President, Treasurer and Chief Financial
   Ronald J. Hoffman               Officer (principal financial and accounting officer)   March 30, 1999
                                   
   /s/ RICHARD M. CASHIN, JR.      
-----------------------------      
   Richard M. Cashin, Jr.          Director                                               March 30, 1999
                                   
   /s/ DAVID L. JOHNSTON           
-----------------------------      
   David L. Johnston               Director                                               March 30, 1999
                                   
   /s/ ROBERT C. LARSON            
-----------------------------      
   Robert C. Larson                Director                                               March 30, 1999
                                   
   /s/ DAVID F. THOMAS             
-----------------------------      
   David F. Thomas                 Director                                               March 30, 1999
                                   
   /s/ MARTIN D. WALKER            
-----------------------------      
   Martin D. Walker                Director                                               March 30, 1999
</TABLE>

                                
                                       69
<PAGE>   72

                        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 27 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 66 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.

PRICEWATERHOUSECOOPERS LLP


PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 1, 1999


                                       70
<PAGE>   73

                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                 Schedule II. Valuation and Qualifying Accounts

                                  (In millions)

<TABLE>
<CAPTION>
                                                                  Column C
                                                          -------------------------------
                Column A                   Column B                 Additions               Column D        Column E
   ------------------------------------  -------------    -------------------------------   ------------   ------------
                                                                            Charged
                                         Balances at      Charged to     (Credited) to                     Balance at
                                         Beginning of      Costs and         Other                           End of
                                            Period         Expenses       Accounts(a)       Deductions       Period
                                         -------------    ------------  -----------------   ------------   ------------
<S>                                     <C>              <C>           <C>                 <C>            <C>         
   Allowance for doubtful accounts,
      deducted from accounts
      receivable in the balance sheets

   Year ended December 31, 1998.......  $         3.9    $        2.6  $           (2.5)   $        1.2   $        2.8
                                         =============    ============  =================   ============   ============

   Year ended December 31, 1997.......  $         4.8    $        6.1  $             0.7   $        7.7   $        3.9
                                         =============    ============  =================   ============   ============

   Aug. 6, 1996 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
                                         =============    ============  =================   ============   ============
</TABLE>

(a) In connection with the accounts receivable securitization, the portion of
the allowance for doubtful accounts related to sold receivables is credited to
accrued liabilities.


                                       71