<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) FOR
         THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
         _______________ TO _______________.

                           COMMISSION FILE NO. 0-22188

                           RIVER OAKS FURNITURE, INC.
-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                                 <C>
                        MISSISSIPPI                                                         62-0749510
------------------------------------------------------------        -----------------------------------------------------------
              (State or other jurisdiction of                                            (I.R.S. Employer
              incorporation or organization)                                           Identification No.)

          3350 MCCULLOUGH BOULEVARD, BELDEN, MISSISSIPPI                                      38826
------------------------------------------------------------------- -----------------------------------------------------------
         (Address of principal executive offices)                                           (Zip Code)

</TABLE>

        Registrant's telephone number, including area code: 601-891-4550
                                                            ------------

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

<TABLE>
<S>                                                                 <C>
                                                                                      Name of Each Exchange
                    Title of Each Class                                                on Which Registered
------------------------------------------------------------        -----------------------------------------------------------
                           NONE                                                                NONE
</TABLE>

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

                     COMMON STOCK, $.10 PAR VALUE PER SHARE
                     
                     --------------------------------------
                                (Title of Class)

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

                  Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

                  The aggregate market value of the shares of Common Stock of
the registrant held by nonaffiliates on October 1, 1997 was $6,886,372
(3,443,186 shares at $2.00 per share).

                  As of October 1, 1997, 5,605,641 shares of the registrant's
Common Stock were outstanding.



<PAGE>   2

                                     PART I


                           FORWARD-LOOKING STATEMENTS

                  Certain statements contained in, or incorporated by reference
into, this Annual Report on Form 10-K under the captions "Business," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Annual Report (including statements
concerning or containing a projection of revenues, income (including income
loss), earnings (including earnings loss) per share, capital expenditures,
dividends, capital structure or other financial items; statements regarding
plans and objectives for future operations, including plans or objectives
relating to the Company's products; the effects of the reorganization of certain
of the Company's facilities; the implementation of new information systems;
expected capital expenditures; the efforts of the Company to become a single
source supplier; the plans of management to satisfy the judgment rendered in the
suit filed by the Ansin Foundation and the effect of such resolution on the
operations or financial results or position of the Company) are forward-looking
in nature. Such forward-looking statements are necessarily estimates reflecting
the Company's best judgment of its expected future results of operations and
performance or events, based upon current financial and other information and,
as a result, involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, general economic and business
conditions; the cyclical and seasonal nature of the furniture market; the
uncertainties necessarily associated with litigation; the availability and cost
of labor and raw materials; the Company's ability to expand the geographic scope
of its operations; general conditions in the capital markets; the willingness of
potential investors to purchase securities of the Company notwithstanding the
Company's recent results of operations and the delisting of the Company's Common
Stock; the willingness of third parties to consider and consummate strategic
and other important transactions with the Company, including the granting of
waivers of defaults by the Company's financing sources; changes in furniture
styles or consumer tastes;  demographic changes; competition; import protection
and regulation; changes in business strategy or development plans;
availability, terms and deployment of capital; business ability and judgment of
management and other personnel; and other factors which may be identified from
time to time in the Company's Securities and Exchange Commission (the
"Commission") filings and other public announcements.


                                       2


<PAGE>   3


ITEM 1.  BUSINESS

GENERAL

                  The Company designs and manufactures varying styles of
upholstered and leather stationary and motion furniture consisting of sofas,
loveseats, matching chairs and recliners in six plants, four of which are
located in northeastern Mississippi, one in Compton, California and one in
McKenzie, Tennessee. The products manufactured by the Company are sold under the
brand names River Oaks(R), River Crest(R), Gaines(TM) and River Oaks Motion. The
Company's individual product lines are targeted to different moderate retail
price points ranging from $399 to $1899.

                  The Company sells its products through independent
commissioned sales representatives, principally to regional and national
furniture chains and to independent furniture retailers. In 1996, the Company
sold its products to over 3,000 retailers, including 45 of the top 100 furniture
retailers as ranked by Furniture Today. The Company also sells its products to
rent-to-own retailers and to the U.S. military post exchange system, as well as
in certain foreign markets. The Company was organized in August 1987 to
manufacture and market a broad line of value-oriented upholstered stationary
furniture. The Company's net sales have grown from $4.3 million in 1988 to
$124.7 million in 1996.

THE INDUSTRY

                  Based on industry data, the upholstery segment of the
furniture industry, including both stationary and motion furniture, accounted
for approximately $7.9 billion of total 1996 shipments. As reported by the
American Furniture Manufacturers Association, the following table sets forth
factory shipments for the domestic furniture industry and the upholstery segment
during the last three years:

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                           ----------------------------------------------------
                                                                                1996              1995              1994
                                                                                ----              ----              ----
                                                                                              (in Billions)
<S>                                                                              <C>              <C>               <C>  
Industry shipments......................................................         $20.0            $19.5             $19.9
Upholstery shipments....................................................           7.9              7.2               7.3

</TABLE>

                  The principal categories of furniture products include wood,
upholstery, metal and other products. Of these categories, wood is the largest,
representing approximately half of total industry sales, while upholstery
represents approximately one-third, and metal and other products account for the
balance. Within each category, furniture manufacturers generally focus on
particular price points and style. Stationary upholstery includes sofas,
sectional sofa pieces, loveseats and stationary chairs. Motion upholstery
includes swivel chairs, rockers, reclining chairs and other adjustable
furniture.

                  The furniture industry historically has been cyclical,
fluctuating with the general economy. Management believes that the industry is
significantly influenced by customer behavior and confidence, personal
disposable income, demographics, housing activity, interest rates and credit
availability. The upholstered and leather stationary segments of the furniture
industry generally have followed the same trends as the rest of the furniture
industry.



                                       3

<PAGE>   4

PRODUCT LINES

                  The Company's original product line, River Oaks, is designed
to appeal to retailers who seek quality upholstered furniture at moderate
prices. The subsequent introduction of the River Crest and Roaring River product
lines enabled the Company to provide retailers with upholstered furniture at
price points below the River Oaks line. However, the Roaring River product line
has ceased to be a current production line, as a result of management's decision
to allocate marketing and production resources to the higher price point River
Crest product line. The Company's acquisition of Gaines Manufacturing Company
("Gaines") in August 1994 provided the Company a well-known leather product line
and its startup in July 1996 of the River Oaks Motion product line, which
produces upholstered motion furniture, has enabled the Company to increase its
penetration of existing customer accounts.

                  The range of retail sofa prices and the date of initial
shipment for the Company's four product lines are as follows:

<TABLE>
<CAPTION>
                                                                                           Date of
                      Product Line                    Sofa Retail Price Points        Initial Shipment
                      ------------                    ------------------------        ----------------
                      <S>                             <C>                             <C>
                      River Oaks                          $  499-799                  December 1987
                      River Crest                            399-499                  September 1990
                      Gaines                                 399-899                  August 1994 (1)
                      River Oaks Motion                     399-1899                  July 1996 (2)
</TABLE>
---------------
(1)      The Company acquired this product line in August 1994.
(2)      The Company started this product line in July 1996.

                  The Company's product lines differ primarily in terms of
price, type of fabric, frame and seat construction, padding, arm design, style
and use of decorative woods.

                  River Oaks. River Oaks was the Company's initial product line.
While River Oaks retail price points generally range from $499 to $799 per sofa,
a significant majority of its sofa sales are for units which carry retail prices
between $499 and $599. The Company utilizes a wide variety of fabrics and frames
to produce many different styles of River Oaks furniture to respond to differing
customer tastes and preferences. In 1994, the Company expanded this product line
to include a step-up seating system called River Oaks Plus. River Oaks Plus,
which is manufactured in a manner similar to the River Oaks line, incorporates
higher quality fabrics, coil springs in the seat cushion and the base, increased
padding and filling and other distinguishing factors. River Oaks sales accounted
for approximately 27% and 22% of the Company's net sales in 1996 and 1995,
respectively.

                  River Crest. The River Crest product line is targeted at
retail price points of between $399 to $499 per sofa. Developed for production
of a lower priced product, the manufacturing process for the River Crest line is
a more standardized, higher volume, lower-cost operation than the River Oaks
process. The River Crest line offers fewer fabrics and frames, resulting in a
more limited number of styles of sofas, loveseats and matching chairs than the
River Oaks line. Sales of River Crest products accounted for approximately 46%
and 53% of the Company's net sales in 1996 and 1995, respectively.

                  River Oaks Motion. The River Oaks Motion product line was
started by the Company in July of 1996 to expand its revenues within the
existing customer base and through new accounts. The ability to offer motion
furniture furthers the Company's goal to become a single source supplier


                                       4

<PAGE>   5

for its customers. River Oaks Motion product line is targeted at retail price
points between $399 and $1899, and utilizes mid-range fabrics and a limited
number of frames in a componentized manufacturing process. In the last six
months of 1996, River Oaks Motion accounted for approximately 4% of the
Company's net sales in 1996.

                  Gaines. The Gaines product line is sold at retail price points
between $399 and $899. The Gaines product line differs visually from the
Company's other products. Additionally, the Gaines product line includes
stationary leather upholstered sofas and loveseats that are not offered in the
Company's other product lines. Gaines sales accounted for approximately 23% and
22% of the Company's net sales in 1996 and 1995, respectively.

SALES AND MARKETING

                  The Company sells its products to national and regional
furniture retailers, as well as to independent, rent-to-own and foreign
retailers. The Company also is approved as a supplier of furniture to 66 post
exchange facilities located in the United States and 17 in foreign countries. In
1996, the Company sold its products to over 3,000 retailers, including 45 of the
top 100 furniture retailers in the United States as ranked by Furniture Today.
These retailers accounted for approximately 57% of the Company's 1996 net sales.
The Company's top five customers accounted for approximately 34% of the
Company's 1996 net sales, and the loss of any of these customers could have a
material adverse effect on the Company. The Company's two largest customers,
Heilig-Meyers and Levitz, accounted for approximately 17% and 8%, respectively,
of the Company's 1996 net sales. Management intends to continue to seek to
diversify its customer base to reduce its risk of reliance upon any single group
of retailers or geographic region.

                  The Company currently sells predominantly all of its products
throughout the United States. In 1996, approximately 30% of the Company's sales
were in the Southeast, 7% in the Midwest, 12% in the Southwest, 33% in the
Northeast and 18% in the West. Foreign sales of the Company's products
constituted 1% of 1996 net sales.

                  The Company's products are sold through independent
commissioned sales representatives. Each sales representative is assigned to a
specific geographic region and services customers in that territory. The
Company's representatives generally carry only the Company's furniture and
non-competing furniture lines of other manufacturers.

                  In addition to selling its furniture to traditional retailers,
the Company also distributes its products to rent-to-own retailers. Sales to
rent-to-own retailers represented approximately 4% of the Company's net sales in
1996. Management believes that sales to rent-to-own retailers will continue to
represent a similar percentage of the Company's net sales in the future.

                  The general marketing practice in the furniture industry is to
exhibit products at international and regional furniture markets. At these
markets, the Company introduces new products which complement the existing
product lines. Many of the Company's new customers are obtained at these shows.
In April and October of each year, an eight-day furniture market is held in High
Point, North Carolina, attracting buyers from both the United States and abroad.
The Company leases space at the High Point market under two leases which expire
on February 28, 1998 and October 31, 1998, respectively. The Company exhibits
its furniture at the San Francisco market pursuant to a lease which expires on
December 31, 1997. The Company intends to exhibit its furniture at its Belden
facility during the 1998 Tupelo Furniture Market.


                                       5

<PAGE>   6


                  The Company's products are regularly promoted by the Company's
customers to the buying public, using advertising and promotional materials
provided by the Company. The Company does not advertise directly to consumers
but advertises in furniture trade publications to promote its image as a
producer of moderately priced, quality furniture.

MANUFACTURING

                  The Company currently manufactures its furniture in six
facilities, four of which are owned by the Company. Four of the facilities are
located within a 30-mile radius of Tupelo, Mississippi, one in Compton,
California and one in McKenzie, Tennessee. A new lease has been negotiated on a
manufacturing facility in California which expires in July 2001. In July of
1996, the Company leased a facility in Booneville, Mississippi, to manufacture
its new Motion product line. This lease expires in July 1998. In February 1996,
the Company also completed its centralized fabric storage, cutting and
distribution center in Belden, Mississippi. This facility is also the location
of the corporate offices.

                  Expansion and Capacity. The Company has historically followed
a cautious facility expansion plan which has resulted in periodic capacity
constraints and related production inefficiencies. The Company has, however,
been able to construct necessary expansion of existing facilities or purchase or
construct new facilities within months of a determination that additional
capacity was required.

                  The Company's facilities, which encompass approximately
1,743,000 square feet, contain the capacity for up to 30 production lines and
24,250 pieces of furniture per week. The Company utilized approximately 81% of
its capacity on a weighted average basis during each of 1995 and 1996.
Management believes that its current manufacturing capacity is adequate to meet
current needs and anticipated future growth through 1998.

                  The following table describes the Company's manufacturing
facilities and indicates past expansions made to the Company's manufacturing
capacity:

<TABLE>
<CAPTION>
 FACILITY LOCATION      1988       1989     1990      1991      1992      1993       1994      1995     1996     TOTAL
 -----------------      ----       ----     ----      ----      ----      ----       ----      ----     ----     -----
<S>                     <C>        <C>      <C>       <C>      <C>        <C>       <C>       <C>      <C>      <C>
Fulton, MS........      120,000             20,000                         82,000                                 222,000  (2)
Baldwyn, MS.......                          50,000    50,000   167,000     65,000                                 332,000  (1)
Pontotoc, MS......                                                        103,000                                 103,000  (2)
New Albany, MS....                                                                            271,000             271,000
Compton, CA.......                                                                  135,000                       135,000
McKenzie, TN......                                                                  350,000                       350,000
Belden, MS........                                                                            250,000             250,000
Booneville, MS....                                                                                     65,000      65,000
                                                                                                                ----------
                                                                                                                1,743,000  (1)(2)
                                                                                                        
</TABLE>

---------------
(1)      Of the square footage attributed to the Baldwyn facility, an adjacent
         facility of approximately  70,000 square feet is utilized to
         manufacture wood frames.
(2)      The Pontotoc and Fulton facilities are currently idle.

                  Cogeneration Facility. In connection with its wood milling
operations, the Company produces large quantities of wood product waste. To
improve the disposal of such wood waste and to provide a source of energy for
its facilities, the Company purchased a wood burning cogeneration facility (the
"Cogeneration Facility") during 1994 which is located at the Baldwyn facility.
The Cogeneration Facility has reduced the costs associated with the disposal of
the wood waste generated by the Company's wood milling operation and will also
provide a source of the electricity required by the Company's Baldwyn
manufacturing facility.


                                       6

<PAGE>   7

                  Backlog. The Company schedules substantially all of its
production based upon actual orders, with the exception of certain orders
produced for a "just-in-time" distribution program for Heilig-Meyers, the
Company's largest customer (the "JIT Program"). The Company's backlog of
unshipped furniture orders was approximately $10.8 million at December 31, 1996
as compared to $16.9 million at December 31, 1995. The Company's backlog as of
September 30, 1997 was $17.0 million. Backlog is affected by the overall level
of orders as well as capacity constraints, which can lengthen order turnaround
time and increase backlog amounts. Management believes difficult conditions in
the furniture industry, coupled with a tightening of credit by the Company's
factor, caused the decline in backlog at December 31, 1996. Management
attributes the substantial increase in backlog during 1997 to strength in demand
for the Company's newly-introduced Motion product line, as well as the seasonal
upswing in demand traditionally experienced during the third and fourth
quarters. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

                  Manufacturing Process. The Company utilizes a vertically
integrated manufacturing process, which includes frame construction, fabric
cutting and sewing, upholstery, foam filling and final assembly. The components
used to construct the frames are either produced by the Company or purchased
from outside suppliers. The Company mills approximately 75% of the wood
components utilized in the frame assembly of the Company's four product lines.
All wood frames used in the Company's products are assembled by the Company. The
fabric cutting process utilizes computer-aided cutting techniques and design
patterns to help maximize fabric yield. The cut fabric is sewn together using
specialized machines which facilitate design work and increase the efficiency of
the assembly process. After assembly, the frames move down a separate production
line on which padding, filling and sewn covers are added. Cushions and pillows
are then placed with the completed piece which is inspected and then packed for
shipping.

                  The Company utilizes varying assembly line techniques for
different lines. The River Oaks manufacturing process utilizes frames which
differ in length and depth, and each piece is manufactured as a single unit. The
higher volume River Crest production operation utilizes standard frames and
construct and upholster the arms separate from the assembly line. The benefits
of this process include increased line speed, higher manufacturing volumes and
lower direct labor and overhead costs per completed piece as compared to the
River Oaks manufacturing process. These efficiencies and the use of less
expensive fabrics allow the Company to offer this product at lower price points.
During 1995, the Gaines manufacturing process was converted to that used by the
River Crest line. The River Oaks Motion manufacturing process reflects a
componentized process where all components are manufactured independently and
assembled at the final stage of the production process.

                  Centralized Fabric Cutting Operations. In February 1996, the
Company completed construction of a new facility in Belden, Mississippi for the
centralized storage and cutting of fabric for each of its Mississippi facilities
and a centralized distribution facility for the JIT Program. Management of the
Company believes that the centralized fabric cutting operations located near its
Mississippi facilities has improved control of the receipt, processing and
distribution of fabric and will permit the Company to further standardize the
fabric cutting process and improve operating efficiencies.

                  Quality Control. A primary emphasis of the Company's
manufacturing process is quality control. The Company maintains a comprehensive
quality assurance program. Quality assurance team members monitor the production
process, conduct a final inspection before shipment, inspect returned
merchandise for defects and work with customers to correct production defects.
Inspectors in each department are responsible for daily statistical process
control reports to help insure quality standards. Management believes that its
quality assurance program has

                                       7

<PAGE>   8

reduced repair and return costs related to manufacturing and shipping and that
those levels of returned or repaired items are consistent with industry
averages. The Company offers limited warranties which management considers
standard in the industry.

                  Computer Systems. The Company uses its computer system to
track backlog and to monitor future raw material requirements. As orders are
scheduled for production, the system monitors raw material levels by comparing
quantities needed against current inventory. To track and control inventory in a
more efficient manner, the Company has implemented a bar coding system which has
improved order processing and allows orders to be updated immediately as each
step of the production process is completed. In 1993, the Company engaged BDO 
Seidmen, LLP to coordinate the selection of a new, fully integrated financial
information system. In 1994, the Company acquired and began the implementation 
of a fully integrated manufacturing and financial computer system, to coordinate
all aspects of the Company's business. The initial attempt to convert to this 
system failed. This failure negatively impacted the Company's sales revenues 
and manufacturing costs. This system became fully operational in June 1997. The 
Company is currently developing an electronic data interchange ("EDI") system, 
which allows certain customers to place orders through a direct electronic link
with the Company systems and to monitor the status of orders. The EDI system 
will also allow sales representatives to enter orders into the system while at
the customer's place of business.

                  Distribution. Shipping is generally arranged by the Company,
although certain customers provide their own freight transportation. The Company
uses a dedicated transportation fleet, as well as independent trucking companies
with which it has negotiated competitive transportation rates. For non-truckload
customers, the Company utilizes a quadrant approach to shipping and load
management. The quadrant approach concentrates production and shipping of orders
to one designated geographic quadrant of the United States for one week of each
month with the objective of improving delivery service and reducing freight
costs.

RAW MATERIALS

                  The raw materials used by the Company include fabrics, lumber,
plywood, polyurethane foam, metals and glue. The Company uses a variety of
hardwoods, including oak, hickory and poplar, all of which are purchased
locally. With the exception of lumber and fabric, all raw materials are
available on an as needed basis. The Company maintains an average of six weeks'
supply of lumber and fabric in inventory. The Company believes that its sources
of supply for these materials are adequate and that it is not dependent on any
one supplier.

                  The Company does not anticipate that the prices of raw
materials will significantly increase in 1997. If prices for raw materials were
to increase, the Company does not anticipate that the effect of these price
increases would have a disproportionate impact on the Company because these
increases would affect the entire furniture industry. There can be no assurance,
however, that if raw material prices were to increase that market and
competitive pressures would allow the Company to increase prices for its 
products in amounts sufficient to cover such increased costs.

COMPETITION

                  The furniture industry is highly competitive and includes a
large number of furniture manufacturers, including manufacturers of upholstered
and leather stationary and motion furniture and other manufacturers of competing
products. Many of the Company's competitors have greater financial resources,
longer operating histories and better name recognition than the Company.


                                       8

<PAGE>   9


GOVERNMENTAL REGULATION

                  The Company's operations must meet federal, state and local
regulatory standards in the areas of safety, health and environmental pollution
controls. Historically, those standards have not had any material adverse effect
on the Company's sales or operations. The Company believes that its plants are
in compliance in all material respects with all applicable federal, state and
local laws and regulations relating to safety, health and environment.

                  Regulations issued in December 1995 under the Clean Air Act
Amendments of 1990 may require the Company to reformulate certain furniture
finishes or institute process changes to reduce emissions of hazardous volatile
organic compounds. The furniture industry and its suppliers are attempting to
develop water-based and other forms of compliant finishing materials to replace
commonly-used organic-based finishes that are a major source of regulated
emissions. The Company cannot at this time estimate the impact of these new
standards on the Company's operations and future capital expenditure
requirements, or the cost of compliance.

TRADEMARKS

                  The Company registered "River Oaks" as a trademark with the
United States Patent and Trademark Office (the "PTO") in 1988. Additionally, in
1994, the Company registered "River Crest," "Roaring River" and "Golden Oaks" as
trademarks with the PTO. Each trademark has a duration of 20 years. The Company
regards its trademarks as having significant value and as being an important
factor in the marketing of the Company's products.

EMPLOYEES

                  On October 1, 1997, the Company employed 1,571 full-time
employees, of which 128 are in management and supervisory positions.
Non-management employees at each of the facilities are paid by the hour with a
potential bonus of up to a certain percentage of their applicable hourly base
rate in the event individual production quotas are surpassed. The Company's
employees are not covered by collective bargaining agreements, and the Company
considers its employee relations to be good.

ITEM 2.           PROPERTIES

                  The Company owns all of its properties except for the
California Facility and the River Oaks Motion Facility located in Booneville,
Mississippi. The leases on these facilities expire in June 2001 and July 1998,
respectively. The Company believes that its facilities are adequate for its
current production needs and that adequate space for expansion is available
should additional production capacity be required. See "Business -
Manufacturing."

ITEM 3.           LEGAL PROCEEDINGS

                  On October 4, 1993, the trustees of the Ansin Foundation,
established by a former shareholder of the Company, and an executor of the
estate of the former shareholder of the Company, filed a complaint in the United
States District Court, District of Massachusetts, against the Company and the
Chief Executive Officer and the Secretary of the Company, both of whom are also
Company directors, alleging fraud, breach of fiduciary duty and unfair and
deceptive business practices in connection with the repurchase of the former
shareholder's shares (the "Ansin Litigation"). On April 8, 1996, a verdict was
returned in favor of the Ansin Foundation awarding compensatory damages against
the Company in the amount of $2.3 million. Additionally, compensatory and
punitive damages were awarded against each of the Company's Chief Executive


                                       9

<PAGE>   10


Officer and Secretary in their individual capacities. The United States Court of
Appeals for the First Circuit affirmed these awards, together with interest
accrued thereon, on February 3, 1997. The Company filed a petition for
certiorari with the United States Supreme Court, which petition was denied on
October 6, 1997. The litigation is, therefore, concluded. Because of this
verdict against the Company, the Company reduced its additional paid-in capital
in the amount of $1,082,000, representing compensatory damages for the amount
that the former shareholder would have received if he had participated in the
Company's initial public offering in September 1993. Additionally, the balance
of the judgment against the Company, $1,357,000, has been charged as an expense
in 1996. See "Management Discussion and Analysis of Results of Operations - 1996
Compared to 1995."

                  On August 6, 1997, the Company filed a complaint in the
Circuit Court of Lee County, Mississippi, against BDO Seidman, LLP ("BDO"), the
Company's former independent accountants, alleging, among other things,
professional malpractice, negligence, breach of contract and breach of
professional responsibilities and fiduciary duties. The Company is seeking
actual damages in the amount of not less than $30,000,000, together with
punitive damages, from BDO. On September 5, 1997, BDO removed the case to the
United States District Court for the Northern District of Mississippi, Eastern
Section. BDO has not yet filed an answer to the complaint. On September 15, 
1997, the Company filed an amended complaint to add a count for defamation. No
assurance can be given that the Company will prevail on any of these
allegations or that it will ultimately recover any damages, actual or punitive,
from BDO.

                  Additionally, the Company is, from time to time, a party to
litigation which arises in the normal course of its business. Except as
described above, the Company is not currently a party to any litigation which,
if adversely determined, would have a material adverse effect on the Company's
liquidity or results of operations.

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

                  No matter was submitted to a vote of shareholders during the
fourth quarter of the Company's fiscal year.


                                       10


<PAGE>   11


                                     PART II

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

                  The Company has not filed with the Commission or with the
Nasdaq National Market, Inc. (the "Nasdaq National Market") the Company's
quarterly reports on Form 10-Q for the periods ended March 31, 1997 and June 30,
1997. Additionally, the Company filed a Form 12b-25 with the Commission on March
31, 1997 indicating that the Company was unable to timely file its Annual Report
on Form 10-K for the year ended December 31, 1996. As a result of the failure to
make these filings, the Company violated the requirements of the Securities
Exchange Act of 1934, as amended, and the listing requirements of the Nasdaq
National Market. As a result of these failures and the inability of the Company
to make available its audited financial statements, the Nasdaq National Market
informed the Company by letter dated August 20, 1997 that it had determined to
delist the Company's Common Stock from the Nasdaq National Market effective with
the close of business on August 20, 1997.

                  The Common Stock was, between May 5, 1997 and August 20, 1997,
quoted on the Nasdaq National Market under the symbol OAKSE. Prior to May 5,
1997, the symbol was OAKS. The following table sets forth the range of high and
low sales prices on Nasdaq for the two most recent fiscal years, as reported by
the Nasdaq National Market:

<TABLE>
<CAPTION>
                   1995                                                          High              Low
                   ----                                                          ----              ---
                   <S>                                                          <C>               <C>
                   First Quarter........................................        $ 13 3/4          $ 11
                   Second Quarter.......................................          14 1/4            11 1/2
                   Third Quarter........................................          13 1/4             8
                   Fourth Quarter.......................................           9 3/4             5 3/4

                   1996

                   First Quarter........................................           6 3/4             3 1/2
                   Second Quarter.......................................           6 3/4             5
                   Third Quarter........................................           6 1/4             3 1/4
                   Fourth Quarter.......................................           4 1/2             2 3/4

                   1997

                   First Quarter .......................................           4                 2 3/8
                   Second Quarter.......................................           3 3/8               3/8
                   Third Quarter
                   (through August 20, 1997)............................           2 1/2             1 1/2

</TABLE>

                  On October 1, there were 94 record holders owners of the
Company's Common Stock.

                  The Company has never paid a dividend on its Common Stock, and
the Company currently intends to retain all earnings, if any, to finance the
development and expansion of its operations and, therefore, does not anticipate
paying cash dividends or making any other distributions on its shares of Common
Stock in the foreseeable future. The Company's future dividend policy will be
determined by its Board of Directors on the basis of various factors, including
the Company's results of operations, financial condition, business
opportunities, capital requirements and restrictions contained in the Company's
financing documents.


                                       11


<PAGE>   12


ITEM 6.           SELECTED FINANCIAL DATA

                  The following table sets forth selected financial and balance
sheet data of the Company which have been derived from the consolidated
financial statements of the Company. The financial statements of the Company for
the year ended December 31, 1996, and the restated financial statements of the
Company for the years ended December 31, 1995 and 1994, have been audited by the
Horne CPA Group, PA, independent auditors ("Horne"). The financial statements of
the Company for the years ended December 31, 1993 and 1992 are restated and
unaudited, and include all adjustments which management considers necessary for
a fair presentation of the financial position and results of operations of the
Company for the respective periods. The selected consolidated balance sheet data
for the years ended December 31, 1994, 1993 and 1992 were derived from unaudited
consolidated financial statements of the Company and include all adjustments
which management considers necessary for the fair presentation of such data for
the respective periods. The following data should be read in conjunction with
the consolidated financial statements of the Company and the related notes
thereto included elsewhere herein. See "Management's Discussion and Analysis of
Results of Operations - Recent Developments."

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                           -------------------------------------------------------------
                                                                            RESTATED               
                                                        ------------------------------------------------
                                               1996         1995         1994        1993        1992
                                               ----         ----         ----        ----        ----
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>          <C>          <C>          <C>         <C>
STATEMENT OF INCOME DATA
Net sales ..............................   $ 124,686    $ 140,833    $ 106,961    $ 68,905    $ 46,048
Gross profit ...........................      13,851       17,650       17,169      10,267       5,923
Operating expenses:
     Selling ...........................       7,275        7,609        5,290       3,412       2,049
     General and administrative ........       7,370        7,398        4,337       2,789       2,319
Operating income (loss) ................        (794)       2,643        7,542       4,066       1,555
Litigation award .......................      (1,357)          --           --          --          --
Interest expense - net .................      (3,846)      (3,166)      (1,692)     (1,281)       (937)
Income (loss) before taxes on income and
     extraordinary item ................      (5,997)        (523)       5,850       2,785         618
Extraordinary item .....................         279           --           --          --          --
Net income (loss) (1) ..................   $  (3,526)   $    (329)   $   3,910    $  1,796    $    397
Net income (loss) per share before
     extraordinary item (1) ............        (.63)        (.06)         .78          --          --
Extraordinary item (net) ...............        (.05)          --           --          --        0.12
Net income (loss) per share (1) ........   $   (0.68)   $   (0.06)   $    0.78    $   0.46    $   0.12
Weighted average common shares and share
     equivalents outstanding
                                               5,562        5,306        5,029       3,880       3,447
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                           -------------------------------------------------------------
                                                                             RESTATED           
                                                         -----------------------------------------------
                                               1996         1995         1994        1993        1992
                                               ----         ----         ----        ----        ----
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>          <C>          <C>          <C>         <C>
BALANCE SHEET DATA
Working capital (deficiency) ...........   $  15,119    $  18,233    $  19,335    $ 10,833    $ (1,586)
Total assets ...........................   $  68,398    $  66,667    $  55,934    $ 25,187    $ 13,473
Long-term debt .........................      24,574       24,050       15,077         256       4,298
Total shareholder's equity .............      25,815       29,346       29,675      19,116         106

</TABLE>

--------

                                       12

<PAGE>   13

(1)      Pro forma adjustments for income taxes have been made as if the Company
         had been a C corporation instead of an S corporation prior to September
         2, 1993.

RESTATEMENT OF FINANCIAL STATEMENTS

                  During the course of its efforts to prepare for the audit of 
the fiscal year ended December 31, 1996, the Company discovered that certain of
the Company's accounts were out of balance. As a result, the Company, together 
with its independent accountants at the time, BDO Seidman, LLP, undertook a 
detailed analysis of certain of the Company's accounts and accounting 
reconciliation procedures for the fiscal year ended December 31, 1996, and prior
fiscal years. As a result of such detailed analysis, the Company's financial 
statements were restated.

                  The following table sets forth certain effects of these
restatements on the Company's financial position and results of operations, and
should be read in conjunction with the consolidated financial statements of the
Company and the related notes thereto included elsewhere herein. Adjustments
were also made to the Company's financial statements for the fiscal years ended
December 31, 1993, 1992, and 1991. See "Management's Discussion and Analysis of
Results of Operations - Recent Developments" and " - Liquidity and Capital
Resources."

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED
                                                                             DECEMBER 31,

                                                                ------------------------------------
                                                                       1995                  1994
                                                                       ----                  ----
                                                                             (IN THOUSANDS)
<S>                                                                   <C>                <C>
Net Sales:
     As previously reported ......................                    143,058            107,811
     As restated .................................                    140,833            106,961
                                                                                        
Cost of goods sold:                                                                     
     As previously reported ......................                    123,183             89,792
     As restated .................................                    123,183             89,792
                                                                                        
Net income (loss):                                                                      
     As previously reported ......................                      1,097              4,455
     As restated .................................                       (329)             3,910
                                                                                        
Net income (loss) per share:                                                            
     As previously reported ......................                       0.21               0.89
     As restated .................................                      (0.06)              0.78
                                                                                        
Total assets:                                                                          
     As previously reported ......................                     69,366             59,312
     As restated .................................                     66,667             55,934
                                                                                        
Total stockholders' equity                                                              
     As previously reported ......................                     33,667             32,570
     As restated .................................                     29,346             29,675
                                                                                        
</TABLE>


                                       13


<PAGE>   14

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

                  The following discussion and analysis of the financial
condition and results of operations of the Company should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
elsewhere herein.

RECENT DEVELOPMENTS

                  Background. During the course of its efforts to prepare for 
the audit of its fiscal year ended December 31, 1996, the Company discovered
that certain of the Company's accounts were out of balance. As a result, the 
Company, together with its independent accountants at the time, BDO Seidman, 
LLP, undertook a detailed analysis of certain of the Company's accounts and 
accounting reconciliation procedures for the fiscal year ended December 31, 
1996, and prior fiscal years. On April 10, 1997, in the course of the Company's 
analysis, a long-time employee of the Company admitted to falsifying certain
account reconciliation statements and underlying documents. The Company 
believes that these actions contributed to imbalances in the Company's cash 
account. This employee resigned from the Company soon after these admissions 
were made.

                  In addition, the Company utilizes a factoring arrangement with
a financial institution to finance a significant portion of its operations. This
arrangement allows the Company to receive advances for a portion of the face
amount of its sales invoices, and customers remit payment directly to the
factoring institution. On occasion, the customer objects to certain invoiced 
charges, notifies the factor of such objection or objections and deducts such
amounts from its payment. At such time, the factor reduces the factored
receivables by the amount objected to (the "chargebacks"), and the Company
becomes responsible for appropriate follow-up and collection of the chargebacks.
From 1991 to 1996, the Company failed to properly record chargebacks of disputed
amounts to the accounts of individual customers. This practice caused the
individual customer accounts to be understated and, as a result, the Company has
not yet attempted to collect these accounts receivable. These unrecorded
chargeback receivables contributed to the imbalances in the Company's cash
account. Management believes that, because of the aging of such receivables, 
such receivables are now uncollectible. As a result, the Company chose to take
charges to net sales of approximately $1,592,000 and $2,225,000 for its fiscal
years ended 1996 and 1995, respectively.

                  On June 5, 1997, BDO resigned as the Company's independent
certified public accountants. On June 10, 1997, the Company retained the Horne
CPA Group, PA as the Company's independent certified public accountants and
authorized BDO to respond fully to the informational requests of Horne. In a
letter dated June 17, 1997, BDO advised the Company that it had withdrawn its
opinions on the 1990, 1991, 1992, 1993, 1994 and 1995 annual financial
statements of the Company.

                  Restatement of Financial Statements. On September 27, 1997,
Horne issued its audit report on the Company's financial statements for the 
fiscal year ended December 31, 1996, and restated, audited financial statements
for the Company's fiscal years ended December 31, 1995 and 1994. The respective
reductions to net sales (gross) and net income (loss), net of tax effect, of
the adjustments made to the Company's financial statements are: $1,592,000 and
$1,020,000, respectively, for the year ended December 31, 1996; $2,225,000 and
$1,426,000, respectively, for the year ended December 31, 1995; and $849,000
and $544,000, respectively, for the year ended December 31, 1994. Retained
earnings at the beginning of 1994 have been adjusted for the net of tax amount
of $2,350,000 for the effect of the accounting errors discussed above on prior 
periods. The Company was a subchapter


                                       14


<PAGE>   15

S corporation prior to its initial public offering. Therefore, the amount of
$2,146,000, applicable to pre-initial public offering operations, has been
reclassified as additional paid-in capital. The amount of $204,000 applicable to
operations of the Company as a subchapter C Corporation prior to 1994 has been 
recorded as an adjustment against the December 31, 1993 retained earnings.

RESULTS OF OPERATIONS

                  The following table sets forth for the years indicated
information derived from the Company's consolidated financial statements
expressed as a percentage of the Company's total net sales.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------
                                                                  1996           1995           1994
                                                                  ----           ----           ----
<S>                                                               <C>            <C>            <C>   
Net Sales ...................................................     100.0%         100.0%         100.0%
                                                                  -----          -----          ----- 

Cost of Sales ...............................................      88.9           87.5           83.9
                                                                  -----          -----          ----- 

Gross profit ................................................      11.1           12.5           16.1

Selling, general and administrative expenses ................      11.7           10.7            9.0
                                                                  -----          -----          ----- 

Operating income (loss) .....................................      (0.6)           1.8            7.1

Litigation award ............................................       1.1             --             --

Interest expense - net ......................................       3.1            2.2            1.6
                                                                  -----          -----          ----- 

Income (loss) before income taxes (benefit) and extraordinary
item ........................................................      (4.8)          (0.4)           5.5

Income taxes (benefit) ......................................      (2.2)          (0.2)           1.8
                                                                  -----          -----          ----- 

Income (loss) before extraordinary item .....................      (2.6)          (0.2)           3.7

Extraordinary item, net .....................................       0.2             --             --
                                                                  -----          -----          ----- 

Net income (loss) ...........................................      (2.8)          (0.2)           3.7

</TABLE>

1996 COMPARED TO 1995

                  Net sales for 1996 decreased by $16,147,000 or 11.5% to
$124,686,000 from $140,833,000 for 1995. The decline in sales volume resulted
primarily, management believes, from a weak national retail furniture
environment, unusually heavy snowfall in the East that affected retail demand in
several major markets and an ice storm that shut down production at the
Mississippi facilities for five days in the first quarter. In addition, net
sales were adversely affected by the Company's decision to write-off
approximately $1,592,000 and $2,225,000 in 1996 and 1995, respectively, of
previously unrecorded chargeback receivables. See "Recent Developments."
Overall sales volume of the River Oaks product lines decreased by $17,187,000
or 15.8%, to $91,662,000 for 1996 from $108,849,000 for 1995. Sales of the
Gaines product line also declined by $3,513,000 or 11.0% in 1996 as compared to
1995. The startup of the River Oaks Motion product line in July of 1996,
contributed volume increases to net sales of $4,553,000 during the last six
months of production in 1996. The Company's backlog at December 31, 1996 was
approximately $10,800,000 as compared to approximately $16,900,000 at December
31, 1995.

                  Cost of sales for 1996 decreased 10.0% to $110,835,000 from
$123,183,000 for 1995. The aggregate decrease resulted primarily from decreased
sales volume. As a percentage of net sales, cost of sales for 1996 increased to
88.9% from 87.5% for 1995. The increase in cost of sales


                                       15

<PAGE>   16

and resulting decline in gross profit margin, was primarily the result of 
reduced levels of production without a corresponding reduction in relatively
fixed overhead levels. The reduced production was primarily the result of
decreased sales. This decrease was partially offset by reductions in certain
variable costs including duplicative labor eliminated by the consolidation of
the Fulton facility into New Albany, completed in March 1996.

                  Selling, general and administrative expenses for 1996
decreased by 2.4% to $14,645,000 from $15,007,000 for 1995. As a percentage of
net sales, such expenses in 1996 increased to 11.7% from 10.7% for 1995. The
aggregate increase, as well as the increase as a percentage of net sales was
primarily the result of a reduction in product development costs and commission
expense relative to a reduction in sales volume.

                  The Company and two of its officers were defendants in a
lawsuit brought by the estate of a former shareholder in connection with the
purchase of the former shareholder's stock. A judgment, now final, was taken
against the Company in the aggregate amount of $2,439,000 (including amounts
paid by the Company on behalf of two of its officers and directors). Of this
amount, $1,082,000 was awarded against the Company as compensatory damages. This
amount has been recognized as a reduction in additional paid in capital. The
balance of the award, $1,357,000 has been charged as an other expense in 1996.
Consequently, assuming an effective tax rate of 45.9%, the balance of the award
accounted for a reduction of net income of approximately $734,000 for 1996.

                  Operating income (loss) for 1996 decreased 130.0% to
$(794,000) from $2,643,000 for 1995. As a percentage of net sales, operating
income for 1996 decreased to (0.6)% from 1.8% for 1995, primarily as a result of
the factors discussed above.

                  Net interest expense for 1996 increased 21.5% to $3,846,000
from $3,166,000 for 1995. As a percentage of net sales, such expenses for 1996
increased to 3.1% from 2.2% for 1995. The aggregate increase was primarily a
result of higher interest rates, less capitalized interest and increased average
levels of borrowing resulting from working capital and capital expenditure
requirements. The increase as a percentage of net sales is primarily the result
of the factors discussed above and decreased sales volume in 1996.

                  Net (loss) before extraordinary item for 1996 increased by
786.9% to $(3,247,000) from $(329,000) for 1995. As a percentage of net sales,
net (loss) before extraordinary item for 1996 increased to (2.6)% compared to
net (loss) before extraordinary item of (0.2)% for 1995, primarily as a result
of the factors discussed above.

                  Extraordinary (loss) for 1996 was $(279,000) as compared to no
extraordinary item (loss) in 1995. As a percentage of net sales, extraordinary
(loss) for 1996 was (0.2)%, the result of expensing the unamortized closing
costs and an early termination fee caused by changing senior lending
institutions in July of 1996.

                  Net (loss) for 1996 increased by 871.7% to $(3,526,000) from
$(329,000) for 1995. As a percentage of net sales, net (loss) for 1996 increased
to (2.8)% compared to (0.2)% for 1995, primarily as a result of the factors
discussed above.

1995 COMPARED TO 1994

                  Net sales for 1995 increased by $33,872,000, or 31.7%, to
$140,833,000 from $106,961,000 in 1994. The increase resulted from sales volume
increases in the various River Oaks product lines, with price increases having
an insignificant effect. The overall increase in net sales


                                       16

<PAGE>   17

was slightly offset by the Company's decision to write-off approximately
$2,225,000 and $849,000 in 1995 and 1994, respectively, of previously unrecorded
charge back receivables. See "Recent Developments." The Gaines product line,
acquired in 1994, contributed volume increases in addition to the inclusion of a
full year's sales for 1995. Overall sales volume of all River Oaks product lines
increased by $15,605,000, or 16.7%, to $108,849,000 from $93,244,000 in 1994.
The River Crest and River Oaks product lines contributed $22,098,000 of the
Company's sales increase, as a result of adding new customers and increased
shipments to existing customers. Capacity expansions to supply these increased
volumes were obtained by a full year's operation of the California facility, as
well as planned reconfiguration of both the Mississippi and Gaines production
lines. Sales of the Roaring River product line decreased by $6,493,000 in 1995
as compared to 1994 as a result of management's decision to allocate marketing
and production resources to the higher price point River Crest product line.
Sales of the Gaines product line increased by $18,267,000 in 1995 as compared to
1994, primarily the result of a full year's sales volume in 1995 compared to
five months in 1994. Incremental sales of $6,289,000 were obtained by offering
the Gaines product line to the existing River Oaks customer base. The Company's
backlog at December 31, 1995, was approximately $16,900,000 as compared to
approximately $20,000,000 at December 31, 1994.

                  Cost of sales for 1995 increased by 37.2% to $123,183,000 from
$89,792,000 for 1994. The aggregate increase resulted primarily from increased
production volume at the Gaines and California facilities, as well as additional
production volume of the River Oaks product lines. Additionally, in 1995, the
Company incurred costs in connection with reconfiguring production lines at both
the Mississippi and Gaines facilities. As a percentage of net sales, cost of
sales for 1995 increased to 87.5% from 83.9% for 1994. The increase in cost of
sales, and resulting decline in gross profit margin, resulted from a soft retail
environment which reduced individual order quantities and shortened lead times.
The resulting accelerated shipping schedules and decreased production runs led
to manufacturing inefficiencies that did not exist in 1994. Manufacturing
efficiencies were further negatively affected by being staffed for a much higher
backlog than the Company experienced, the reconfiguration at the Mississippi and
Gaines facilities and the conversion to the new cutting and storage facility in
Belden, Mississippi.

                  Selling, general and administrative expenses for 1995
increased by 55.9% to $15,007,000 from $9,627,000 for 1994. As a percentage of
net sales, such expenses for 1995 increased to 10.7% from 9.0% for 1994. The
aggregate increase was the result of higher sales commissions as a result of the
31.7% increase in sales volume, administrative personnel additions and seven
months additional amortization of goodwill relating to the Gaines acquisition.
Additionally, difficult conditions in the furniture industry affected a small
number of the Company's non-factored customers, which required the Company to
increase its bad debt allowance by $696,000.

                  Operating income for 1995 decreased by 65.0% to $2,643,000
from $7,542,000 for 1994, while operating income, as a percentage of net sales
for 1995, decreased to 1.8% from 7.1% for 1994. Both the aggregate and
percentage decline in operating income resulted from the factors discussed
above.

                  Net interest expense for 1995 increased by 87.1% to $3,166,000
from $1,692,000 for 1994. As a percentage of net sales, such expenses for 1995
increased to 2.2% from 1.6% for 1994. Both the aggregate and percentage increase
resulted from factoring charges related to an increasing overall sales volume,
as well as a larger percentage of factored sales, higher interest rates and
increased levels of borrowings outstanding resulting from working capital and
capital expenditure requirements associated with expanded operations during
1995.


                                       17

<PAGE>   18

                  The income tax (benefit) for 1995 was a benefit of $(194,000)
compared with income tax expense of $1,940,000 for 1994. The effective tax rate
for 1995 increased to 35.5% from 33.5% for 1994, resulting primarily from state
income taxes attributable to increased California volume.

                  Net income (loss) for 1995 decreased by 108.4% to a net loss
of ($329,000) from a net income of $3,910,000 for 1994. As a percentage of net
sales, net income (loss) for 1995 decreased to (0.2)% as compared to net income
of 3.7% for 1994, primarily as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

                  The Company's financing for its operations and capital
requirements historically has been a combination of long-term borrowings,
factoring of accounts receivable and internally generated funds. The Company's
capital requirements have increased because of capital requirements for capacity
expansion and working capital needs to support sales growth. A significant
portion of capital expansion has historically been financed with long-term
mortgage indebtedness. Factoring of accounts receivable has played an important
role in providing cash to fund increased inventory requirements necessary for
sales growth.

                  In the absence of current financial information during the
second and third quarters of 1997, the Company experienced some tightening of
credit with its trade suppliers. This tightening of credit was usually in the
form of reduced credit lines and not in payment terms. As of the date of this
filing, however, the Company has completed all accelerations of payments
necessary to be within the reduced credit lines of its key trade suppliers.
Furthermore, management believes, based upon verbal communications with its key
trade suppliers, that existing credit lines will be increased following the
publication of current financial information regarding the Company.

                  After changes in current assets and current liabilities,
operating activities provided net cash of $2,315,000 in 1996 and $359,000 in
1995. In prior years, cash flow from operations has historically been less than
net income as a result of the need for increased investment in inventories
needed to support higher sales levels. During 1996, cash provided by operations
was the result of a decrease in inventories as well as more favorable payment
terms with key suppliers.

                  Net cash used by investing activities was $4,132,000 in 1996
as compared to $11,359,000 used in 1995. Net capital expenditures in 1996 were
$4,132,000 as compared to $11,359,000 in 1995 and were incurred primarily in
connection with a new management information system, replacement of a smaller
production facility and construction of the centralized fabric storage, cutting
and distribution center and administrative offices. Capital expenditures were
funded primarily with long-term borrowings.

                  In 1996, financing activities provided net cash of $1,536,000
compared with $10,464,000 in 1995 and reflected long-term borrowings of
$9,100,000 to fund the capital expenditures discussed above and replace
long-term debt of $8,427,000.

                  On July 26, 1996, the Company entered into a Revolving Credit
and Term Loan Agreement (the "Credit Agreement") with BNY Financial Corporation
("BNYFC") and other lenders (the "Banks"), which replaced the previous credit
facility with The CIT Group/BCC, Inc. ("CIT"). The Credit Agreement with BNYFC
and other lenders together with related agreements (collectively, the "Financing
Documents") provides the Company and its direct and indirect subsidiaries with a
$42 million revolving credit facility (with a $3 million overadvance sublimit),
a $9 million term loan, and certain factoring arrangements (collectively, the
"BNYFC Facility"). Proceeds of the BNYFC Facility were used to refinance the
Company's indebtedness to CIT, with


                                       18


<PAGE>   19

the CIT facility being terminated effective July 26, 1996. As of December 31,
1996 and August 31, 1997, outstanding borrowings under the BNYFC Facility were
approximately $38,444,000 and $42,820,000, respectively. Funds are made
available under the BNYFC Facility under the formula-based lending provisions of
the BNYFC Facility. The BNYFC Facility is secured by substantially all of the
Company's assets, including certain real property.

     Revolving loans under the Credit Facility bear interest at a floating rate
per annum equal to 1.5% over the one month London Interbank Offered Rate (7.2%
at September 30, 1997), subject to a 0.50% increase if any over-advances are
outstanding for more than four days in any month. The term loan under the Credit
Agreement bears interest at a floating rate equal to 2.50% over the one month
London Interbank Offered Rate (8.2% at September 30, 1997), subject to a 0.50%
reduction if the outstanding principal amount of the term loan is $7 million or
less and no default or event of default exists.

                  The BNYFC Facility terminates on July 26, 2000, subject to
successive one year extensions thereafter unless notice of non-renewal is given
by the Banks or the Company 90 days prior to the termination date. The BNYFC
Facility is subject to earlier termination at the option of the Banks upon the
occurrence of certain "Events of Default" enumerated in the Loan Documents. All
amounts due to the Banks are payable upon the termination of the BNYFC Facility
for any reason. The term loan requires 59 equal monthly payments of principal in
the amount of $107,143 commencing September 1, 1996, with all remaining
principal and other amounts owing to the Banks being payable in full on the
earlier to occur of (i) the termination of the BNYFC Facility, and (ii) July 26,
2001.

                  The Financing Documents contain provisions that are customary
for financing transactions of this type, including representations, warranties,
conditions, covenants, and default provisions. Among other things, the Company
is required to maintain profitability and certain consolidated financial ratios
while the BNYFC Facility is in place, including ratios relating to tangible net
worth, interest coverage, debt service coverage, indebtedness to tangible net
worth, working capital, and the excess of current assets over current
liabilities. At December 31, 1996 the Company was in default of certain of the
above requirements.  

                  On June 17, 1997, BNYFC agreed to waive the Company's breach
of the financial covenants contained in the BNYFC Facility for the Company's 
fiscal year ended December 31, 1996 (the "June Agreement").  Also on June 17,
1997, BNYFC and the Company agreed that, based upon BNYFC's review of the
Company's audited financial statements for the fiscal year ended December 31,
1996 in relation to the financial convenants of the BNYFC Facility, BNYFC shall
propose, in BNYFC's sole discretion, certain revised financial convenants to be
applicable to the Company under the BNYFC Facility.  Once these convenants are
agreed upon, BNYFC and the Company are to enter into an amendment to the BNYFC
Facility.  No assurance can be given, however, that BNYFC will propose
covenants that will be acceptable to the Company.  If BNYFC proposes covenants
that are not acceptable to the Company, and if BNYFC seeks to apply the
existing  covenants of the BNYFC Facility to the Company, then the Company
would be in default of the BNYFC Facility.  Based on discussions with
representatives of BNYFC, management believes, however, that the Company and
BNYFC will agree upon mutually acceptable covenants to be applied to the
Company in the current fiscal year. Once the BNYFC Facility is amended,
management believes, based upon conversations with representatives of BNYFC and
BNYFC's forbearance to date, that these defaults will be waived by BNYFC. In
the June Agreement, the Company and BNYFC agreed to decrease the notice of
non-renewal to 60 days prior to and effective as of the fourth anniversary of
the Effective Date (as defined in the BNYFC Facility) in any subsequent year,
to the BNYFC Facility, to promptly execute and deliver to BNYFC a second
priority Deed of Trust, Security Agreement and Assignment of Leases with
respect to the premises owned at 501 North Glenfield, New Albany, Mississippi
and to pay BNYFC a waiver fee of $150,000.

                  On September 30, 1996, the Company's $5,000,000 fully secured
equipment line of credit with Deposit Guaranty National Bank ("DGNB") matured.
The line was utilized to purchase equipment and machinery. In January 1996, the
Company converted the outstanding balance of $810,000 to a term loan with DGNB.
Outstanding borrowings on the equipment line were $721,000 at December 31, 1996
and bear interest at LIBOR plus 175 basis points (7.4% as of September 30,
1997). This new, fully secured term loan matures on January 1, 2003, and bears
interest at 7.6 percent requiring monthly principal and interest payments of
$12,500. At December 31, 1996, and based upon the application of existing
provisions of the term loan, the Company was, and is currently, in default of
the financial covenants for the loan. DGNB has waived the Company's defaults of
the financial covenants of this loan for the Company's 1996 fiscal year. Based
on conversations with



                                       19



<PAGE>   20

representatives of DGNB and the forbearance of DGNB to date, management believes
that the Company's defaults for the current fiscal year will be waived and that
DGNB will amend the applicable covenants in a manner consistent with those to be
proposed by BNYFC. 

                  The Company has a $2,000,000 fully secured real estate loan
with DGNB which was utilized to purchase a new manufacturing facility in New
Albany, Mississippi. The loan is secured by the building and land and matures on
October 1, 2000 (the "Deposit Guaranty Real Estate Loan"). The loan requires
monthly payments of $24,500, including interest at 8.1 percent through September
2000, with the remaining balance of $1,224,000 due October 2000, secured by land
and buildings with a net book value of $3,232,000, purchased with the loan
proceeds. Outstanding borrowings under this facility at December 31, 1996 were
$1,845,000. At December 31, 1996, the Company was in default of the Deposit
Guaranty Real Estate Loan.  DGNB has waived the Company's defaults of the 
financial covenants of this loan for the Company's 1996 fiscal year. Based on 
conversations with representatives of DGNB and the forbearance of DGNB to date,
management believes that the Company's defaults for the current fiscal year 
will be waived and that DGNB will amend the applicable covenants in a manner 
consistent with those to be proposed by BNYFC. The Company did not renew this 
line of credit which matured on September 30, 1996.

                  In 1995, the Company established with the Bank of Mississippi
(the "BOM") two construction lines of credit in the amounts of $4,800,000 and
$450,000. These loans were obtained to finance the construction of the new
Belden, Mississippi facility and related purchases of office equipment. These
construction loans, bearing interest at the bank's prime rate (8.5 percent at
December 31, 1995), both matured on January 2, 1997. These construction loans
were converted on May 6, 1996, to a long-term and a short-term real estate loan
that mature on May 6, 2001 (monthly $31,390), and May 1, 1997 (monthly $8,335),
respectively (the "New BOM Construction Loans"). Both loans bear interest at the
bank's prime rate (8.3 percent at December 31, 1996) and are secured by land,
buildings and office equipment with a net book value of $7,270,000 at December
31, 1996. As of December 31, 1996, outstanding borrowings under the new
long-term and short-term loans were $5,432,000 and $42,000, respectively (total
$5,474,000). At December 31, 1996, and based upon the application of existing
provisions of the loans, the Company was, and currently is, in default of the
financial covenants for the loans. The BOM has consented to a waiver of the
Company's default of the financial covenants of these loans for the fiscal year
ended December 31, 1996. Based upon conversations with representatives of the
BOM and the forbearance of the BOM to date, management believes that the
Company's defaults for the current fiscal year, if any, will be waived.

                  Based on conversations with representatives of BOM and DGNB,
management believes that the New BOM Construction Loans and the Deposit Guaranty
Real Estate Loan will be amended to contain covenants and default provisions
similar to those expected to be contained in the BNYFC Facility, as amended.

                  On August 13, 1997, the Company retained Scott & Stringfellow,
Inc., (the "Investment Bank") on an exclusive basis, to advise the Company with
respect to its strategic options, including the placement of the Company's 
securities or the sale or merger of all or a portion of the Company to provide
additional working capital for the Company, including, without limitation,
funds to satisfy the verdict awarded in the Ansin Litigation. Based on 
preliminary discussions with representatives of the Investment Bank, and 
although the Company intends to consider all available options, the Company 
believes it can issue additional equity or subordinated debt to satisfy the 
judgment entered against the Company in the Ansin Litigation described in 
"Item 3 - Legal Proceedings" and to increase the Company's working capital. 
There can be no assurance, however, that the Company can successfully identify 
and consummate any such transaction or sell shares of its Common Stock or 
issue subordinated debt in order to raise sufficient capital.

                  The issuance of any additional debt by the Company will
further leverage the Company and will have a negative effect on the per share
earnings of the Company, through additional interest expense, during the period
that such debt remains outstanding. The issuance of


                                       20

<PAGE>   21

additional equity would also have a dilutive effect on the per share earnings of
the Company. The failure to obtain additional financing would have a material
adverse effect on the Company, including defaults under the Company's credit
facilities. Any such issuance of additional shares of common stock or of
subordinated debt must be approved by the Company's senior lender. The Company's
ability to satisfy its obligations and to raise working capital are dependent,
in part, upon the Company's financial performance, which is subject to
prevailing economic conditions, business trends and financial, business and
other factors, including factors beyond the control of the Company and those
described under the caption "Forward-Looking Statements."

                  Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") issued by FASB is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The disclosure requirements of FAS 123 are also effective for
financial statements for fiscal years beginning after December 15, 1995. The new
standard encourages entities to adopt a fair value method of accounting for
employee stock-based compensation plans and requires such accounting for
transactions in which an entity acquires goods or services from non-employees
through issuance of equity instruments. As allowed under the provisions of FAS
123, the Company will continue to measure compensation cost of employee
stock-based compensation plans using the intrinsic value based method of
accounting prescribed by the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As such, the Company will make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company does not expect
adoption to have a material effect on its financial position or results of
operations.

                  Statement of Financial Accounting Standards No. 128,
"Accounting for Earnings per Share" ("FAS 128"), issued by the FASB is effective
for financial statements issued for periods ending after December 15, 1997. The
disclosure requirements of FAS 128 are also effective for financial statements
for fiscal years beginning after December 15, 1997. The new statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly-held common stock. This standard simplifies
the standards for computing earnings per share previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share," and makes them comparable
to international EPS standards. The Company does not expect adoption to have a
material effect on its financial position or results of operations.

                  Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," issued by the FASB is effective for years
beginning after December 15, 1997. The new statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. This standard requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.

                  Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," issued by
the FASB is effective for years beginning after December 15, 1997. The new
statement establishes standards for the way public enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This standard requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available


                                       21

<PAGE>   22

that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.

INFLATION

                  Although the effects on the Company cannot be accurately
determined, inflation in recent years has primarily affected the Company's
manufacturing costs in the areas of labor, manufacturing overhead and raw
materials, including lumber. The Company does not believe that inflation has 
had a significant impact on its result of operations for the periods presented.
Historically, the Company believes it has been able to minimize the effects of
inflation by improving its manufacturing and purchasing efficiency, increasing
its employee productivity and, to a lesser degree, increasing selling prices
of its products.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  See Appendix A.

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

                  By letter dated June 5, 1997, BDO Seidman, LLP resigned as the
Company's independent certified public accountants. The reports of BDO on the
Company's financial statements for the two years preceding the resignation of
BDO did not contain an adverse opinion or disclaimer of an opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles. During the Company's two most recent fiscal years, and the
subsequent interim period preceding the resignation of BDO, there were no
disagreements with BDO on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.

                  On June 10, 1997, the Company retained Horne CPA Group, PA as
the Company's independent certified public accountants and, by letter dated such
date, also authorized BDO to respond fully to the informational requests of
Horne.

                 As previously described, following the Company's discovery 
that certain of the Company's accounts were out of balance, the Company,
together  with BDO, undertook a comprehensive analysis of certain of the 
Company's accounts and its accounting reconciliation procedures for the fiscal 
year ended December 31, 1996, and prior fiscal years. "Management's Discussion 
and Analysis of Financial Condition and Results of Operations - Recent
Developments."

                  During this analysis, the Board of Directors instructed the
Company's management to make freely available to BDO all of the Company's books,
records and employees. No restrictions were placed on BDO's access to the
Company's books, records or employees. In this regard, the Company believes that
it worked diligently to provide BDO with all information requested by BDO in
connection with the ongoing comprehensive analysis of the Company's accounts and
accounting reconciliation procedures. During this analysis, the Company believes
that it made available to BDO all of its employees, and all of its books and
records with respect to the Company's fiscal years ended December 31, 1996,
1995, 1994 and 1993.

                  Prior to BDO's resignation, on May 29, 1997, the Board of
Directors of the Company, through its outside counsel, requested, in writing,
information from BDO regarding any accounting


                                       22

<PAGE>   23

issues that BDO believed should be resolved before the Company could receive
BDO's audit report on the Company's financial statements. By letter dated June
4, 1997, BDO responded in part that "[t]hese matters raise grave concerns about
the integrity of the accounting records... All of the above puts us in a
position making it impossible for us to get comfortable with the systems, the
books and records, or the people involved with the systems at this point."

                  By letter dated June 17, 1997, BDO advised the Company that it
had withdrawn its opinions on the 1990, 1991, 1992, 1993, 1994 and 1995 annual
financial statements of the Company. Also by letter dated June 17, 1997, BDO
stated that:

                  Item 304(a)(1)(v) of Regulation S-K requires
                  disclosure of events wherein the former accountant
                  has advised the registrant that the internal
                  controls necessary for the registrant to develop
                  reliable financial statements do not exist. In that
                  regard, at a meeting on March 17, 1997,
                  representatives of BDO Seidman, LLP verbally
                  communicated three material weaknesses in internal
                  controls to the audit committee of the Company's
                  Board of Directors relating to the following areas:


                           -        Journal entries were noted where there was
                                    insufficient documentation supporting the
                                    entries and no evidence of approval.

                           -        Factor receivable reconciliations were not
                                    completed on a timely basis.

                           -        Factor receivable reconciliations were not
                                    reviewed by an official who was not involved
                                    in the reconciliation process.

                  Based on the Company's review and the issuance by Horne of the
Company's audited financial statements for the Company's fiscal years ended
December 31, 1996, 1995 and 1994, the Company has concluded that these actions
were not taken to conceal any misappropriation of the Company's assets, and,
based on the lack of contrary evidence found by the Company's outside legal
counsel in its review, the Company has concluded that no other employees were
involved.


                                       23


<PAGE>   24


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS


DIRECTORS OF THE COMPANY

<TABLE>
<CAPTION>
                                                            Principal                                           Director
Name                                                Age     Occupation                                            Since
----                                                ---     ----------                                          ---------
<S>                                                 <C>     <C>                                                 <C>
John D. Nail (1)                                     49     President of the Company                              1993

Johnny C. Walker (2)                                 51     Chief Operating Officer and Chief Financial           1995
                                                            Officer of the Company

Don D. Murphy (1)                                    53     General Manager of WBIP Radio Station                 1987

John B. Apple (1)                                    62     Vice President of Dover Corporation                   1993

R. Gerald Turner (2)                                 51     President of Southern Methodist University            1993

James T. Boone (2)                                   47     Athletic Director, University of Mississippi          1997

A. Douglas Jumper, Sr. (3)                           65     President of S&J Steel Builders, Inc.                 1993

Stephen L. Simons (3)                                48     Chairman of the Board and Chief Executive             1987
                                                            Officer of the Company

Thomas D. Keenum, Sr. (3)                            58     Secretary and General Counsel to the                  1987
                                                            Company; Attorney
</TABLE>
                                                            
--------------
  (1)  Class I Director - Term expires 1997.
  (2)  Class II Director - Term expires 1998.
  (3)  Class III Director - Term expires 1999.

                  During the last fiscal year, the Board of Directors held four
meetings. No director attended less than 75% of the meetings held during 1996.
Additionally, the Board of Directors took one action by unanimous written
consent. Directors not otherwise employed by the Company received an annual fee
of $10,000, $750 plus expenses for each quarterly meeting of the Board of
Directors attended and $250 plus expenses for each quarterly committee meeting
attended. In addition, such directors are eligible to participate in the
Company's Non-Employee Director Stock Option Plan (the "Director Plan").

                  The Board of Directors has three committees: an Executive
Committee, a Compensation Committee and an Audit Committee. The Board of
Directors does not have a nominating committee. Members of the Executive
Committee during 1996 were Messrs. Simons, Keenum, Apple and Jumper. The
Executive Committee is authorized by the Board of Directors to


                                       24

<PAGE>   25

take all action which may be delegated by the Board of Directors under the
Mississippi Business Corporation Act. During 1996, the Executive Committee held
eight meetings, and each member attended each meeting.

                  Members of the Compensation Committee during 1996 were Messrs.
Keenum, Jumper, Apple and Chulick. The Compensation Committee was appointed by
the Board of Directors to administer the Company's stock plans and recommend to
the Board of Directors compensation of the Company's executive officers. During
1996, the Compensation Committee held five meetings, and each member attended
each meeting.

                  Members of the Audit Committee during 1996 were Messrs. Murphy
and Turner. The Audit Committee was appointed by the Board of Directors to
recommend the annual appointment of the Company's auditors, with whom the Audit
Committee reviews the scope of audit and non-audit assignments and related fees,
accounting principles used by the Company in financial reporting, internal
auditing procedures and the adequacy of the Company's internal control
principles. During 1996, the Audit Committee held four meetings, and each member
attended each meeting.

                  Stephen L. Simons has served as Chairman of the Board of the
Company and Chief Executive Officer since November 1988 and as a director since
inception. Mr. Simons served as President of the Company from August 1987 to
November 1988. Prior to joining the Company, from 1984 to 1987, Mr. Simons
served as Executive Vice President of Finger Furniture Company Incorporated, a
full-service furniture retailer based in Houston, Texas. Prior to 1984, Mr.
Simons held various positions with Finger Furniture.

                  John D. Nail has served as President of the Company since
November 1988 and served as Executive Vice President from August 1987 to
November 1988 and as a director since June 1993. Prior to joining the Company,
from September 1983 to August 1987, Mr. Nail was General Manager for Westwood
Industries of Tupelo, Mississippi, a custom upholstery furniture manufacturer.
From January 1982 to September 1983, Mr. Nail was President of Homan Wood
Products, Incorporated of Fulton, Mississippi.

                  Johnny C. Walker has served as the Company's Chief Operating
Officer since August 1995 and Chief Financial Officer since August 1993 and as a
director since December 1995. From November 1990 until August 1993, Mr. Walker
was a partner in Walker, Waddill and Associates, a certified public accounting
firm in Dallas, Texas. From November 1985 until November 1990, Mr. Walker served
as Executive Vice President of Tony Lama Company, a boot manufacturer in El
Paso, Texas.

                  Thomas D. Keenum, Sr. has served as General Counsel, Secretary
and a director of the Company since inception. He served as Treasurer of the
Company from its inception until March 1993. Mr. Keenum is a partner in Keenum &
Tutor, P.A., a law firm in Booneville, Mississippi where he has practiced law
since 1968. Mr. Keenum is a director of Belmont Homes, Inc., a producer of
manufactured homes in Belmont, Mississippi.

                  Don D. Murphy has served as a director of the Company since
inception. Mr. Murphy is general manager of WBIP, a radio station in Booneville,
Mississippi owned by Community Broadcast Services of Mississippi, Inc. From 1988
until 1995, Mr. Murphy was Vice President and co-owner of WBIP Broadcasting
Company in Booneville, Mississippi. Mr. Murphy is a director of Belmont Homes,
Inc., a producer of manufactured homes in Belmont, Mississippi.


                                       25

<PAGE>   26


                  A. Douglas Jumper, Sr. has served as a director since June
1993. Mr. Jumper has been the President and co-owner of S&J Steel Builders, Inc.
of Booneville, Mississippi since 1963. Mr. Jumper is a director of Belmont
Homes, Inc., a producer of manufactured homes in Belmont, Mississippi, and of
BancorpSouth, Inc., a bank holding company in Tupelo, Mississippi.

                  John B. Apple has served as a director since August 1993. Mr.
Apple serves as a Vice President of Dover Corporation in New York, New York. Mr.
Apple served as President and Chief Executive Officer of Dover Elevator
International in Memphis, Tennessee from January 1985 until January 1986. Mr.
Apple serves on the Board of Directors of Dover Elevator International and
National Elevator Industry, Inc.

                  R. Gerald Turner has served as a director since August 1993.
Mr. Turner has served as President of Southern Methodist University since May
1995. From April 1984 until May 1995, Mr. Turner served as Chancellor of the
University of Mississippi. Mr. Turner serves on the Board of Directors of
Capstar Broadcasting Partners, Inc., an operator of midsized-market radio
stations based in Austin, Texas; First Mississippi Corp., a chemical and
fertilizer manufacturer in Jackson, Mississippi; Mobile Telecommunications
Technologies, a wireless messaging service in Jackson, Mississippi; and J.C.
Penney Co., Inc., an apparel retailer in Dallas, Texas.

                  James T. Boone has served as a director since February 1997.
Mr. Boone has served as Athletic Director for the University of Mississippi
since 1995. From 1974 to 1994, Mr. Boone served in various capacities with
Sunburst Bank before becoming Chairman and CEO of Sunburst Bank.

                  Messrs. Keenum and Jumper are first cousins. There are no
other family relationships between any directors or executive officers of the
Company.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

                  Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's executive officers, directors and persons who own more than 10% of
a registered class of the Company's securities to file reports of ownership and
changes in ownership with the Commission. Officers, directors and greater than
ten-percent shareholders are required by the Commission to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on a review of
copies of such forms received by it, or written representations from certain of
the Company's directors and executive officers that no other reports were
required, the Company notes that Messrs. Simons, Nail and Walker were each
granted options to purchase 12,500 of the Company's common stock on November 14,
1996, but failed to report timely their acquisition of such options on Form 4,
and that Mr. Apple acquired 1,000 shares of the Company's common stock on
December 3, 1996, but failed to report timely his acquisition of such shares on
Form 4. Each of Messrs. Simons, Nail, Walker and Apple subsequently reported
their transactions on Form 5.


                                       26

<PAGE>   27

EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name                                            Age      Position
----                                            ---      --------
<S>                                             <C>      <C>
Stephen L. Simons                                48      Chairman of the Board and Chief Executive Officer

John D. Nail                                     49      President

Johnny C. Walker                                 51      Chief Operating Officer and Chief Financial Officer

Thomas D. Keenum, Sr.                            58      Secretary
</TABLE>

         See the foregoing section for the business experience of Messrs.
Simons, Nail, Walker and Keenum.

ITEM 11.          EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

                  The following table summarizes the compensation paid to or
accrued by or on behalf of the Company's Named Executive Officers for services
rendered in all capacities to the Company for the years ended December 31, 1994,
1995 and 1996.


<TABLE>
<CAPTION>
                                                                                 LONG TERM COMPENSATION
                                                                                 -----------------------
                                   ANNUAL COMPENSATION                           AWARDS           PAYOUTS
                                   -------------------                           ------           --------
     NAME AND                                          OTHER        RESTRICTED     SECURITIES
    PRINCIPAL                                       ANNUAL COM-       STOCK        UNDERLYING       LTIP           ALL OTHER
    POSITION         YEAR   SALARY($)   BONUS($)   PENSATION ($)    AWARDS($)      OPTIONS (#)    PAYOUTS($)     COMPENSATION($)
    --------         ----   ---------   --------   -------------    ----------     -----------    ----------     ---------------
<S>                  <C>    <C>        <C>         <C>              <C>            <C>            <C>             <C>
Stephen L. Simons    1996   $200,487        --           --                          12,500           --            --
 Chairman of the     1995    225,000   $66,667           --                          12,500           --            --
 Board and Chief     1994    150,000    50,000           --                          12,500           --            --
 Executive Officer                                                                         

John D. Nail         1996    174,074        --           --              --          12,500           --            --
 President           1995    190,000   $66,667           --              --          12,500           --            --
                     1994    140,000        --           --              --          14,000           --            --
                                                                                           
Johnny C. Walker     1996   $146,725        --           --              --          12,500           --            --
 Chief Operating     1995    155,000   $66,667           --              --          12,500           --            --
 Officer and Chief   1994     99,476        --           --              --          20,000           --            --
 Financial                                                                           
 Officer

</TABLE>



                                       27






<PAGE>   28
OPTION GRANTS IN LAST FISCAL YEAR

                  The following table sets forth certain information regarding
grants of stock options made to the Named Executive Officers during 1996.

<TABLE>
<CAPTION>
                                                                                                    POTENTIAL REALIZABLE VALUE
                                                                                                      AT ASSUMED ANNUAL RATES
                                                                                                     OF STOCK PRICE APPRECIA-
                                                 INDIVIDUAL GRANTS                                     TION FOR OPTION TERM
                     --------------------------------------------------------------------------    -----------------------------
                        NUMBER OF       PERCENTAGE OF
                        SECURITIES      TOTAL OPTIONS                  
                        UNDERLYING       GRANTED TO      EXERCISE OR   MARKET PRICE 
                         OPTIONS        EMPLOYEES IN     BASE PRICE     ON DATE OF   EXPIRATION
       NAME             GRANTED(1)       FISCAL YEAR       ($/SH)      GRANT($/SH)      DATE        5%($)          10%($)
       ----             ----------       -----------       ------      ----------       ----        -----          ------
<S>                     <C>              <C>             <C>            <C>          <C>            <C>            <C>    
Stephen L. Simons        12,500             6.5%            $3.00          $3.00     11/14/2001     $10,325        $22,875

John D. Nail             12,500             6.5%            $3.00          $3.00     11/14/2001      10,325         22,875

Johnny C. Walker         12,500             6.5%            $3.00          $3.00     11/14/2001      10,325         22,875

</TABLE>

---------------
(1)      Each option may be exercised as to one-fifth of the number of shares
         covered by the option during each of the five successive twelve-month
         periods beginning on the date of grant.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

                  The following table provides certain information, with respect
to the Named Executive Officers, concerning the exercise of options during 1996
and with respect to unexercised options at December 31, 1996.

<TABLE>
<CAPTION>
                                                                  Number of Securities           Value of Unexercised
                                                             Underlying Unexercised Options      In-the-Money Options at
                                                                 at Fiscal Year End (#)              Fiscal Year End ($)
                                                             --------------------------------    ----------------------------
                                Shares
                               Acquired         Value
Name                         on Exercise(#)   Realized ($)     Exercisable     Unexercisable    Exercisable    Unexercisable
----                         ------------    ------------     -----------     -------------    -----------    -------------
<S>                          <C>             <C>              <C>             <C>              <C>            <C>
Stephen L. Simons                  --             --            27,100           25,900             $0             $0
John D. Nail                                                    27,100           25,900              0              0
Johnny C. Walker                                                47,500           38,560              0              0
</TABLE>

Employment Agreements

         As of December 1, 1995, Messrs. Simons, Nail and Walker entered into
employment agreements with the Company. The agreements provide for base salaries
in the amount of $225,000 for Mr. Simons, $190,000 for Mr. Nail and $155,000 for
Mr. Walker, subject to adjustment by the Compensation Committee. The agreements
also entitle the employees to receive certain insurance and other benefits and
to eligibility for bonuses as determined by the Compensation Committee.

         Each employment agreement expires on December 31, 1998 and may be
terminated by the Company prior to that time for "cause," which is defined to
include the employee's failure to comply with a material term of the agreement,
the employee's engaging in any material misconduct, neglect of duties or failure
to act which materially and adversely affects the business or affairs of the
Company, or upon the employee's conviction of a felony or commission of an act
of dishonesty, fraud or embezzlement against the Company. In the event the
employee is terminated for cause, the Company shall have no further obligation
to make any payments to the employee except for accrued salary or bonus and
unreimbursed expenses as of the termination date. Each


                                       28
<PAGE>   29

agreement will also terminate if the employee is disabled and unable to perform
his assigned duties for a period of six months.

         In the event the employee is terminated without cause, the Company will
continue to pay the employee his salary and maintain his insurance benefits for
the lesser of 12 months or the remaining term of the agreement. Additionally,
the Company shall pay the employee all accrued bonuses and unreimbursed expenses
as of the termination date.

         If, on account of physical or mental disability, the employee fails or
is unable to perform his duties in any material respect for a period of 60 days,
the Company shall pay the employee his salary and maintain his insurance
benefits for a period of six months commencing on the date such disability
begins. In the event the employee is unable to perform his duties at the end of
the six-month period, the employment agreement shall automatically terminate.


         In the event the employee is terminated upon a "change-in-control" (as
defined in the employment agreements), the employee shall immediately be paid
his accrued salary, bonus and other benefits provided under the employment
agreement. In addition, Employee shall be paid as severance compensation three
times his annual salary in equal monthly installments through the remaining term
of the employment agreement and an amount equal to his average annual bonus for
the two years immediately preceding the termination. The officer may elect to
receive from the Company his severance payment (calculated as provided above) in
a lump sum. Notwithstanding the foregoing, the Company is not required to pay
the officer any amount which is not deductible for federal income tax purposes.


         Under the agreements, the employees may not, during the term of the
agreement and for a period of 36 months thereafter, directly or indirectly,
unless the employee is terminated without cause, (i) operate, develop or own any
interest, other than the ownership of less than 5% of the equity securities of a
publicly traded company, in any business which has significant (viewed in
relation to the business of the Company) activities relating to the ownership,
management or operation of, or consultation regarding, the manufacture of
furniture or related businesses (a "Furniture Manufacturer"); (ii) compete with
the Company or its subsidiaries and affiliates in the operation or development
of any Furniture Manufacturer within the continental United States; (iii) be
employed by or consult with any Furniture Manufacturer; (iv) interfere with any
past, present or prospective relationship between the Company and any customer,
client, employee or supplier or (v) solicit any employee of the Company to leave
their employment with the Company or hire any such employee to work for a
Furniture Manufacturer.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Mr. Keenum, a member of the Compensation Committee, serves as Secretary
of the Company but is not compensated in such capacity. There are no other
relationships among the Company's executive officers and any entity affiliated
with any of the members of the Compensation Committee that require disclosure
under applicable rules promulgated by the Securities and Exchange Commission
(the "Commission").

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         This report is submitted by the Compensation Committee pursuant to
rules established by the Commission with respect to compensation policies
applicable to the Company's executive officers and with respect to the basis for
Mr. Simons' compensation as Chief Executive Officer for 1996. The Compensation
Committee is responsible for establishing and administering the Company's
executive compensation philosophy, policies and programs. Each member of the


                                       29

<PAGE>   30

current Compensation Committee is an outside director, except for Mr. Keenum,
who is Secretary of the Company.

COMPENSATION PHILOSOPHY.

         The Compensation Committee believes that, while familiar indicators of
success such as stock price and earnings per share are important, there are
numerous criteria to evaluate in assessing the skill with which the executive
officers are performing their duties. The Company's executive compensation
policies are designed to motivate and retain senior management by providing
levels of compensation which relate to past and anticipated individual and
Company performance and to base a portion of each executive officer's
compensation package on the financial performance of the Company in the form of
bonuses tied to financial performance and the granting of stock options. The
compensation policies and programs utilized by the Compensation Committee
generally consist of (i) tying total compensation to the Company's performance,
(ii) aligning base salary and bonus amounts for the Company's executive officers
with annual compensation paid to executive officers of companies comparable in
size and performance to the Company, and (iii) providing long-term compensation
in the form of stock options to encourage the executive officers to increase
shareholder value. The compensation program of the Company currently consists of
(i) base salary and annual incentive compensation in the form of cash bonuses
and (ii) long-term compensation in the form of stock options.

         During 1996, the Compensation Committee commissioned a comparative
analysis of the compensation paid to the Company's executive officers in 1995
with the compensation paid to executive officers of a peer group of 10 furniture
manufacturers and retailers of either a similar size or with similar financial
performance as the Company. The analysis of the peer group compared salary,
bonus and other non-stock compensation on a dollar-for-dollar basis and as a
percentage of revenues, operating income, earnings before interest and taxes and
earnings before interest, taxes, depreciation and amortization. The Company
utilized the comparative data in establishing the bonuses paid and stock options
granted to the Company's executive officers in 1996 and intends to use it in the
future for all forms of compensation.

         The Compensation Committee intends to structure future compensation so
that executive compensation paid by the Company is fully deductible in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended.
Section 162(m), which was enacted in 1993, generally disallows a tax deduction
to public companies for compensation over $1 million paid to certain executive
officers unless certain conditions are met.

         Salary. Pursuant to each executive's employment agreement, the
Compensation Committee determines increases in compensation on an annual basis.
The Compensation Committee's policy in determining the appropriate annual salary
for executives is to consider the executive's contribution to the success of the
Company and the amount of responsibility vested in the executive's position. In
establishing the base salaries of the Company's executive officers for 1996, the
Compensation Committee made a subjective determination that the salaries of the
executive officers should remain unchanged from their 1995 levels.

         Performance Bonus. The Compensation Committee believes that a portion
of executive compensation should be "at risk." The Compensation Committee
believes that the performance bonus motivates the executives to increase the
Company's revenues and net income, which should result in increased shareholder
value. The performance bonus is subjective, but the Compensation Committee
considers the performance of the Company during the year, especially with
respect to the benchmarks set forth above. In determining the performance
bonuses for 1996, the Compensation Committee emphasized the 11.5% decrease in
sales and an 871.7% decrease in net income because of the Compensation
Committee's belief that the executive officers performed admirably in the face
of difficult market conditions and that the decrease in net income was


                                       30

<PAGE>   31

primarily attributable to factors beyond the control of the Company's executive
officers. The Compensation Committee also considered the additional duties of
the Company's executive officers in managing the Company as a result of the
resignation of a key employee, the death of the Company's best salesman, the
reorganization of a key division, the implementation of new information systems
and difficult conditions in the furniture market as a whole. No specific
relative weighting of these factors was used.

         The amount earned under the performance bonus by each Named Executive
Officer in 1993, 1994, 1995 and 1996 is as follows:



<TABLE>
<CAPTION>
                                    1993     1994     1995     1996
                                    ----     ----     ----     ----
<S>                                <C>      <C>      <C>       <C>
Stephen L. Simons                  $11,000  $50,000  $66,667    --
John D. Nail                        15,000      --    66,667    --
Johnny C. Walker                        --      --    66,667    --
</TABLE>

         Stock Options. The Company's long-term compensation strategy includes
the grant of stock options, which the Compensation Committee believes rewards
the executives for their efforts to improve long-term stock performance.
Additionally, the grants are intended to align the financial interests of
management with those of the Company's shareholders. In awarding the stock
options to the executives in 1996, the Compensation Committee considered the
same subjective factors as set forth above with respect to salary. The size of
the option grants, which was subjectively determined, was slightly smaller than
the size of previous grants. In determining the size of the grants, the
Compensation Committee attempted to provide the executive officers with an
opportunity for significant long-term compensation, the scope of which is
entirely dependent upon the improvement in the Company's long-term stock
performance. In this manner, the Compensation Committee also attempted to induce
the executive officers to continue their service with the Company in a difficult
furniture market.

         Chief Executive Officer's Compensation. Pursuant to Mr. Simons'
employment agreement, the Compensation Committee determines increases in Mr.
Simons' compensation on an annual basis. In establishing the compensation for
Mr. Simons for 1995, the same approach applicable to all executive officers was
utilized. In establishing Mr. Simons' base salary for 1996, the Compensation
Committee made a subjective determination based upon the Company's revenues and
net income from 1994 to 1995 and the corresponding increase in Mr. Simons'
management duties. Mr. Simons' salary for 1996 represented an 11% decrease from
his salary for 1995.

         In establishing Mr. Simons' bonus and grant of stock options for 1996,
the Compensation Committee made a subjective determination based on the factors
generally applicable to all executive officers. Although no specific relative
weighting of these factors was used, the Compensation Committee emphasized the
additional sales duties that Mr. Simons assumed as a result of the death of the
Company's leading salesman and the resignation of the Company's Senior Vice
President of Marketing and Sales in the second and third quarters, respectively,
of 1996.


                                    Compensation Committee:

                                             John B. Apple
                                             A. Douglas Jumper, Sr.
                                             Thomas D. Keenum, Sr.


                                       31


<PAGE>   32
COMPENSATION OF DIRECTORS

         Directors not otherwise employed by the Company receive an annual fee
of $10,000, $750 plus expenses for each quarterly meeting of the Board of
Directors attended and $250 plus expenses for each quarterly committee meeting
attended. In addition, non-employee Directors are entitled to receive options
pursuant to the Director Plan. The Director Plan provides for the granting of
non-qualified stock options to each Director of the Company who is not also
either an employee or officer of the Company (a "Non-Employee Director"). The
material features of the Director Plan are described below.

         The Director Plan authorizes the issuance of up to 50,000 shares of
Common Stock pursuant to options having an exercise price equal to the fair
market value of the Common Stock on the date the options are granted. The
Director Plan contains provisions providing for adjustment of the number of
shares available for option and subject to unexercised options in the event of
stock splits, dividends payable in Common Stock, business combinations or
certain other events.

         The Director Plan provides for the grant on January 1 of each year (the
"Grant Date") of options to purchase 500 shares to each Non-Employee Director
serving the Company on the Grant Date. The price at which each share of Common
Stock covered by an option may be purchased upon exercise of such option is the
fair market value of the share on the Grant Date of such option. On October 1,
1997, the fair market value of a share of Common Stock subject to the options
was $2.00.

         On January 1,1996, the Company granted options to purchase an aggregate
of 2,500 shares of Common Stock under the Director Plan at an exercise price per
share of $6.25, the fair market value, as described above, of the Common Stock
on January 1, 1996, the last trading date prior to the Grant Date. Messrs.
Apple, Franks, Jumper, Murphy and Turner, the Non-Employee Directors on such
date, were each granted options to purchase 500 shares.


COMPARATIVE PERFORMANCE GRAPH

         The Commission requires the Company to include a line graph which
compares the yearly percentage change in cumulative total shareholder return on
the Company's Common Stock with (a) the performance of a broad equity market
indicator, and (b) the performance of a published industry index or peer group.
The following graph compares the yearly percentage change in the return on the
Company's Common Stock since the Company's initial public offering with the
cumulative total return on the CRSP Index for Nasdaq Stock Market Companies and
the CRSP Index for NYSE/AMEX/Nasdaq furniture and fixture companies. The graph
assumes the investment on August 27, 1993 of $100 in the Company's Common Stock
and that all dividends were reinvested at the time they were paid.

<TABLE>
<CAPTION>
                                    8/27/93           12/31/93          12/21/94          12/31/95          12/31/96
                                    -------           --------          --------          --------          --------
<S>                                 <C>               <C>               <C>               <C>               <C>
OAKS                                $100.00           $107.81           $ 71.87           $ 39.06           $ 19.53
Nasdaq market                       $100.00           $106.36           $103.97           $147.03           $180.85
Peer Group                          $100.00           $112.83           $ 94.60           $119.10           $154.48
</TABLE>
                                       32



<PAGE>   33


ITEM    12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the number of shares held beneficially,
directly or indirectly, as of October 1, 1997, by (i) all holders of more than
5% of the Company's Common Stock, (ii) all Directors and nominees for Director,
(iii) the Company's Chief Executive Officer and the two other most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 for the year ended December 31, 1996 (these three
executive officers being hereinafter referred to as the "Named Executive
Officers") and (iv) all Directors and executive officers as a group, together
with the percentage of the outstanding shares which such ownership represents.

<TABLE>
<CAPTION>
NAME AND ADDRESS                                            AMOUNT AND NATURE
OF BENEFICIAL OWNER                                     OF BENEFICIAL OWNERSHIP (1)               PERCENT OF CLASS (2)
-------------------                                     ---------------------------               --------------------
<S>                                                     <C>                                       <C>
Stephen L. Simons (3) ............................                   616,280                           10.9%
John D. Nail (3) .................................                   370,400                            6.6%
Johnny C. Walker (3) .............................                    73,500                            1.3%
Thomas D. Keenum, Sr .............................                   368,020                            6.6%
A. Douglas Jumper, Sr. (3) .......................                   460,020                            8.2%
Don D. Murphy (3) ................................                   373,020                            6.7%
John B. Apple ....................................                     8,995                              *
R. Gerald Turner (3) .............................                     8,495                              *
James T. Boone (3) ...............................                    16,000                              *
Franklin Resources, Inc. (5) .....................                   394,600                            7.0%
Pioneering Management Corp. (6) ..................                   460,000                            8.2%
All directors and executive officers as a group (9
    persons) .....................................                 3,149,330                           56.0%
</TABLE>

-------------------------------------
*        Indicates less than 1% ownership
(1)      Beneficial ownership is deemed to include shares of the Company's
         Common Stock which an individual has a right to acquire within 60 days
         of the date of this Proxy Statement upon the exercise of options. The
         table includes options granted under the Company's Director Plan and
         1993 Incentive Stock Plan. These shares are deemed to be outstanding
         for the purposes of computing the percentage ownership of that
         individual but are not deemed outstanding for the purposes of computing
         the percentage of any other person. Unless otherwise noted in the
         following footnotes, the persons as to whom information is given has
         sole voting and investment power over the shares of Common Stock shown
         as beneficially owned.
(2)      Computation based upon 5,605,641 shares outstanding on October 1, 1997.
(3)      The address for Messrs. Simons, Nail, Keenum, Jumper, and Murphy is
         3350 McCullough Boulevard, Belden, Mississippi 38826.
(4)      Includes 27,500 shares held by the Thomas D. Keenum, Jr. Trust, of
         which Mr. Keenum, Sr. serves as trustee.
(5)      According to a Form 13G filed with the Commission on February 12, 1997,
         Franklin Resources, Inc. reported ownership of the shares listed in the
         foregoing table.
(6)      According to a Form 13G filed with the Commission on January 28, 1996,
         Pioneering Management Corporation reported ownership of the shares
         listed in the foregoing table.


                                       33


<PAGE>   34


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         S&J Steel Builders, Inc. ("S&J"), which is 50% owned by Mr. Jumper, a
shareholder and director of the Company, has constructed substantially all of
the Company's facilities in Mississippi. Each contract between S&J and the
Company is on a cost plus 7.5% basis. The amounts paid to S&J for the
construction of such facilities was $4,900,000 for the year ended December 31,
1996.

         On May 6, 1996, the Company entered into two promissory notes in the
amounts of $5,650,000 and $100,000, respectively, with the Bank of Mississippi
(the "BOM Construction Loans") which replaced previous promissory notes to the
Bank of Mississippi in the combined amount of $5,250,000. The proceeds of the
BOM Construction Loans have been used for construction of a centralized fabric
storage, cutting and distribution center. The BOM Construction Loans are secured
by the land and the building constructed thereon, all office furniture located
at the facility, and, at the option of the Bank of Mississippi, the Company's
deposits on hand at the bank. The BOM Construction Loans mature on May 6, 2001
and May 1, 1997, respectively and bear interest at the prime rate as established
by the Bank of Mississippi (8.6% at September 30, 1997). The Loan that matured
on May 1, 1997 was satisfied. At December 31, 1996, outstanding borrowings under
the BOM Construction Loans were $5,474,000. Mr. Jumper is a member of the board
of directors of BancorpSouth, Inc., the parent of the Bank of Mississippi.

         Mr. Keenum, a shareholder, director and officer of the Company, is a
partner with the law firm of Keenum and Tutor, P.A., which has performed certain
legal services for the Company. Fees paid to the firm by the Company were less
than 5% of the firm's gross revenues for its last full fiscal year.

         On September 29, 1995, the Company purchased its manufacturing facility
in New Albany, Mississippi for $3,380,000 from Four Star Realty, Inc. ("Four
Star"), a company whose shareholders include Messrs. Keenum, Sr., Jumper, Sr.
and Murphy, each of whom is a director of the Company. Concurrently therewith,
the Company sold one of its facilities in Pontotoc, Mississippi to Four Star for
$1,425,000. The purchase price for each facility was based upon independent
appraisals.

         On February 26, 1996, the Company entered into a promissory note in the
amount of $82,500 with Johnny C. Walker, the Chief Operating Officer, Chief
Financial Officer and a Director of the Company. Mr. Walker used the proceeds of
this loan to purchase 22,000 shares of the Company's common stock from the
Company at $3.75 per share. The loan matured on February 26, 1997, bore interest
at 8 1/4%, and was unsecured. On February 26, 1997, the Company and Mr. Walker
entered into a promissory note bearing the same principal and interest rate.
This loan will mature on February 26, 1998.


                                       34


<PAGE>   35


                                    Part IV

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

(a)      Index to Consolidated Financial Statements, Financial Statement
         Schedules and Exhibits

         (1) CONSOLIDATED FINANCIAL STATEMENTS: See Item 8 herein.

             The Consolidated Financial Statements of the Company required to be
             included in Part II, Item 8, are indexed on Page A-1 and are
             submitted as a separate section of this report.

         (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:

             Report of Independent Certified Public
             Accountants.....................................A-4
          
             Schedule II - Valuation and Qualifying
             Accounts........................................S-2


             All other schedules are omitted, because they are not applicable
             or not required, or because the required information is included
             in the consolidated financial statements or notes thereto.


                                       35


<PAGE>   36


                           (3)        EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT           
NUMBER   DESCRIPTION OF EXHIBITS
------   -----------------------
<S>      <C>
 2.1     Agreement and Plan of Merger, dated July 27, 1994, among the
         Registrant, R.O. East, Inc., Gaines Manufacturing Company, G.M.
         Acquisition Corp. ("GMAC") and the shareholders of GMAC (1).
 3.1     Restated Articles of Incorporation of Registrant (2).
 3.2     Bylaws of Registrant (2).
 4.1     Article 5 of the Restated Articles of Incorporation of Registrant
         (included in Exhibit 3.1) (2).
 4.2     Specimen of Common Stock certificate (2).
10.1     Employment Agreement, dated as of December 1, 1995, between Registrant
         and Stephen L. Simons (3).
10.2     Employment Agreement, dated as of December 1, 1995, between Registrant
         and John D. Nail (3).
10.3     Employment Agreement, dated as of December 1, 1995, between Registrant
         and John C. Walker (3).
10.4     Registrant's 1993 Incentive Stock Plan (2).
10.5     Registrant's 1993 Non-Qualified Stock Option Plan for Non-Employee
         Directors (2).
10.6     Master Lease Agreement dated as of February 28, 1992 between First
         Continental Leasing and Registrant (2).
10.7     $75,000 Promissory Note of Walter R. Billingsley, Jr. to Registrant,
         dated December 1, 1992 (2).
10.8     License Agreement between Symix Computer Systems, Inc. and Registrant,
         dated March 25, 1994 (4).
10.9     Lease Agreement, dated January 1, 1995, between San Francisco Mart and
         Registrant (5).
10.10    $2,500,000 Construction/Term Loan, dated June 6, 1995, between
         Registrant and Bank of Mississippi (6).
10.11    $4,800,000 Construction/Term Note, dated August 11, 1995, between
         Registrant and Bank of Mississippi (7).
10.12    $45,000,000 Credit Facility, dated July 25, 1995, between Registrant
         and CIT Group/BCC, Inc. (7). 
10.13    $6,000,000 Term Loan, dated July 25, 1995, between Registrant and CIT
         Group/BCC, Inc. (7).
10.14    $5,000,000 Capital Expenditure Line of Credit, dated September 26,
         1995, between Registrant and Deposit Guaranty National Bank (7).
10.15    $2,000,000 Real Estate Loan, dated September 29, 1995, between
         Registrant and Deposit Guaranty National Bank (7).
10.16    Lease Agreement, dated March 1, 1995, between Market Square Limited
         Partnership and Gaines Manufacturing Company (3).
10.17    Lease Agreement, dated October 18, 1995, between Market Square Limited
         Partnership and Registrant (3).
10.18    Lease Agreement, dated January 1, 1996, between San Francisco Furniture
         Mart and Registrant (3).
10.19    $450,000 Master Promissory Note, dated December 12, 1995, between Bank
         of Mississippi and Registrant (3).
10.20    $4,800,000 Master Promissory Note, dated December 12, 1995, between
         Bank of Mississippi and Registrant (3).

</TABLE>

                                       36

<PAGE>   37

<TABLE>
<CAPTION>
EXHIBIT           
NUMBER   DESCRIPTION OF EXHIBITS
------   -----------------------
<S>      <C>
10.21    Revolving Credit and Term Loan Agreement by and among the Registrant,
         BNY Financial Corporation, and other parties, dated July 26, 1996 (8).
10.22    Term Note in the principal amount of $9,000,000 dated as of July 26,
         1996 by the Registrant in favor of BNY Financial Corporation, as Agent
         (8).
10.23    Revolving Note in the maximum principal amount of $42,000,000 dated as
         of July 26, 1996 by the Registrant in favor of BNY Financial
         Corporation, as Agent (8).
10.24    Factoring Agreement dated July 26, 1996 between the Registrant and BNY
         Financial Corporation (8).
10.25    Security Agreement dated as of July 26, 1996 by the Registrant in favor
         of BNY Financial Corporation, as Agent (8).
10.26    $5,650,000 construction/term loan agreement between the Registrant and
         the Bank of Mississippi (9).
10.27    $100,000 construction/term loan agreement between the Registrant and
         the Bank of Mississippi (9).
16.1     Letter dated June 17, 1997 from BDO Seidman, LLP to the Securities and
         Exchange Commission (10).
21.1     Subsidiaries of Registrant (10).
27.1     Financial Data Schedule (for SEC use only) (11).
</TABLE>

-----------------
(1)      Incorporated by reference to exhibit filed with Registrant's Current
         Report on Form 8-K dated August 2, 1994, File No. 0-22188.
(2)      Incorporated by reference to exhibits filed with Registrant's
         Registration Statement on Form S-1, Registration No. 33-65066.
(3)      Incorporated by reference to exhibits filed with Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1995, File No.
         0-22188.
(4)      Incorporated by reference to exhibits filed with Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1993, File No.
         0-22188.
(5)      Incorporated by reference to exhibits filed with Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1994, File No.
         0-22188.
(6)      Incorporated by reference to exhibit filed with Registrant's Quarterly
         Report on Form 10-Q for the quarterly period ended July 1, 1995, File
         No. 0-22188.
(7)      Incorporated by reference to exhibit filed with Registrant's Quarterly
         Report on Form 10-Q for the quarterly period ended September 30, 1995,
         File No. 0-22188.
(8)      Incorporated by reference to exhibits filed with the Registrant's
         Quarterly Report on Form 10-Q for the quarterly period ended September
         29, 1996.
(9)      Incorporated by reference to exhibits filed with the Registrant's
         Quarterly Report on Form 10-Q for the quarterly period ended June 30,
         1996.
(10)     Incorporated by reference to exhibit filed with Registrant's Current
         Report on Form 8-K dated August 2, 1994, File No. 0-22188.

(11)     Filed herewith.



                                       37

<PAGE>   38

                 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

         The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER   EXHIBIT
-------  -------
<S>      <C>
10.1     Employment Agreement, dated as of December 1, 1995, between Registrant
         and Stephen L. Simons (1).
10.2     Employment Agreement, dated as of December 1, 1995, between Registrant
         and John D. Nail (1).
10.3     Employment Agreement, dated as of December 1, 1995, between Registrant
         and John C. Walker (1).
10.4     Registrant's 1993 Incentive Stock Plan (2).
10.5     Registrant's 1993 Non-Qualified Stock Option Plan for Non-Employee
         Directors (2).
</TABLE>


-------------------
(1)      Incorporated by reference to exhibits filed with the Registrants Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995, File
         No. 0-22188.
(2)      Incorporated by reference to exhibits filed with Registrant's
         Registration Statement on Form S-1, Registration No. 33-65066.

(b)      Reports on Form 8-K

         No Current Reports on Form 8-K were filed by the Company during the
         reporting period.



                                       38


<PAGE>   39



                                   SIGNATURES

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


                                             RIVER OAKS FURNITURE, INC.


                                             By:  /s/ Stephen L. Simons
                                                 ------------------------------
                                                   Stephen L. Simons
                                                   Chairman of the Board and
                                                   Chief Executive Officer

Date:  October 15, 1997

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

<TABLE>
<CAPTION>
NAME                                         TITLE(S)                                              DATE
----                                         -------                                               ----
<S>                                 <C>                                                    <C>
/s/ Stephen L. Simons                Chairman of the Board and Chief                       October 15, 1997
-----------------------------       Executive Officer; Director (principal
Stephen L. Simons                             executive officer)                           
                                              
                                              
/s/ John D. Nail                           President; Director                             October 15, 1997
-----------------------------
John D. Nail 

/s/ John C. Walker                      Chief Operating Officer and Chief                  October 15, 1997
-----------------------------         Financial Officer; Director (principal
John C. Walker                         financial and accounting officer)                   
                                       
                                       
/s/ Thomas D. Keenum, Sr.            Secretary, General Counsel; Director                  October 15, 1997
-----------------------------
Thomas D. Keenum, Sr.

/s/ Don D. Murphy                              Director                                    October 15, 1997
-----------------------------
Don D. Murphy


/s/ A. Douglas Jumper, Sr.                     Director                                    October 15, 1997
-----------------------------
A. Douglas Jumper, Sr.


/s/ John B. Apple                              Director                                    October 15, 1997
-----------------------------
John B. Apple 

/s/ R. Gerald Turner                           Director                                    October 15, 1997
-----------------------------
R. Gerald Turner 


/s/ James T. Boone                             Director                                    October 15, 1997
-----------------------------
James T. Boone

</TABLE>

                                       39


<PAGE>   40


                  RIVER OAKS FURNITURE, INC. AND SUBSIDIARIES


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                                        Page
                                                                                                                        ----
         <S>                                                                                                            <C>
         Report of Independent Certified Public Accountants..............................................................A-4
         Consolidated Balance Sheets.....................................................................................A-5
         Consolidated Statements of Income...............................................................................A-7
         Consolidated Statements of Shareholders' Equity.................................................................A-8
         Consolidated Statements of Cash Flows...........................................................................A-9
         Notes to Consolidated Financial Statements......................................................................A-10

</TABLE>


                                      A-1

<PAGE>   41
                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES

                               Belden, Mississippi

                          Audited Financial Statements

                  Years Ended December 31, 1996, 1995 and 1994



                                     A-2
<PAGE>   42




                                    CONTENTS





<TABLE>
<CAPTION>
                                                                    Pages
                                                                    -----
<S>                                                              <C>
Independent Auditor's Report                                          1



Consolidated Balance Sheets                                           2



Consolidated Statements of Operations                                 3



Consolidated Statements of Shareholders' Equity                       4



Consolidated Statements of Cash Flows                                 5



Notes to Consolidated Financial Statements                       6 - 24



Independent Auditor's Report on Supplemental
Information                                                          25



Schedule II - Valuation and Qualifying Accounts                      26
</TABLE>



                                     A-3
<PAGE>   43
                       [HORNE C.P.A. GROUP LETTERHEAD]

                          INDEPENDENT AUDITOR'S REPORT





Board of Directors
River Oaks Furniture, Inc.
  and Subsidiaries
Belden, Mississippi


We have audited the accompanying consolidated balance sheets of River Oaks
Furniture, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of River Oaks
Furniture, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.


                                /s/ Horne CPA Group

Jackson, Mississippi
September 27, 1997, except for litigation disclosure 
 in note 13 as to which the date is October 6, 1997


                                     A-4
<PAGE>   44



                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1996 and 1995
                      (In Thousands, Except Share Amounts)



<TABLE>
<CAPTION>
                                                    Assets


                                                                            (RESTATED)
                                                                  1996         1995
                                                                -------     ----------
<S>                                                             <C>          <C>    
Current Assets
  Cash and cash equivalents                                     $   218      $   499
  Accounts receivable, net (Notes 2, 5 and 10)                    5,961        6,568
  Income tax refund claim receivable (Note 7)                     3,415        1,114
  Inventories (Notes 3 and 5)                                    19,565       20,682
  Prepaid expenses and other                                        811          483
  Deferred income taxes (Note 7)                                    719        1,823
                                                                -------      -------

     Total Current Assets                                        30,689       31,169
                                                                -------      -------

Property and equipment, less accumulated depreciation
  (Notes 4, 5, 12 and 13)                                        29,895       28,413
                                                                -------      -------

Other assets, including unamortized costs in excess of
  net assets acquired of $6,380 and $6,550 (Note 6)               6,403        7,085
Deferred income taxes (Note 7)                                      306         --
Idle property (Note 4)                                            1,105         --
                                                                -------      -------





     Total Long-Term Assets                                       7,814        7,085
                                                                -------      -------

     Total Assets                                               $68,398      $66,667
                                                                =======      =======
</TABLE>


See accompanying notes.



                                     A-5



<PAGE>   45



                      Liabilities and Shareholders' Equity


<TABLE>
<CAPTION>
                                                                                   (RESTATED)
                                                                       1996          1995
                                                                     -------       -------
<S>                                                                  <C>           <C>    
Current Liabilities
  Current maturities of long-term debt (Note 5)                      $ 1,993       $ 1,845
  Accounts payable                                                    12,511         9,660
  Accrued expenses                                                     1,066         1,431
                                                                     -------       -------




     Total Current Liabilities                                        15,570        12,936

Deferred income taxes (Note 7)                                          --             335

Long-term debt, less current maturities (Note 5)                      24,574        24,050

Litigation award (Note 13)                                             2,439          --
                                                                     -------       -------

     Total Liabilities                                                42,583        37,321
                                                                     -------       -------

Commitments and contingencies (Notes 4 and 13)

Shareholders' Equity
  Preferred stock, $.10 par value, 5,000,000 shares
    authorized; no shares issued                                        --            --
  Common stock, $.10 par value, 20,000,000 shares
    authorized; 5,608,141 shares issued  (Note 9)                        561           531
  Additional paid-in capital                                          24,345        24,281
  Retained earnings                                                    1,203         4,729
  Notes receivable from shareholders                                    (262)         (163)
  Treasury stock, at cost, 2,500 shares                                  (32)          (32)
                                                                     -------       -------

     Total Shareholders' Equity                                       25,815        29,346
                                                                     -------       -------

     Total Liabilities and Shareholders' Equity                      $68,398       $66,667
                                                                     =======       =======
</TABLE>




                                     A-6


<PAGE>   46


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                      Consolidated Statements of Operations
                  Years Ended December 31, 1996, 1995 and 1994
                      (In Thousands, Except Share Amounts)




<TABLE>
<CAPTION>
                                                                         (RESTATED)
                                                      1996          1995            1994
                                                   ---------      ---------      ---------
<S>                                                <C>            <C>            <C>      
Net Sales (Note 10)                                $ 124,686      $ 140,833      $ 106,961
Cost of Sales                                        110,835        123,183         89,792
                                                   ---------      ---------      ---------
     Gross Profit                                     13,851         17,650         17,169
                                                   ---------      ---------      ---------
Operating Expenses
  Selling                                              7,275          7,609          5,290
  General and administrative                           7,370          7,398          4,337
                                                   ---------      ---------      ---------
     Total Operating Expenses                         14,645         15,007          9,627
                                                   ---------      ---------      ---------
     Income (Loss) from Operations                      (794)         2,643          7,542
                                                   ---------      ---------      ---------
Other Income (Expense)
  Litigation award (Note 13)                          (1,357)          --             --
  Interest expense                                    (3,888)        (3,180)        (1,777)
  Other income                                            42             14             85
                                                   ---------      ---------      ---------
       Total Other Expense                            (5,203)        (3,166)        (1,692)
                                                   ---------      ---------      ---------
       Income (Loss) Before Income Taxes              (5,997)          (523)         5,850
Income Taxes (Benefit) (Note 7)                       (2,750)          (194)         1,940
                                                   ---------      ---------      ---------
       Income (Loss) before Extraordinary Item        (3,247)          (329)         3,910
Extraordinary Item, Net (Note 13)                       (279)          --             --
                                                   ---------      ---------      ---------
       Net Income (Loss)                           $  (3,526)     $    (329)     $   3,910
                                                   =========      =========      =========
Income (Loss) Per Common Share
  Income (loss) per share before
     extraordinary item                            $    (.63)     $    (.06)     $     .78
  Extraordinary item, net                               (.05)          --             --
                                                   ---------      ---------      ---------
     Income (Loss) Per Common Share                $    (.68)     $    (.06)     $     .78
                                                   =========      =========      =========
Weighted Average Common Shares and
  Share Equivalents Outstanding                        5,562          5,306          5,029
                                                   =========      =========      =========
</TABLE>




See accompanying notes.


                                     A-7


<PAGE>   47


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity
                  Years Ended December 31, 1996, 1995 and 1994
                                 (In Thousands)



<TABLE>
<CAPTION>
                                                                                    NOTES
                                       COMMON STOCK       ADDITIONAL              RECEIVABLE
                                      ---------------     PAID-IN      RETAINED      FROM      TREASURY
                                      SHARES   AMOUNT     CAPITAL      EARNINGS   SHAREHOLDERS  STOCK      TOTAL
                                      ------   ------    -----------   --------   ------------ --------   --------
<S>                                   <C>      <C>       <C>           <C>        <C>          <C>        <C>     
Balance, December 31, 1993,
  As Previously Reported              4,825     $483     $ 19,784      $ 1,352      $(153)     $--       $ 21,466

  Prior period
adjustment for
    write-off of unrecorded
    receivables, net (Note 8)          --        --        (2,146)        (204)      --         --         (2,350)
                                      -----     ----     --------      -------      -----      ----      --------

Balance, December 31, 1993,
  As Restated                         4,825      483       17,638        1,148       (153)      --         19,116

  Issuance of common stock              483       48        6,643         --         --         --          6,691
  Net income                           --        --          --          3,910       --         --          3,910
  Additions to shareholder notes       --        --          --           --          (10)      --            (10)
  Purchase of treasury stock           --        --          --           --         --         (32)          (32)
                                      -----     ----     --------      -------      -----      ----      --------

Balance, December 31, 1994            5,308      531       24,281        5,058       (163)      (32)       29,675

  Net loss                             --        --          --           (329)      --         --           (329)
                                      -----     ----     --------      -------      -----      ----      --------
Balance, December 31, 1995            5,308      531       24,281        4,729       (163)      (32)       29,346

  Issuance of common stock              300       30        1,101         --         --         --          1,131

  Net loss                             --        --          --         (3,526)      --         --         (3,526)
  Adjustment for litigation award
    (Note 13)                          --        --        (1,082)        --         --         --         (1,082)
  Additions to shareholder notes       --        --            45         --          (99)      --            (54)
                                      -----     ----     --------      -------      -----      ----      --------

Balance, December 31, 1996            5,608     $561     $ 24,345      $ 1,203      $(262)     $(32)     $ 25,815
                                      =====     ====     ========      =======      =====      ====      ========
</TABLE>





See accompanying notes.



                                     A-8


<PAGE>   48


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 1996, 1995 and 1994
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                           (RESTATED)
                                                          1996         1995          1994
                                                        -------      --------      --------
<S>                                                     <C>          <C>           <C>     
Cash Flows from Operating Activities
  Net income (loss)                                     $(3,526)     $   (329)     $  3,910
  Depreciation                                            1,569         1,186           814
  Amortization                                              671           500           105
  Deferred income taxes                                     463          (865)         (462)
  Litigation award                                        1,357          --            --
  Other                                                     200          --              49
  Changes in operating assets and liabilities
    Accounts receivable                                     607         5,183        (3,185)
    Inventories                                           1,117        (3,878)       (7,271)
    Prepaid expenses and other                             (328)          404        (1,075)
    Accounts payable and accrued expenses                 2,486          (693)        2,834
    Income taxes payable or refundable                   (2,301)       (1,149)         (259)
                                                        -------      --------      --------
          Net Cash Provided by (Used by)
            Operating Activities                          2,315           359        (4,540)
                                                        -------      --------      --------
Cash Flows from Investing Activities
  Purchase of property and equipment                     (4,164)      (12,815)       (5,915)
  Proceeds on sale of property and equipment                 32         1,456          --
  Sales of trading securities                              --            --           3,879
  Purchase of business, net of cash acquired               --            --          (2,914)
                                                        -------      --------      --------
          Net Cash Used by Investing Activities          (4,132)      (11,359)       (4,950)
                                                        -------      --------      --------
Cash Flows from Financing Activities
  Proceeds from issuance of long-term debt                9,100         8,000          --
  Net proceeds (payments) from borrowings under
    revolving lines of credit                            (1,724)       19,060        15,000
  Principal payments on long-term debt                   (6,703)      (16,388)       (5,550)
  Proceed from issuance of stock                          1,131          --            --
  Other                                                    (268)         (208)          (46)
                                                        -------      --------      --------
          Net Cash Provided by Financing Activities       1,536        10,464         9,404
                                                        -------      --------      --------
          Net Decrease in Cash and Cash
            Equivalents                                    (281)         (536)          (86)
Cash and Cash Equivalents, Beginning                        499         1,035         1,121
                                                        -------      --------      --------
Cash and Cash Equivalents, Ending                       $   218      $    499      $  1,035
                                                        =======      ========      ========
</TABLE>




See accompanying notes.


                                     A-9


<PAGE>   49
                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 1:  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

-        Organization and Business:

                  River Oaks Furniture, Inc. (the "Company") was incorporated in
         Mississippi in 1987. The Company and its subsidiaries, Gaines
         Manufacturing Company (acquired August 1994) and R. O. West, Inc.
         (formed May 1994), are engaged in the design, manufacture and sale of
         moderately priced upholstered stationary furniture primarily to retail
         furniture and department stores throughout the United States. The
         Company operates four production facilities in Mississippi, one
         production facility in Tennessee, and one production facility in
         California.

-        Principles of Consolidation:

                  The consolidated financial statements include the accounts of
         the Company and its subsidiaries, all of which are wholly-owned. All
         material intercompany balances and transactions are eliminated in
         consolidation.

-        Use of Estimates:

                  The preparation of financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities 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 those estimates.

-        Trading Securities:

                  Debt and equity securities purchased with the intent of being
         sold in the near term are classified as "trading securities" and
         reported at estimated fair value, with unrealized gains and losses
         being included in earnings. There were no trading securities during
         1996 and 1995. Net losses of $69,000 were realized in 1994 on the sale
         of all trading securities.

-        Inventories:

                  Inventories are valued at the lower of cost or market. Cost is
         determined by the first-in, first-out ("FIFO") method.


                                     A-10


<PAGE>   50


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements





NOTE 1:  (CONTINUED)

-        Property, Equipment, Depreciation and Amortization:

                  Property and equipment are stated at cost and include interest
         on funds borrowed to finance construction of certain long-term assets.
         Capitalized interest was $376,000 and $402,000 in 1996 and 1995,
         respectively. For financial reporting purposes depreciation and
         amortization are computed using the straight-line method over the
         following estimated useful lives: 

<TABLE>
<CAPTION>
                                                                      YEARS
                                                                      -----
                       <S>                                            <C>
                       Buildings and improvements                       40
                       Machinery and equipment                         3 - 7
                       Furniture and fixtures                          3 - 7
                       Trucks                                          3 - 5
</TABLE>

                 For income tax purposes, depreciation is computed primarily
using accelerated methods.

-        Costs in Excess of Net Assets Acquired:

                 Costs in excess of net assets acquired (1996, $6,380,000 and
         1995, $6,550,000) are amortized over 40 years on the straight-line
         basis. Accumulated amortization as of December 31, 1996 and 1995 is
         $412,000 and $242,000, respectively. The Company continually evaluates
         these assets for impairment when events or changes in circumstances
         indicate that the carrying amount of the assets may not be recoverable
         through the estimated undiscounted future cash flows from the use of
         these assets. Should any such impairment be found to exist, the related
         assets will be written down to fair value. No impairment losses have
         been necessary through December 31, 1996.

-        Revenue Recognition:

                  Sales are recognized upon shipment of products. Allowances for
         estimated advertising costs are provided when sales are recorded.



                                     A-11


<PAGE>   51


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 1:  (CONTINUED)

-        Income Taxes:

                 Deferred taxes are provided on a liability method whereby
         deferred tax assets are recognized for deductible temporary differences
         and operating loss and tax credit carryforwards and deferred tax
         liabilities are recognized for taxable temporary differences. Temporary
         differences are the differences between the reported amounts of assets
         and liabilities and their tax bases. Deferred tax assets are reduced by
         a valuation allowance when, in the opinion of management, it is more
         likely than not that some portion or all of the deferred tax assets
         will not be realized. Deferred tax assets and liabilities are adjusted
         for the effects of changes in tax laws and rates on the date of
         enactment.

-        Statement of Cash Flows:

                  For purposes of this statement, cash equivalents include cash
         on hand and bank checking and money market accounts and other highly
         liquid debt securities with original maturities of 90 days or less.

-        Recently Issued Accounting Standards:

                  Statement of Financial Accounting Standards No. 128,
         "Accounting for Earnings per Share" ("FAS 128"), issued by the FASB is
         effective for financial statements issued for periods ending after
         December 15, 1997. The new statement establishes standards for
         computing and presenting earnings per share (EPS) and applies to
         entities with publicly-held common stock. This standard simplifies the
         standards for computing earnings per share previously found in
         Accounting Principles Board Opinion No. 15, "Earnings per Share," and
         makes them comparable to international EPS standards. The Company does
         not expect adoption to have a material effect on its financial position
         or results of operations.

                  Statement of Financial Accounting Standards No. 130,
         "Reporting Comprehensive Income," issued by the FASB is effective for
         years beginning after December 15, 1997. The new statement establishes
         standards for reporting and display of comprehensive income and its
         components (revenues, expenses, gains, and losses) in a full set of
         general purpose financial statements. This standard requires that all
         items that are required to be recognized under accounting standards as
         components of comprehensive income be reported in a financial statement
         that is displayed with the same prominence as other financial
         statements. Reclassification of financial statements for earlier
         periods provided for comparative purposes is required. The Company does
         not expect adoption to have a material effect on its financial position
         or results of operations.


                                     A-12


<PAGE>   52


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 1:  (CONTINUED)

                 Statement of Financial Accounting Standards No. 131,
         "Disclosures about Segments of an Enterprise and Related Information,"
         issued by the FASB is effective for years beginning after December 15,
         1997. The new statement establishes standards for the way public
         enterprises report information about operating segments in annual
         financial statements and requires that those enterprises report
         selected information about operating segments in interim financial
         reports issued to shareholders. It also establishes standards for
         related disclosures about products and services, geographic areas, and
         major customers. This standard requires that a public business
         enterprise report financial and descriptive information about its
         reportable operating segments. Operating segments are components of an
         enterprise about which separate financial information is available that
         is evaluated regularly by the chief operating decision maker in
         deciding how to allocate resources and in assessing performance. The
         Company does not expect adoption to have a material effect on its
         financial position or results of operations.


NOTE 2:  ACCOUNTS RECEIVABLE AND FACTORING AGREEMENT

         Accounts receivable consists of the following:
<TABLE>
<CAPTION>
                                           (IN THOUSANDS)
                                                     RESTATED
                                         1996         1995
                                       -------      -------
<S>                                    <C>          <C>    
Due from factor                        $ 1,767      $ 3,629
Nonfactored trade receivables            3,516        2,163
Insurance claims                           630          593
Commission advances and other            1,364          890
                                       -------      -------
                                         7,277        7,275
Less allowance for possible losses      (1,316)        (707)
                                       -------      -------
     Total                             $ 5,961      $ 6,568
                                       =======      =======
</TABLE>

         The Company factors, without recourse as to credit losses, most of its
customer accounts receivable. Under the terms of the factor agreement, the
Company receives advances prior to the due dates of the factored invoices. Such
advances, which may equal up to 90 percent of the factored receivables through
July 25, 1996, and 95 percent through the remainder of 1996, bear interest at
LIBOR plus 160 basis points. Amounts factored with recourse amounted to
$1,121,000 and $1,476,000 at December 31, 1996 and 1995, respectively.



                                     A-13


<PAGE>   53


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 3:  INVENTORIES

         Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                (IN THOUSANDS)      
                                              1996          1995    
                                            -------      -------    
     <S>                                    <C>          <C>        
     Finished products                      $ 3,800      $ 3,377    
     Work-in-process                          3,934        4,634    
     Raw materials                           11,831       12,671    
                                            -------      -------    
                                                                    
          Total                             $19,565      $20,682    
                                            =======      =======    
</TABLE>


NOTE 4:  PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                (IN THOUSANDS)       
                                               1996         1995     
                                             -------      -------    
      <S>                                    <C>          <C>        
      Land                                   $ 1,566      $ 1,566    
      Buildings and improvements              20,246       13,940    
      Machinery and equipment                  6,066        5,731    
      Furniture and fixtures                   1,389        1,180    
      Trucks                                      29           25    
      Construction in progress                 5,041        9,020    
                                             -------      -------    
                                              34,337       31,462    
      Less accumulated depreciation            4,442        3,049    
                                             -------      -------    
                                                                     
           Total                             $29,895      $28,413    
                                             =======      =======    
</TABLE>
      
         During the first quarter of 1996, the Company reorganized its
manufacturing process, effectively reducing the required square footage needs in
the Mississippi operation. As a result of these changes, the Company made a
decision in the fourth quarter of 1996 to idle its facility in Pontotoc,
Mississippi. The Company plans to dispose of this facility which has a carrying
value of approximately $1,105,000. The estimated sales value, net of related
costs to sell, approximates carrying value. The facility is classified as a
non-current asset at December 31, 1996, as management does not expect it to sell
during 1997.


                                     A-14


<PAGE>   54


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 5:  LONG-TERM DEBT

         Long-term debt consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                           (IN THOUSANDS)
                                                                          1996        1995
                                                                        -------     -------
             <S>                                                        <C>         <C>    
             BNY Financial Corporation line of credit                   $ 9,853     $  --

             BNY Financial Corporation term loan                          8,632        --

             The CIT Group/Commercial Services, Inc. line of credit        --        12,564

             The CIT Group/Commercial Services, Inc. term loan             --         5,786

             Deposit Guaranty National Bank real estate loan              1,845       1,980

             Deposit Guaranty National Bank equipment loan                  721         810

             Bank of Mississippi term loan                                5,474       4,663

             Other                                                           42          92
                                                                        -------     -------
                                                                         26,567      25,895

                  Less current maturities                                 1,993       1,845
                                                                        -------     -------

                     Total Long-Term Debt                               $24,574     $24,050
                                                                        =======     =======
     </TABLE>

         In 1995, the Company established a $45,000,000 credit facility with its
factor, The CIT Group/Commercial Services, Inc. ("CIT"). The credit facility was
secured by substantially all the assets of the Company and its subsidiaries,
excluding certain real property. This credit facility had a maturity date of
July 31, 1998, with automatic annual renewals thereafter, subject to the
lender's approval, and bore interest at LIBOR plus 160 basis points (7.3 percent
as of December 31, 1995). At December 31, 1995, the outstanding balance under
the line of credit portion of the facility was $12,564,000.

         A related term loan under The CIT agreement had a balance of $5,786,000
at December 31, 1995. The loan required quarterly payments of $214,000 through
April 2000, with the remaining balance of $1,928,000 due July 2000. Interest was
due monthly at LIBOR plus 210 basis points (7.8 percent as of December 31,
1995). The loan was secured by substantially all tangible assets of Gaines
Manufacturing Company which had a net book value of $2,741,000 at December 31,
1995.



                                     A-15


<PAGE>   55


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements





NOTE 5:  (CONTINUED)

         In 1996, the Company entered into a Revolving Credit and Term Loan
Agreement with BNY Financial Corporation ("BNYFC") and other lenders, which
replaced the previous credit facility with CIT. The Credit Agreement with BNYFC
and other lenders together with related agreements provides the Company and its
direct and indirect subsidiaries with a $42,000,000 revolving credit facility
(with a $3,000,000 overadvance sublimit), a $9,000,000 term loan, and certain
factoring arrangements (collectively, the "BNYFC Facility"). Proceeds of the
BNYFC were used to refinance the Company's indebtedness to CIT, with the CIT
facility being terminated effective July 26, 1996. (Additional proceeds are
available under the BNYFC Facility to the Company and its direct and indirect
subsidiaires for working capital purposes, subject to the satisfaction of the
terms and conditions established by the Financing Documents, including without
limitation, compliance with borrowing base requirements). The BNYFC Facility is
secured by substantially all of the Company's assets, excluding certain real
property. At December 31, 1996, the outstanding balance under the line of credit
of the facility was $9,853,000.

         Revolving loans under the Credit Facility bear interest at a floating
rate per annum equal to 1.5 percent over the one month LIBOR (7 percent at
December 31, 1996), subject to a 0.5 percent increase if any overadvances are
outstanding for more than four days in any month.

         The term loan under the Credit Agreement bears interest at a floating
rate equal to 2.5 percent over the one month LIBOR (8.0 percent at December 31,
1996), subject to a 0.5 percent reduction if the outstanding principal amount of
the term loan is $7,000,000 or less and no default or event of default exists.
Monthly principal payments of $107,143 are due through July 2001, with the
remaining balance of $2,739,000 due at the same date. The net book value of
assets securing this term loan is $29,895,000. At December 31, 1996, the
outstanding balance under the term loan was $8,632,000.

         The BNYFC Facility terminates on July 26, 2000, subject to successive
one year extensions thereafter unless notice of non-renewal is given by the
Banks or the Company 90 days prior to the termination date. (The BNYFC Facility
is subject to earlier termination at the option of the Banks upon the occurrence
of certain "Events of Default" enumerated in the Loan Documents.)



                                     A-16


<PAGE>   56


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 5:  (CONTINUED)

         The Financing Documents contain provisions that are customary for
financing transactions of this type, including representations, warranties,
conditions, covenants, and default provisions. Among other things, the Company
is required to maintain profitability and certain consolidated financial ratios
while the BNYFC Facility is in place, including ratios relating to tangible net
worth, interest coverage, debt service coverage, indebtedness to tangible net
worth, working capital, and the excess of current assets over current
liabilities. At December 31, 1996, the Company was in default of certain of the
above requirements, but BNYFC has since consented to a waiver of these
violations through an amendment to the violated covenants. The amendment
decreases the notice of non-renewal to 60 days prior to and effective as of the
fourth anniversary of the Effective Date in any subsequent year. The Company
agreed to promptly execute and deliver to BNYFC a second priority Deed of Trust,
Security Agreement and Assignment of Leases with respect to the premises owned
at 501 North Glenfield, New Albany, Mississippi.

         The Company has a $2,000,000 fully secured real estate loan with
Deposit Guaranty National Bank which was utilized to purchase a new
manufacturing facility in New Albany, Mississippi. The loan is secured by the
building and land and matures on October 1, 2000. The loan requires monthly
payments of $24,500, including interest at 8.1 percent through September 2000,
with the remaining balance of $1,224,000 due October 2000, secured by land and
buildings with a net book value of $3,232,000, purchased with the loan proceeds.
Outstanding borrowings under this facility at December 31, 1996, were
$1,845,000. At December 31, 1996, the Company was in default of the financial
covenants for the Deposit Guaranty Real Estate Loan, but Deposit Guaranty
National Bank has since consented to a waiver of these violations for the fiscal
year ended December 31, 1996.

         In 1995, the Company obtained a $5,000,000 fully secured equipment line
of credit with Deposit Guaranty National Bank. Outstanding borrowings, as well
as the cost of equipment and machinery securing such borrowings, were $810,000
at December 31, 1995.

         In January 1996, the Company converted the balance of $810,000 to a
term loan. This new fully secured term loan matures on January 1, 2003, and
bears interest at 7.6 percent requiring monthly principal and interest payments
of $12,500. The outstanding balance of the loan at year end was $721,000. At
December 31, 1996, the Company was in default of the financial covenants for the
loan, but Deposit Guaranty National Bank has since consented to a waiver of
these violations for the fiscal year ended December 31, 1996.



                                     A-17


<PAGE>   57


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 5:  (CONTINUED)

         In 1995, the Company established with the Bank of Mississippi two
construction lines of credit in the amounts of $4,800,000 and $450,000. These
loans were obtained to finance the construction of the new Belden, Mississippi
facility and related purchases of office equipment. These construction loans,
bearing interest at the bank's prime rate (8.5 percent at December 31, 1995),
both matured on January 2, 1997. At December 31, 1995, the outstanding balance
under these construction loans was $4,663,000.

         The above mentioned construction loans were converted on May 6, 1996,
to a long-term and a short-term real estate loan that mature on May 6, 2001
(monthly $31,390), and May 1, 1997 (monthly $8,335), respectively. Both loans
bear interest at the bank's prime rate (8.3 percent at December 31, 1996) and
are secured by land, buildings and office equipment with a net book value of
$7,270,000 at December 31, 1996. As of December 31, 1996, outstanding borrowings
under the new long-term and short-term loans were $5,432,000 and $42,000,
respectively (total $5,474,000). At December 31, 1996, the Company was in
default of the financial covenants for the loans, but the Bank of Mississippi
has since consented to a waiver of these violations for the fiscal year ended
December 31, 1996.

         The aggregate maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING
                  DECEMBER 31,                              AMOUNT
                 -------------                              ------
                 <S>                                       <C>    
                 1997                                      $ 1,993
                 1998                                        1,926
                 1999                                        1,948
                 2000                                       13,010
                 2001                                        7,547
                 Thereafter                                    143
                                                           -------

                       Total                               $26,567
                                                           =======
</TABLE>

         Based on the borrowing rates currently available to the Company and its
subsidiaries for financing arrangements with similar terms and average
maturities, management believes the carrying value of long-term debt, as
presented above, approximates its fair value.



                                     A-18


<PAGE>   58


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 6:  ACQUISITION OF GMAC

         In August 1994, the Company acquired the outstanding stock of G.M.
Acquisition (GMAC), the sole shareholder of Gaines Manufacturing Company. The
acquisition of GMAC was accounted for using the purchase method and,
accordingly, the assets and liabilities of GMAC were recorded at their fair
values at the date of acquisition. Consideration paid consisted of (a) 475,415
shares of the Company's common stock valued at $6,584,000 and (b) the payment of
$1,442,111 in cash to GMAC's lender. Transaction costs for advisory and
professional fees were approximately $513,000. In addition, the Company assumed
approximately $10,375,000 of existing liabilities of GMAC and Gaines. The cash
portion of the Merger Consideration was financed under the Company's revolving
line of credit. The results of operations of GMAC have been consolidated with
the Company only since the date of acquisition.

         The following table represents summarized consolidated unaudited pro
forma results of operations for the year ended December 31, 1994, as if the
acquisition of GMAC had occurred at January 1, 1994. These pro forma results are
provided for comparative purposes only and do not purport to be indicative of
the results which would have been obtained if the acquisition had been effected
on the date indicated or which may be obtained in the future:

<TABLE>
<S>                                                                      <C>     
Net sales (in thousands)                                                 $124,760
Pro forma net income (in thousands)                                         4,567
Pro forma net income per share                                                .95
</TABLE>


NOTE 7:  INCOME TAXES/PRO FORMA INCOME TAXES

         The provision for income taxes charged to operations for the years
ended December 31, 1996, 1995, and 1994, consists of the following:

<TABLE>
<CAPTION>
                                               (IN THOUSANDS)
                                                       (RESTATED)
                                       1996        1995         1994
                                     -------      -------      -------
<S>                                  <C>          <C>          <C>    
Current payable (benefit):
       Federal                       $(3,002)     $   610      $ 2,203
       State                            (211)          61          199
                                     -------      -------      -------
                                      (3,213)         671        2,402
                                     -------      -------      -------
     Deferred expense (benefit):
       Federal                         1,140         (778)        (159)
       State                            (677)         (87)        (303)
                                     -------      -------      -------
                                         463         (865)        (462)
                                     -------      -------      -------
     Taxes on income (benefit)       $(2,750)     $  (194)     $ 1,940
                                     =======      =======      =======
</TABLE>



                                     A-19


<PAGE>   59


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 7:  (CONTINUED)

         The following summary reconciles taxes on income at the federal
statutory tax rate with the effective rate:

<TABLE>
<CAPTION>
                                                                               (RESTATED)
                                                                   1996       1995      1994
                                                                   ----       ----      ----
<S>                                                               <C>        <C>        <C>  
Provision for federal income taxes
       at the statutory rate                                      (34.0)%    (34.0)%     34.0%
     Increase (decrease) due to:
       Non-deductible litigation claim                              7.7       --         --
       Deductible sales allowances                                (10.4)      --         --
       State income taxes, net of federal
         benefit                                                   (7.3)       1.8        2.3
       Other                                                       (1.9)      (4.9)      (3.1)
                                                                  -----      -----      -----

                                                                  (45.9)%    (37.1)%     33.2%
                                                                  =====      =====      =====
</TABLE>


         The components of deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
                                                                           RESTATED
                                                                           --------
                                                                  1996       1995
                                                                -------     -------
<S>                                                             <C>         <C>     
Deferred income tax assets
       Allowance for sale returns as restated                   $  --       $ 2,011
       State tax credit carryforwards                               776         971
       Inventory                                                    243         340
       Allowance for doubtful accounts                              444         262
       Loss carryforwards                                           696        --
       Contributions                                                 40        --
       Alternative minimum tax credit carryforwards                 220        --
                                                                -------     -------
                                                                  2,419       3,584
       Less valuation allowance                                    (659)     (1,432)
                                                                -------     -------
     Total deferred income tax assets                             1,760       2,152
                                                                -------     -------
     Deferred income tax liabilities
       Depreciation                                                (727)       (603)
       Other                                                         (8)        (61)
                                                                -------     -------
     Total deferred income tax liabilities                         (735)       (664)
                                                                -------     -------
     Total net deferred income tax assets                         1,025       1,488
     Less current deferred income tax assets                       (719)     (1,823)
                                                                -------     -------
     Long-term deferred income tax asset (liability)            $   306     $  (335)
                                                                =======     =======
     </TABLE>


                                     A-20


<PAGE>   60


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 7:  (CONTINUED)

         Deferred tax assets are net of valuation allowances to reduce them to
the amount that management estimates to be ultimately collectible. Total
valuation allowances of $659,000 and $1,432,000 have been recognized for 1996
and 1995, respectively. Included in the allowances are the benefit of $1,471,000
and $1,176,000 of Mississippi Jobs Tax Credit carryforwards, which expire in
varying amounts between 1997 and 2001. The other significant deferred tax asset
is the prior period adjustment discussed in Note 8 to the financial statements.

         Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.

         Loss carryforwards for tax purposes as of December 31, 1996, have the
following expiration date:


<TABLE>
<CAPTION>
                                 EXPIRATION DATE           AMOUNT
                                 ---------------          --------
                                 <S>                      <C>                
                                      2011                $706,000
                                                          ========
</TABLE>

         The alternative minimum tax (AMT) credit carryforward of $220,000 may
be carried forward indefinitely to reduce future regular federal income taxes
payable.


NOTE 8:  ADJUSTMENT TO EARLIER FINANCIAL STATEMENTS

         The Company utilizes a factoring arrangement with a major financial
institution to finance a large part of operations. This arrangement allows the
Company to receive advances for a portion of the face amount of sales invoices.
Arrangements are made for customers to remit payment directly to the factoring
institution. On occasion the customer objects to certain charges on invoices and
notifies the factoring institution and deducts such amounts from its payment. At
that point the factoring institution reduces the factored receivables by the
amount objected to (chargebacks), and the Company becomes responsible for
appropriate follow-up and collection.



                                     A-21


<PAGE>   61


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 8:  (CONTINUED)

         From 1991 to 1996, the Company failed to properly record chargebacks of
disputed amounts to the accounts of individual customers. This practice caused
the individual customer accounts to be understated and prevented the Company
from collecting on these accounts receivable. The respective gross and net of
tax effect decrease of income for these adjustments to the accompanying
financial statements are: years ended December 31, 1995, $2,225,000 and
$1,426,000; and 1994, $849,000 and $544,000. Retained earnings at the end of
1993 has decreased for the net of tax amount of $2,350,000 for the effect of
this accounting error on prior periods. The Company was a Sub Chapter S
Corporation prior to its initial public offering. Therefore, the amount of
$2,146,000, applicable to pre-initial public offering operations, has been
reclassed to additional paid-in capital. The amount of $204,000 applicable to
operations of the C Corporation prior to 1994 has been recorded as an adjustment
against the December 31, 1993 retained earnings.


NOTE 9:  STOCK OPTION PLANS

         At December 31, 1996, the Company has two stock-based compensation
plans which are described below. As permitted under generally accepted
accounting principles, grants under those plans are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the plans. Had compensation cost for all of
the stock-based compensation plans been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), reported net
income and earnings per common share would have been reduced to the pro forma
amounts shown below:

<TABLE>
<CAPTION>
                                             (IN THOUSANDS, EXCEPT
                                                 SHARE AMOUNTS)
                                                            RESTATED
                                             1996            1995
                                           ---------      ---------- 
<S>                                        <C>            <C>       
     Net Income (Loss)
       As reported                         $  (3,526)     $    (329)
       Pro forma                              (4,003)          (476)

     Primary earnings (loss) per share
       As reported                              (.68)          (.06)
       Pro forma                                (.75)          (.09)
</TABLE>




                                     A-22


<PAGE>   62


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 9:  (CONTINUED)

Employee Option Plan

         The Company has an employee option plan under which it may grant
options to purchase common stock, with a term of five years, at the market price
on the date of grant. Options for up to 1,000 shares may be granted to
employees.

         The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996 and 1995, respectively: no dividend rate for each
year; price volatility of 56 and 38 percent; risk-free interest rates of 5.5 and
5.9 percent; and expected lives of 7 for each year.

         A summary of the status of the plan at December 31, 1996 and 1995, and
changes during the years ended on those dates is as follows:


<TABLE>
<CAPTION>
                                                  1996                         1995
                                          ---------------------       -------------------        
                                                       WEIGHTED                   WEIGHTED
                                                       AVERAGE                    AVERAGE
                                                       EXERCISE                   EXERCISE
                                           SHARES      PRICE           SHARES      PRICE
                                          -------     ---------       -------     -------        
     <S>                                  <C>         <C>             <C>         <C>            
     Outstanding at Beginning of Year     229,500     $ 13.55         192,000     $ 14.85        
     Granted                              193,100        3.84          37,500        6.88        
     Exercised                               --          --              --          --          
     Forfeited                               --          --              --          --          
                                          -------                     -------                    
                                                                                                 
                                                                                                 
     Outstanding at End of Year           422,600        9.11         229,500       13.55        
                                          =======                     =======     =======        
                                                                                                 
     Exercisable at End of Year           189,620                     105,700                    
                                          =======                     =======                    
                                                                                                 
     Weighted Average Fair Value                                                                 
       Per Option of Options Granted                                                             
       During the Year                    $  2.05                     $  3.29                    
                                          =======                     =======                    
</TABLE>                                                            

         At December 31, 1996, the Employee Option Plan has 422,600 options
outstanding with an average remaining contractual life of 2.5 years.

Non-Employee Director Option Plan

         The Company has a non-employee director option plan under which it may
grant options to purchase common stock, with a term of four years, at the market
price on the date of grant. Options for up to 500 shares, per grant date, may be
granted to directors.



                                     A-23


<PAGE>   63


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements




NOTE 9:  (CONTINUED)

         The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996 and 1995, respectively: no dividend rate for each
year; price volatility of 56 and 38 percent; risk-free interest rate of 5.5 and
7.8 percent; and expected lives of 4.5 for each year.

         A summary of the status of the plan at December 31, 1996 and 1995, and
changes during the years ended on those dates are as follows:

<TABLE>
<CAPTION>
                                                  1996                    1995
                                          ---------------------  --------------------       
                                                       WEIGHTED              WEIGHTED
                                                       AVERAGE               AVERAGE
                                                       EXERCISE              EXERCISE
                                           SHARES      PRICE      SHARES      PRICE
                                          -------     ---------  -------     --------       
<S>                                       <C>         <C>        <C>         <C>    
     Outstanding at Beginning of Year       9,000     $ 13.55      6,000     $ 14.85
     Granted                                3,000        6.25      3,000       11.50
     Exercised                               --          --         --          --
     Forfeited                               --          --         --          --
                                          -------                -------    


     Outstanding at End of Year            12,000       12.98      9,000       15.22
                                          =======                =======    

     Exercisable at End of Year             4,000                  1,000      
                                          =======                =======    

     Weighted Average Fair Value
       Per Option of Options Granted
       During the Year                    $  2.42                $  4.83       
                                          =======                =======     
</TABLE>

         At December 31, 1996, the Non-Employee Director Option Plan has 12,000
options outstanding with an average remaining contractual life of 7.5 years.


NOTE 10:  MAJOR CUSTOMERS AND CREDIT RISK

         Presented below are customers whose sales exceeded 10 percent of the
Company's net sales in the years shown:

<TABLE>
<CAPTION>
                                                1996       1995      1994
                                                ----       ----      ----
     <S>                                        <C>        <C>       <C>  
     Heilig-Meyers                               17.7%     15.2%     11.1%
     Levitz (Sales were less than 10 percent
       in 1996 and 1994.)                        --        11.5%     --
</TABLE>


                                     A-24


<PAGE>   64


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 10:  (CONTINUED)

         The Company sells a significant portion of its accounts receivable to a
factor to shift the credit risk associated with the collection of those
receivables. Nonfactored accounts receivable are primarily from small retail
furniture stores located throughout the continental United States.

         Due to the nature of its business and the volume of sales activity, the
Company accumulates, from time to time, bank balances in excess of the insurance
provided by federal insurance authorities.


NOTE 11:  SUPPLEMENTAL CASH FLOWS INFORMATION

         In 1996, the Company had a non-cash adjustment in paid-in capital of
$1,082,000 related to a litigation award accrual as disclosed in Note 13.

         In 1994, the Company assumed $10,375,000 of debt obligations and issued
common stock value at $6,584,000 in connection with the acquisition of GMAC. In
addition, liabilities totaling $107,000 assumed upon the acquisition of GMAC
were paid through the issuance of 7,726 shares of the Company's common stock.
The change in assets and liabilities in arriving at net cash provided by
operating activities in 1994 is net of the purchase of GMAC.

         Cash paid for interest and income taxes is as follows:

<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                                    RESTATED
                                                               ----------------------
                                                   1996         1995           1994
                                                 ------        ------         -------
<S>                                              <C>           <C>           <C>    
Interest paid (net of capitalized
        amounts)                                 $ 3,765       $ 3,138       $ 1,326
     Income taxes paid (refund)                     (977)        1,617         2,446
</TABLE>


NOTE 12:  RELATED PARTY TRANSACTIONS

         The Company's manufacturing facilities and certain equipment were built
by a construction company owned by a director of the Company. Costs incurred in
connection with such construction were approximately $806,000, $3,603,000 and
$491,000 during 1996, 1995 and 1994, respectively.

         During 1995, the Company purchased a manufacturing facility for
approximately $3,380,000 from a company whose shareholders included certain
directors of the Company. The purchase price was determined by independent
appraisals.


                                     A-25


<PAGE>   65


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 13:  COMMITMENTS AND CONTINGENCIES

-        Litigation:

                 On October 4, 1993, the trustees of the Ansin Foundation,
         established by a former shareholder of the Company, and an executor
         of the estate of the former shareholder of the Company, filed a
         complaint in the United States District Court, District of 
         Massachusetts, against the Company and the Chief Executive Officer and
         the Secretary of the Company, both of whom are also Company directors,
         alleging fraud, breach of fiduciary duty and unfair and deceptive
         business practices in connection with the repurchase of the former
         shareholder's shares (the "Ansin Litigation"). On April 8, 1996, a
         verdict was returned in favor of the Ansin Foundation awarding
         compensatory damages against the Company in the amount of $2.3
         million. Additionally, compensatory and punitive damages were awarded
         against each of the Company's Chief Executive Officer and Secretary in
         their individual capacities. The United States Court of Appeals for
         the First Circuit affirmed these awards, together with interest
         accrued thereon, on February 3, 1997. The Company filed a petition for
         certiorari with the United States Supreme Court, which petition was
         denied on October 6, 1997. The litigation is, therefore; concluded.
         Because of this verdict against the Company, the Company reduced its
         additional paid-in capital in the amount of $1,082,000, representing
         compensatory damages for the amount that the former shareholder would
         have received if he had participated in the Company's initial public
         offering in September 1993. Additionally, the balance of the judgment
         the Company, $1,357,000, has been charged as an expense in 1996.

-        Leases:

                 The Company leases certain production facilities, showroom
         space, vehicles and office equipment under operating leases that expire
         at various dates through 1998. Total rent expense under operating
         leases was $2,310,000, $1,702,000 and $502,000 in 1996, 1995 and 1994,
         respectively.

                 The Company also leases data processing and other equipment
         under capital leases expiring at various dates through 1997. Following
         is an analysis of leased property:

<TABLE>
<CAPTION>
                                                   (IN THOUSANDS)
                                                   1996       1995
                                                  -----      -----
<S>                                               <C>        <C>  
     Production and Office Equipment              $ 647      $ 647
     Less Accumulated Amortization                 (502)      (384)
                                                  -----      -----
     Net Leased Property Under Capital Leases     $ 145      $ 263
                                                  =====      =====
</TABLE>


                                     A-26

<PAGE>   66


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 13:  (CONTINUED)

                 At December 31, 1996, future net minimum lease payments
         required under capital leases and future minimum rental payments
         required under operating leases that have initial or remaining
         noncancellable lease terms in excess of one year are as follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
          YEAR ENDING                                         CAPITAL   OPERATING
         DECEMBER 31,                                         LEASES     LEASES
         ------------                                         -------   ---------
         <S>                                                  <C>       <C>   
              1997                                             $ 36      $  798
              1998                                              --          209
              1999                                              --           22
                                                               ----      ------
              Total minimum lease payments                       36      $1,029
                                                               ====      ======
              Less amounts representing interest                 (1)        
                                                               ----   
              Present value of net minimum lease payments,
                included in long-term debt                     $ 35         
                                                               ====    
</TABLE>


         Certain leases contain renewal options, and some have purchase options
and generally provide that the Company shall pay for insurance, taxes, and
maintenance. In most cases, management expects that in the normal course of
business, leases that expire will be renewed or replaced by other leases.

-        Extraordinary Item:

                 During 1996, the Company terminated its credit facility
         arrangement with CIT Group/Commercial Services, Inc. The Company had an
         unamortized balance of $165,000 on the debt organization costs related
         to the CIT credit facility. The Company paid a $255,000 termination fee
         to CIT as part of this early extinguishment. As a result of this
         transaction, the Company recognized a loss of $279,000, net of the
         related income tax effect of $141,000, from the retirement of the
         credit facility. The funds used to retire the CIT credit facility
         represented a portion of the proceeds from the new BNY credit facility
         as discussed in Note 5.

-        Employment Agreements:

                 The Company has three-year employment agreements with certain
         key employees. The agreements expire August 1998, and provide, among
         other things, severance pay to the employee. Under each agreement,
         three months' salary is to be paid to the employee's estate in the
         event of death, and up to six and twelve months' salary and benefits
         are to be provided to the employee in the events of disability or
         termination without cause, respectively. Aggregate payments required
         under the employment agreements are approximately $850,000 in 1997.



                                     A-27


<PAGE>   67


                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



NOTE 13:  (CONTINUED)

-        Retirement Plan:

                 In 1993, the Company adopted the Savings and Profit Sharing
         Plan (the "Savings Plan"), a tax-qualified employee benefit plan which
         meets the criteria of Section 401(k) of the Internal Revenue Code.
         Under the Savings Plan, participants may elect to defer from 1 percent
         to 20 percent of their compensation into the Savings Plan, up to
         specified limits per year. The Company may make discretionary
         contributions, as determined annually by the Company's management, of
         up to 5 percent of the employee's base salary irrespective of whether
         the employee participates in salary deferral provisions of the Savings
         Plan. All participants are fully vested at all times in their
         respective contributions. Participants become fully vested in
         contributions made by the Company on a graduated scale defined in the
         Savings Plan document. No Company contributions were made to the
         Savings Plan in either 1996, 1995, or 1994.




                                     A-28

<PAGE>   68


                       [HORNE C.P.A. GROUP LETTERHEAD]

                         INDEPENDENT AUDITOR'S REPORT ON
                            SUPPLEMENTAL INFORMATION





Board of Directors
River Oaks Furniture, Inc.
  and Subsidiaries
Belden, Mississippi


Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.



                                /s/ Horne CPA Group


Jackson, Mississippi
September 27, 1997




                                     S-1

<PAGE>   69


                                                                     SCHEDULE II

                           RIVER OAKS FURNITURE, INC.
                                AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>
                                         BALANCE AT  CHARGED TO   CHARGED TO                   BALANCE AT
                                         BEGINNING   COSTS AND     OTHER                         END OF
           CLASSIFICATION                OF PERIOD   EXPENSES      ACCOUNTS    DEDUCTIONS       PERIOD
           --------------               ----------   ---------    ----------   ----------     ----------
<S>                                     <C>          <C>          <C>          <C>            <C>       
Year Ended December 31, 1994
   Allowance for possible losses on
     accounts receivable                $ 85,000     $   --       $110,000(1)  $ (10,000)     $  185,000
                                        ========     ========     ========     =========      ==========


 Year Ended December 31, 1995
   Allowance for possible losses on
     accounts receivable                $185,000     $696,000     $   --       $(174,000)     $  707,000
                                        ========     ========     ========     =========      ==========


 Year Ended December 31, 1996
   Allowance for possible losses on
     accounts receivable                $707,000     $677,000     $   --       $ (68,000)     $1,316,000
                                        ========     ========     ========     =========      ==========
 </TABLE>


(1)  Allowance assumed upon purchase of subsidiary.



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