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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                  For the fiscal year ended December 31, 2000.
                                       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 Number: 33-29942-NY

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

                             NATIONS FLOORING, INC.
             [Exact name of registrant as specified in its charter]

Delaware                   2836, 2835                      11-2925673
(State or Other            (Primary Standard               (IRS Employer
Jurisdiction               Industrial Classification       Identification Number
Of Incorporation or        Code Number)
Organization)

100 Maiden Lane
New York, New York                                         10038
(Address of principal                                      (Zip Code)
executive offices)


       Registrant's telephone number, including area code: (212) 898-8855

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

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

                                                Name of Each Exchange on
               Title of each Class                  Which Registered
               -------------------              ------------------------
                                      None

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

                         Common Stock, $0.001 par value
                              (Title of each class)

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

Indicate by check mark if disclosure of delinquent filers in response 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 the Form 10-K or any amendment to this
Form 10-K [X]

As of March 15, 2001, the aggregate market value of the voting stock held by
non-affiliates (2,288,806 shares) of the registrant was $9,155,224 (based on the
quoted market price of $4.00 per share on July 7, 1997, being the last date for
which a market quote was available).

As of March 15, 2001, there were 3,729,779 shares of Common Stock, $0.001 par
value per share, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

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This Annual Report on Form 10-K contains forward-looking statements which
include risks and uncertainties. The Company's actual operations may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, leverage,
capital requirements, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed in Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 13-Certain Relationships and Related Transactions.

                                     Part I.
Item 1. Business


The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including the Consolidated
Financial Statements and the Notes thereto) appearing elsewhere in this report.
References to the Company herein shall mean the Company, including the
operations of Nations Flooring, Inc. and its consolidated subsidiary, except to
the extent that the context requires otherwise.

The Company

         Nations Flooring, Inc. (the "Company" or "Nations") is engaged in the
business of selling floorcoverings, window treatments and certain related
products, primarily for the residential housing market. The Company subcontracts
the installation of its products with independent contractors. The practice of
subcontracting installation is typical within the industry.

         The Company had sales of $45.0 million in 1998, $58.1 million in 1999
and $62.7 million in 2000. Currently, the Company is engaged in business in Las
Vegas, Nevada, St. George, Utah, Boise, Idaho, Washington D.C. and Myrtle Beach,
S.C.

         The Company sells approximately 61.2% of its products through its
Residential Contract Division, approximately 28.3% of its products through its
Residential Replacement Division, approximately 5.1% through its Commercial
Division and approximately 5.4% in other areas. Residential Contract Division
sales are effected primarily to or through new-homebuilders who offer purchasers
a wide selection of basic grade floorcoverings as part of the unit cost.
Customers then visit the Company's new-home design center and, with the
assistance of one of the Company's design consultants, choose from the basic
floorcoverings offered, or often from possible upgrades on floorcoverings, in
addition to purchasing wall coverings, window treatments and related products.
The Company sells to the commercial market including multi-family, office,
retail store and small hotel projects through its Commercial Division. Sales to
the residential replacement market represent the replacement of floorcoverings.
The significance of sales to this market increased in 1999 as the result of the
opening of new retail showrooms in Las Vegas and the Company's acquisition of
the Washington, D.C. operations formerly operated by E.I. duPont DeNemours under
the "Kemper" name, and the Company hopes to continue to expand its sales to this
market, and broaden its product offerings, as the result of these and additional
new showrooms and through other strategic acquisitions.

         The Company's strategy is to achieve cost advantages and operating
efficiencies through selective acquisitions and internal growth. Such
acquisitions and internal growth can require significant capital resources.
However, as discussed elsewhere herein, the Company has already utilized
essentially all of the borrowings available under its current credit facility,
and that credit facility will not be sufficient to allow the Company to pursue
its strategy of expansion and acquisitions. Additional capital is needed for
such expansion and acquisitions. As a result, the Company has entered into
discussions with potential lenders to raise both debt and equity capital.
However, there can be no assurance that any of these efforts will be successful.
The failure to obtain these or alternative capital resources would adversely
affect the Company's pursuit of its growth strategies.

Organizational History

         The Company was organized under the laws of the State of Delaware and
operates through its wholly owned subsidiary, Carpet Barn, Inc. ("CBI").


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Industry Overview

         The floorcovering industry in the United States (which includes fixed
and non-fixed carpeting and natural stone, ceramic tile, vinyl, wood and
laminate flooring) is estimated to have steadily grown to approximately $19.0
billion in 1999, an increase of 9.0% over 1998 according to "Floor Covering
Weekly." Despite this growth in size, the industry has remained fragmented. The
Company believes that no single floorcovering retailer, including national and
large retailers such as Home Depot and Lowes account for more than ten percent
of the total market. The Company believes that while chains and mass
merchandisers do not dominate the floorcovering industry, such companies do
influence pricing, product selection and service innovation and that small
independent floorcovering retailers face competitive disadvantages resulting
from limited purchasing power, ineffective inventory control and inadequate
resources for sales, marketing and store management.

         The carpet industry's two primary markets are residential (the primary
market served by the Company) and commercial. A number of factors influence
overall sales levels in the carpet industry, including consumer spending on
durable goods, levels of discretionary spending, interest rates, housing
turnover, the condition of the residential construction industry and the
economy's overall strength.

Approach to Markets

         The Company's objective is to maintain its position as the leading
provider of floorcoverings, window treatments and related products in the Las
Vegas builder and retail market and to become the leading provider of
floorcoverings, window treatments and related products in other selected markets
throughout the United States. The Company is also seeking to become a leading
provider of floorcoverings in the commercial market in Las Vegas and in other
markets.

         The Company believes that significant opportunities exist for
floorcovering retailers that can achieve cost advantages and operating
efficiencies through selective acquisitions and internal growth. To take
advantage of these opportunities the Company is pursuing a strategy of acquiring
existing floorcovering businesses that are dominant competitors in their regions
and developing new stores in markets experiencing significant growth in
population and homebuilding that do not have a dominant floorcovering retailer.
The Company is reviewing various markets throughout the United States to
determine their desirability for expansion. In July 2000, the Company opened a
location in Myrtle Beach, South Carolina to service the residential contract,
residential replacement and commercial markets. In July 1999, the Company
acquired a residential contract and residential replacement business (four
locations with annual sales of approximately $7 million) in the metropolitan
Washington D.C. area. In addition, the Company acquired a small residential
replacement business in St. George, Utah in September 1998 and acquired a small
residential contract business in Boise, Idaho in November 1998. . However, there
can be no assurance as to the viability of this approach, or the ability of the
Company to execute its strategy.

         The Company's approach includes the following:

         Las Vegas Market

         Maintain New-home Market Share in Las Vegas; Increase Replacement Sales
Penetration. The Company intends to expand upon its existing base of customers
by increasing its sales for new-home projects with homebuilders. Homebuilders
provide the Company's new-home design center with the floor plans of all their
units. This allows the new-home design center to then provide a home buyer with
alternatives specifically tailored to the floor plan of the customer's unit, as
well as one-stop shopping for home buyers with respect to their floor, wall and
window covering needs. The Company's new-home design center is a significant
element in the Company's plan to enhance service to homebuilders and homebuyers.
Based on estimates of the Las Vegas Homebuilder's Association, the total
new-homes market for carpet in Las Vegas is projected to grow at an annual rate
of 5% to 10% over the next 10 years. There can be no assurance that the Las
Vegas market will grow as projected or that the Company will be able to increase
or maintain its market share.

         The Company's share of the Las Vegas residential contract market was
35.0% in 1998, 34.6% in 1999 and 34.0% in 2000. To reduce the Company's reliance
on business generated by residential contract sales in Las Vegas, the Company
increased its presence in the residential replacement market through retail
showrooms in Las Vegas and has entered into the commercial flooring market.


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         Continue to Offer Superior Service. The Company believes that the most
important factor in its ability to compete is the quality of the customer
service it offers. The Company believes that it offers the highest quality
customer service in Las Vegas. This service begins with the offering of a full
range of floorcovering products and includes a policy, which the Company intends
to continue, of next-day installation and guarantee against carpet installation
defects for as long as the buyer owns the home (one year on all other products).
The Company also inspects all floorcovering installations in new-homes before
the customer moves in and has created a customer service department to handle
all complaints and installation problems. Management believes these programs
have continued to have a positive effect on the Company's reputation with
builders and home buyers which enhances the Company's ability to be selected as
the floorcovering referral for subsequent new-home developments and allow the
Company to gain customers for life. The Company also intends to continue to
offer what it believes is quality technical service and assistance to its
customers in both the new-home and replacement sales markets. Employees of the
Company assist, as needed, in all phases of customers' projects, from
conceptualization, design and product selection to actual installation. In
addition, the Company's design center is staffed with specially trained design
consultants that are highly knowledgeable regarding the broad range of
decorating possibilities provided by the Company's products. The Company intends
to continue to hire salespersons with experience in floorcovering or related
trades, and to continue to train such salespersons with respect to its products
and services. The Company believes that such programs will have a positive
effect on results of operations, although there can be no assurance of this.

         Competitive Prices. A second factor affecting the Company's ability to
compete is the pricing of its products. Because of the volume of its purchases,
the Company receives what it believes to be favorable pricing from its
suppliers, including payment discounts from most suppliers and cooperative
marketing contributions from others, including DuPont, Solutia and Allied. The
Company is able to pass these savings along to customers and thus generally is
able to offer the lowest prices in the region while maintaining a high profit
margin. The Company intends to continue to offer low prices and also to continue
its policy of offering to beat any competitor's price.

         Inventory Practices. In the Las Vegas market, the Company has been able
to maintain low warehousing costs by stocking small amounts of inventory while
at the same time providing its customers with next-day installation on purchases
in the Las Vegas market. The ability to maintain low warehousing costs is an
element in the Company's ability to offer what it believes are the lowest prices
in the region.

         These practices are dependent on the Company's ability to schedule
next-day "cut and drop" product deliveries from its suppliers. To date the
Company's suppliers have been able to satisfy its Las Vegas delivery
requirements with overnight shipments to the Company from distribution centers
maintained by such suppliers primarily in California, and the Company believes
that because of the volume of its purchases, it can continue to operate in Las
Vegas and certain other markets on this basis. However, there can be no
assurance in this regard, and any significant failure of suppliers to make
timely deliveries would adversely affect the Company's reputation among
customers.

         Addition of New Products; Showrooms. The Company also plans to attract
and maintain customers by adding complementary products to its current
offerings. The Company targeted window coverings and countertops and wall tile
as its first significant product extensions. These products accounted for
approximately $3.0 million in sales for 2000 as compared to approximately $2.8
million in sales for 1999 and $2.3 million in sales in 1998.

         The Company also seeks to increase market share and profit margins
through its operation of "showrooms" in its residential replacement facilities.
The showrooms provide customers the opportunity to consult with trained
personnel concerning the multitude of design possibilities utilizing the full
range of products offered by the Company. The Company operates a design center
in the Las Vegas area for new-homebuyers who are selecting floorcoverings and
other products to be installed in their new homes. This design center was opened
in 1996 in response to requests by builders who are currently customers as well
as other major builders who have expressed a desire to use the Company, should
it open such a center. There can be no assurance that these showrooms will have
a positive impact on the Company's operations.


                                       4
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         Other Markets

         Pursuit of Selective Acquisitions and Development of New Stores. The
Company opened a store in Myrtle Beach, South Carolina in July 2000 to penetrate
the homebuilder, retail and commercial markets. The Company acquired a
residential contract and residential replacement business in the Washington,
D.C. area in July 1999 to penetrate the homebuilder, retail and commercial
segments in the metropolitan Washington, D.C. market. In 1998, the Company
acquired a small residential replacement business to penetrate the retail and
commercial segments and to service various homebuilders in St. George, Utah and
a small residential contract business in Boise, Idaho.

         The Company believes that, because of the fragmented nature of the
floorcovering industry, significant consolidation opportunities exist and that
the Company is well positioned to achieve financial and operational efficiencies
through selective acquisitions due to favorable working relationships with its
suppliers and major customers. The Company believes that any such acquisitions
will enable it to increase its sales while decreasing its general and
administrative costs as a percentage of such sales due to the creation of
substantial economies of scale. The Company intends to pursue acquisitions of
businesses that provide the same products and services as, or those
complementary to, the Company's existing business. The Company has identified a
number of markets that it intends to explore entering over the next several
years.

         The Company has also selectively targeted certain markets throughout
the United States where there is no dominant competitor for internal expansion
through the development of new stores. Targeted markets are, like Las Vegas,
experiencing high growth in population and home building. The Company believes
that it can duplicate its successful concepts in these high growth markets by
strengthening its relationships with its existing builders who are active in
these markets, and that it can compete in these markets through its demonstrated
ability to compete on service and price. Additionally, internal expansion which
increases the volume of the Company's purchases, and as a result its ability to
obtain favorable prices and terms from floorcovering suppliers that also supply
operations that the Company has acquired, can allow the Company to also benefit
those acquired operations through reduced product costs. However, there can be
no assurance that such expansion will be effected or, if effected that any new
facilities will be operated profitably.

         The Company contemplates that any residential replacement facilities it
opens will have a dedicated showroom area where customers can consult with
trained personnel concerning the multitude of design possibilities utilizing the
full range of products offered by the Company. The Company believes that the
clean, relaxed environment of these new facilities will increase the average
total sale price and gross margin for its sales, although there can be no
assurance in this regard.

         Expansion through the opening of new facilities in new markets requires
the Company to incur costs to lease or build and equip a facility. However, in
some markets the Company has been able to, and believes that in the future may
continue to be able to, obtain cooperative funding of such costs from suppliers
of the Company's products.

         Competitive Prices. The Company is able to use the volume it purchases
for the Las Vegas market, combined with purchases for other markets, to receive
what it believes to be favorable pricing from its suppliers. The Company is able
to pass these savings along to customers and thus generally is able to offer the
lowest prices in the region while maintaining a high profit margin. The Company
intends to continue to offer low prices and also to continue its policy of
offering to beat any competitor's price.

         Inventory Practices. In markets other than Las Vegas, the Company
schedules its installations upon receipt of the product from the supplier,
therefore reducing the amount of inventory on hand.

Operations

         Background. The Las Vegas, Nevada (Clark County) market is the location
of the Company's most significant operations. This market accounted for
approximately 98.6%, 88.6% and 82.6% of the Company's 1998, 1999 and 2000 sales,
respectively. Approximately 63.7%, 53.3% and 61.4% of its Nevada sales in 1998,
1999 and 2000, respectively, were to new homebuyers in the Las Vegas market.

         According to regional publications, the Las Vegas area is one of the
fastest growing in the country. According to the Las Vegas Review Journal,
during 2000 an average of 6,000 persons relocated to Las Vegas each month, and
the Las Vegas (Clark County) population has increased to over 1.4 million. Such
statistics illustrate the high numbers of persons arriving in the Las Vegas area
and the potential strength of the retail floorcovering market.


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         On July 1, 1999, the Company began operations in the Washington, D.C.
metropolitan area through its acquisition of the Kemper operations. The sales of
Kemper from July 1, 1999 though December 31, 1999 accounted for 7.3 of total
company sales for 1999. Kemper's total sales for 2000 accounted for 12.8% of the
Company's total sales in 2000. Approximately 54.1% and 57.4% of the Kemper sales
were to new-homebuyers in 1999 and 2000, respectively. The remaining sales are
replacement sales.

         The Washington, D.C. market in which the Company acquired a residential
contract and residential replacement business in July 1999 is expected to grow
over 7% over the next ten years and was rated as the "Best Place to Live" by
Money Magazine in 1998. In an attempt to increase the existing residential
contract and residential replacement business, the Company opened a residential
contract design center and redesigned its residential replacement showrooms. In
addition, the Company believes that by having added new flooring products in
2000 such as ceramic tile and marble the Company will increase its sales in this
market.

         The Company began operations in St. George, Utah, and Boise, Idaho
during 1998. These markets accounted for 0.5%, 3.9% and 4.1% of the Company's
total sales in 1998, 1999 and 2000, respectively.

         St. George, Utah, in which the Company acquired a small residential
replacement business in September 1998, is a resort community located in
southern Utah, two hours north of Las Vegas. The Company expects to increase the
residential replacement business in this market during 2001.

         Boise, Idaho, in which the Company acquired a small residential
contract business in November 1998, is a fast growing community, the state
capital and is located near several resort towns. The city has been experiencing
an estimated annual population growth of approximately 4.1%, and is home to such
companies as Micron and Hewlett-Packard. Other major industries include
manufacturing, service, government and high tech. The Company expects to
increase the existing residential contract business during 2001.

         The Company also began operations in Myrtle Beach, S.C. in July 2000.
This market accounted for less than 1% of the Company's sales in 2000. Myrtle
Beach is a fast growing resort community which attracts vacationers from all
over the country. While the community's permanent population is approximately
200,000 and growing, visitors utilizing time shares, golf packages and rentals
raise the population to over 800,000 during peak months. The Company believes
that it can penetrate all aspects of the area's floor covering market with its
unique design center showroom concept. However, there can be no assurance in
this regard.

         Divisions. The Company primarily operates through three divisions, the
Residential Contract Division, the Residential Replacement Division and the
Commercial Division.

         Residential Contract Division. The Company's Residential Contract
Division is responsible for installation of floorcovering and related products
in newly built homes. Salespersons in this division deal with both homebuilders
and buyers. In servicing the new-home market, the Company generally secures
contracts from builders to provide floorcovering in their new homes. In most
cases, when the builder sells a new-home, the builder will direct the home buyer
to the Company, which allows the buyer to choose the floorcovering represented
by a standard allowance provided from the builder to the home buyer or to
upgrade from the standard selection by paying a higher price. The Company has
found that a majority of homebuyers choose an upgraded floorcovering selection.

         The Company receives payment for its carpeting in new-homes in one of
two ways. In some cases, the buyer directly pays the upgraded portion of a
carpet sale by generally paying the full upgrade amount with the order. In other
cases, the Company bills the upgraded portion of the job to the builder, who
then passes on the additional cost to the buyer as part of the total price of
the home; this method may allow buyers to finance their flooring upgrades
through their mortgage, with little incremental effect on monthly payments. The
builders' standard allowance and any billable upgrades are billed to the
builder, payable within thirty days of installation, and most of the Company's
accounts receivable result from residential contract billings to homebuilders.

         Through its Residential Contract Division, the Company has
relationships with most of the larger home builders in the Clark County area,
with its five largest customers accounting for $16.5 million, $18.1 million and
$18.1 million in sales in 1998, 1999 and 2000, respectively. During the past ten
years, the Residential Contract Division has accounted for Company sales ranging
from a low of $21.8 million in 1990 (56% of total Company sales) to a high of
$38.4 million in 2000 (61% of total Company sales). The Company's new-homes
sales in Clark County as a percentage of its total sales was 63%, 53%, and 51%
in 1998, 1999 and 2000, respectively.


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         Because the Residential Contract Division's sales are dependent on
sales of new-homes, such sales are affected by population growth, mortgage
interest rates, and the other factors that generally affect the level of
new-home construction and sales. However, because the Company also services the
residential replacement market, the adverse effects on the Company's sales by
downturns in the building cycle may be moderated by offsetting trends in the
redecoration of existing homes.

         Residential Replacement Division. The Residential Replacement Division
is responsible for providing individual consumers who have existing homes with
new or replacement floorcoverings. The Company is one of the three largest
residential replacement retailers in the Las Vegas area, chiefly because of its
large selection, low prices, quick installation time and name recognition.
Customers contemplating purchasing flooring or window treatments will visit one
of the Company's retail showrooms strategically placed throughout Las Vegas.
Highly trained retail salespersons will then go to the customer's home to verify
measurements and confirm product selections. Due to the Company's "cut and drop"
program with its suppliers, installation is available at the customer's
convenience.

         Generally, the Company requires that Residential Replacement Division
buyers provide a deposit by cash, check or credit card when they place an order,
and that they pay the balance upon installation. For customers who wish to
finance their purchases, the Company refers such customers to a consumer finance
company, which issues a payment directly to the Company upon completion of
installation. The Company's sales in the residential replacement market were
$11.1 million, $16.7 million and $17.8 million in 1998, 1999 and 2000,
respectively. The increase in residential replacement sales during 2000 occurred
primarily as a result of an increase of $1.6 million in sales in Washington,
D.C. and Myrtle Beach, S.C. operations, partially offset by decreases of $0.5
million in sales in the Las Vegas and Utah markets.

         Commercial Division. The Commercial Division is responsible for
providing floorcovering and related products to the multi-family, office, retail
store and small hotel markets.

         Highly trained commercial salespersons call on potential commercial
customers including general contractors, developers and real estate brokers to
bid projects. Commercial projects have a duration ranging from one week to
several months. Short duration contracts are billed upon completion and others
are billed as they progress; all billings are payable on a net thirty-day basis.
The Company's sales in the commercial market were $2.8 million, $3.6 million and
$3.2 million in 1998, 1999 and 2000, respectively. Although sales decreased
during 2000, commercial sales generated a higher gross profit. The Company
believes that it can increase its sales in the Commercial Division during 2001
with the same gross profit percentage; however, there can be no assurance of
this.

         Other. The Company sells other products and services including window
treatments, countertop and wall tile and floor cleaning services. These products
and services are distributed much the same as other Company products. The
Company's sales in the other areas were $2.7 million, $3.1 million and $3.4
million in 1998, 1999 and 2000, respectively.

         Operating Business Segments. The Company sells floorcoverings and
related products through its residential contract, residential replacement and
commercial operating segments in Nevada, Utah, Idaho, metropolitan Washington,
D.C. and Myrtle Beach, S.C. The Company believes that the economic and other
characteristics of its three operating segments meet the aggregation criteria
outlined in Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Accordingly, segment
information is not presented since the Company's operating segments are
aggregated for reporting purposes.

Customers

         The Company has among its customers most of the larger home builders in
Clark County, Nevada, including KB Home and American West Homes ("AWH"). The
Company has developed its relationships with such builders over the past 28
years. In 1998, 1999 and 2000, five customers accounted for approximately 37%,
31%, and 29% of the Company's net sales, respectively. In 1998, 1999 and 2000,
KB Home accounted for 15.3%, 14.5% and 16.4% of net sales, respectively. In
1998, 1999 and 2000, AWH accounted for 9.5%, 5.8%, and 4.2% of net sales,
respectively.


                                       7
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Suppliers

         The Company currently purchases its carpeting from suppliers outside
Nevada including suppliers located in Georgia and California. The Company
generally pays for its purchases within three weeks of delivery, allowing the
Company to procure substantial discounts from its suppliers. The Company's six
largest suppliers, which include Shaw Industries, Mohawk Industries and Beaulieu
United accounted for 80.1%, 74.2% and 66.3% of its total purchases in 1998, 1999
and 2000, respectively. The Company believes that one of its competitive
advantages is its strong relationship with such suppliers. While the Company
continues to have good relations with its suppliers, management believes that
the Company could find alternative sources of supply should any of the Company's
major suppliers cease doing business with it.

Marketing, Advertising and Merchandising

         The Company's advertising program includes television and radio
commercials and print advertising in local daily newspapers. Expenditures for
advertising and promotion, net of cooperative advertising contributions, were
approximately $785,000, $1,080,000 and $1,260,000 (representing 1.7%, 1.9%, and
2.0% of net sales) in 1998, 1999 and 2000, respectively. In its advertising, the
Company features its large selection, low prices and also features its guarantee
against carpet installation defects for as long as the buyer owns the home (one
year on all other products). The Company also receives cooperative advertising
contributions (up to 50% of the cost of qualifying advertisements depending on
the amount of the relevant products sold), from certain mills and yarn companies
by including in its advertising references to brand name yarns (such as DuPont,
Solutia and Allied) or floorcoverings (such as Congoleum).

Training

         The Company strives to develop the technical and sales skills of its
store personnel to ensure that customers consistently receive knowledgeable and
courteous assistance. The Company's training programs are oriented toward
emphasizing the importance of customer service, improving selling skills and
creating realistic expectations. The Company provides training for its
entry-level personnel through an in-house training program, which combines
on-the-job training with formal presentations by the Company's suppliers
concerning their products. The suppliers' contributions in this regard evidence
their commitment to the sales and service efforts of the Company. In addition,
ongoing instruction is given to all sales and customer service personnel.

Competition

         The floorcovering industry is highly competitive and fragmented.
According to an industry publication, the nations ten largest floorcovering
retailers in terms of sales volume accounted for approximately 30% of all
floorcovering sales in the United States in 1998, although none of such
retailers dominated the market. In 2000, Clark County, Nevada had approximately
100 outlets through which carpet was sold.

         Companies in the floorcovering industry compete mainly through their
ability to provide service and selection at reasonable prices. The Company
competes with general merchandise and discount stores, home improvement centers
and specialty retailers operating on a local, regional and national basis. The
Company believes that its chief competitors are local and regional specialty
chains as well as homebuilders' in-house design centers. Competitors in the
builder market include Adams Brothers, DuPont Flooring Systems, Bairs Carpet
Valley and Builders Services. Competitors in the retail market include Cloud
Carpets and Carpeteria.

         In addition to the local and regional specialty chains, the Company
competes with national and regional home improvement centers (such as Home Depot
and Lowes) and national department stores and specialty retailers (such as
Sears) which have branches in or near all of the Company's markets. Many of such
regional and national competitors have substantially greater financial resources
than the Company. In addition, expansion by certain regional home improvement
center chains has led to increased price competition for certain of the
Company's products.

         While there is intense competition among providers of floorcoverings in
the Company's markets the Company has successfully competed for customers on the
basis of price, reliability and quality of product, breadth of product line, and
service.


                                       8
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Employees

         As of March 15, 2001, the Company employed approximately 200 persons,
divided among its accounting, administrative, buying, sales, customer service
and warehousing departments. A substantial portion of the compensation of
residential replacement sales personnel is commission-based. None of the
Company's employees is covered by a collective bargaining agreement. The Company
believes that its relationship with its employees is satisfactory.

Product Liability and Insurance

         The sale of the Company's retail products involves some risk of product
liability claims. The Company has obtained product liability insurance in the
amount of $1.0 million per occurrence with a $2.0 million aggregate limit. The
Company has a $4.0 million excess liability umbrella insurance policy. Effective
October 1999, the Company obtained directors and officers and employment
practices liability insurance in the amount of $3.0 million. There can be no
assurance that the coverage limits of the Company's insurance policy and/or any
rights of indemnification and contribution that the Company may have will offset
potential claims. A successful claim against the Company in excess of insurance
coverage and not subject to indemnification could have a material adverse effect
on the Company.

Item 2. Properties

         Through March 1999, the Company leased from C.B. Realty of Delaware,
Inc. ("Realty") the property at which the Company's original Las Vegas facility
is located. The property was leased under a lease, extended through April 1,
2004, having an annual rental of $120,000. The 44,000 square foot property
includes a retail and commercial showroom and a warehouse retail outlet. On
March 31, 1999, the Company acquired the ownership of Realty, which was owned by
certain stockholders of the Company, and as a result thereof acquired ownership
of the facility. See Item 13-Certain Relationships and Related Transactions.

         In August of 1999, the Company moved its administrative offices from
the above described location to an office complex at which the Company leases
approximately 11,000 square feet at an annual rental of approximately $180,000.

         The Company also leases additional facilities in Las Vegas, consisting
of four retail showrooms, an additional warehouse, and a new-home design center,
containing a total of approximately 40,000 square feet at an aggregate annual
rental of approximately $640,000.

         The Company leases facilities in the greater Washington, D.C.
metropolitan area, consisting of three retail showrooms and a combination
warehouse and administrative offices containing approximately 30,000 square feet
at an aggregate annual rental of approximately $460,000.

         In addition, the Company also leases facilities in St. George, Utah,
Boise, Idaho and Myrtle Beach, South Carolina containing a total of
approximately 20,000 square feet at an aggregate annual rental of approximately
$190,000.

         The Company maintains its principal executive offices in New York, New
York at 100 Maiden Lane.

         The Company believes that its facilities are adequate for their
intended purposes.

Item 3. Legal Proceedings

         In December, 1999, BankBoston Development Company, LLC ("BankBoston"),
an affiliate of Fleet Boston Financial, filed a lawsuit in the United States
District Court for the District of Massachusetts against Philip Herman (former
Chairman of the Board and President of the Company), Branin Investments, Inc.
(Branin) (100% owned by Philip A. Herman) and the Company. In its complaint,
BankBoston alleges, purportedly on behalf of itself and other stockholders of
Millennium Services Corporation ("Millennium"), a company the majority of whose
common stock is owned by Branin, that Mr. Herman breached his fiduciary duties
to BankBoston in connection with BankBoston's $500,000 investment in Millennium,
that Branin and the Company aided and abetted this breach and that all the
defendants engaged in fraudulent activities under federal securities laws,
common law and the Massachusetts blue sky laws in connection with the
investment. The complaint seeks damages of $1.5 million on the fiduciary duty
claims and $500,000 on the fraud claims, together with treble damages on the
Massachusetts blue sky law claim, interest, attorneys' fees and costs. The
Company has filed an answer denying the principal allegations in the complaint.
The case is in the discovery stage, but the Company believes it has meritorious
defenses to the allegations in the complaint and intends to defend against such
allegations vigorously. Therefore, no liability has been recorded in the
consolidated financial statements as of December 31, 2000.


                                       9
<PAGE>

Item 4. Submission of Matters to a Vote of Security Holders

None

Part II.

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.

         The Company's Common Stock has been quoted on the "electronic bulletin
board" operated by the NASD under the symbol "CRPT" since May 1997 and, prior to
that, under the symbol "RAGC." No reported trading or quotes have been available
since July 7, 1997. The last sale price of the Common Stock on July 3, 1997 was
$4.00 per share as reported by the Automated Confirmation Transaction Service.

         As of March 15, 2001, there were approximately 370 record holders of
the Common Stock. The Company's credit facility with Fleet Capital Corporation
places restrictions on the Company's ability to pay dividends. The Company has
not paid and does not intend to declare or pay dividends on its Common Stock for
the foreseeable future.

Item 6.  Summary Financial Information
(in thousands, except share and per share data)

The summary financial information presented below has been derived from the
financial statements of the Company. This information should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Annual Report on Form 10-K. See Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations.

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                              --------------------------------------------------------------
                                                                    1996          1997         1998      1999 (1)     2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>          <C>        <C>          <C>
Results of Operations
  Net sales                                                      $  42,414      $ 40,836    $ 45,000    $ 58,114   $ 62,743
  Operating income                                                   2,400         1,858       1,785       2,593        474
  Dividends to preferred
    stockholders of subsidiary                                         538           559         466           -          -
  Amortization of discount
    on preferred stock of subsidiary                                     -             -       1,543           -          -
  Net income (loss)                                                     75          (652)     (1,794)      1,029       (558)
----------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share
  Income (loss) from continuing
    Operations
      Basic                                                      $    0.02      $  (0.18)   $  (0.52)   $   0.11   $  (0.32)
      Dilutive                                                   $    0.02      $  (0.18)   $  (0.52)   $   0.10   $  (0.32)
----------------------------------------------------------------------------------------------------------------------------
Assets and Capital
  Working capital (deficit)                                      $ (10,777)     $ (8,062)   $ (2,722)   $ (3,098)    (5,806)
  Total assets                                                      22,383        21,462      22,130      26,589     25,921
  Long-term debt and capital lease obligations,
      less current maturities                                          111         1,842       4,036       3,801        505
  Related party debt, less current portion                               -             -       2,500       2,000      2,732
  Stockholders' equity                                               3,416         2,763       6,225       7,889      7,263
----------------------------------------------------------------------------------------------------------------------------
Other Information
  EBITDA (2)                                                     $   3,623      $  3,066    $  2,917    $  3,783   $  2,780
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


1)  Includes the results of operations of the Kemper acquisition from July 1,
    1999. See Note 2 of Notes to Consolidated Financial Statements.
2)  EBITDA is computed as operating income excluding the effects of depreciation
    and amortization and, for 2000, executive severance expense. See Item 7.
    Management's Discussion and Analysis of Financial Condition and Results of
    Operations.


                                       10
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

         This Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Act of 1995. The Company's future results of
operations, as compared to those forward looking statements, is subject to and
will be affected by certain risks and uncertainties. As a result the Company's
actual operations may differ significantly from those discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, leverage, capital requirements, demand for the Company's
products and services, dependence on manufacturers and suppliers, relationships
with customers, dependence on key operating personnel, uncertainties related to
the Company's growth strategies and those discussed below.

         The following discussion of the financial condition and results of
operations of the Company relates to the fiscal years ended December 31, 1998,
1999 and 2000 and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K. All references to full years are to the applicable fiscal year of the
Company.

         The discussion of results includes discussions regarding EBITDA. EBITDA
is used by management as a measure of performance and is defined as operating
income excluding the effects of depreciation and amortization and, for the year
2000, executive severance expense Management believes it is meaningful to
readers as a measure of liquidity and allows investors to evaluate the Company's
liquidity using the same measure that is used by the Company's management. The
Company's calculation of EBITDA may or may not be consistent with the
calculation of EBITDA by other companies. Management views EBITDA as a
meaningful supplemental measure to, but not a replacement of, the primary
measures of financial condition and results of operations and accordingly,
management's discussion of EBITDA should not be viewed as an alternative to the
discussions of results of operations or cash flows as measured or presented
under generally accepted accounting principles. In addition, EBITDA does not
take into effect changes in certain assets and liabilities which can affect cash
flow.

Results of Operations

         Fiscal Years Ended December 31, 1999 and 2000

         Total revenues increased by $4,628,826 to $62,742,607 for the year
ended December 31, 2000 from $58,113,781 for the year ended December 31, 1999,
representing an increase of 8.0%. The components of this increase are as
follows:

         Residential Contract                      $ 3,667,343
         Residential Replacement                     1,143,728
         Commercial                                   (410,335)
         Other                                         228,090
                                                   -----------
                                                   $ 4,628,826
                                                   ===========

         The Company acquired a floorcovering operation in Washington, D.C. in
July 1999 and opened a location in Myrtle Beach, S.C. in July 2000. These
operations accounted for $4,051,781 of the total increase in sales, including
residential contract sales of $2,340,962, residential replacement sales of
$1,648,834 and commercial sales of $61,985. The remaining increase of $577,045
consists of increases in residential contracts sales of $1,326,381 and other
sales of $228,090, offset by decreases in residential replacement sales of
$505,106 primarily in the Las Vegas market and commercial sales of $472,320. The
decline in residential replacement sales in the Las Vegas market is primarily
due to increased competition from large do-it-yourself retailers such as Home
Depot and Lowes. The decline in commercial sales includes $142,090 attributable
to the April 1999 closing of the Company's Arizona location with the balance due
to a decline in Las Vegas sales. Overall, prices for the Company's products were
not significantly changed.

         Gross profit increased by $947,144 to $15,760,908 for the year ended
December 31, 2000 from $14,813,764 for the year ended December 31, 1999,
representing an increase of 6.1%. The Company's gross profit percentage
decreased to 25.1% in 2000 from 25.5% in 1999. Three factors contributed to the
decline in the gross profit percentage. First, throughout 2000 and continuing
into 2001, the Company has minimal available working capital borrowing capacity,
and as a result, has been unable to take full advantage of vendor discounts.
Second, residential contract sales included a higher number of model homes,
versus production homes. This change in the mix reduced gross profit as model
homes generally generate a lower gross profit. Third, in reaction to the
Company's assessment of the competitive environment in the Las Vegas market, the
Company reduced its pricing in bids on certain new-home developments to maintain
its market share. The Company is unable at this time to predict what, if any,
effect these factors will have on future trends in sales, gross profit and gross
profit percentages.


                                       11
<PAGE>

         Selling, general and administrative expenses increased by $2,900,763 to
$13,931,991 for the year ended December 31, 2000 from $11,031,228 for the year
ended December 31, 1999. The charges for the severance agreements with the
Company's former president and a director (see Note 11 of Notes to Consolidated
Financial Statements) accounted for $951,050 of the increase. Excluding the
effect of those charges, selling, general and administrative expenses increased
by $1,949,713 to $12,980,941 for the year ended December 31, 2000 from
$11,031,228 for the year ended December 31, 1999. The inclusion of the
Washington, D.C. operation acquired in 1999 and the new location opened in
Myrtle Beach, S.C. accounted for $1,297,373 of this increase. The remaining
increase of $652,340 is due to increases in general administrative expenses
required to accommodate increased volume and, as discussed below, in
anticipation of increased volume due to future acquisitions which did not occur.
This increase was comprised primarily of approximate increases in salaries and
benefits of $319,000, rent of $223,000, bank charges of $18,000, advertising of
$52,000, insurance of $15,000, fees paid to directors of $82,000 and
professional fees of $173,000, partially offset by approximate decreases in
entertainment and promotions of $31,000, third party finance charges of $93,000,
office expenses of $77,000 and travel of $22,000. Excluding the severance
charges discussed above, as a percentage of sales, selling, general and
administrative expenses increased to 20.7% in 2000 from 19.0% in 1999.

         In anticipation of the Company obtaining financing that would enable it
to acquire additional operations in the year 2000, the Company expanded its
corporate administrative operation to accommodate the planned growth. As a
result of the Company's failure to date to obtain additional financing, these
acquisitions were not completed as anticipated. After assessing the likelihood
and possible timing of obtaining such financing, the Company identified certain
administrative expenses, comprised principally of salaries and benefits, that
were eliminated during the third quarter. The Company believes that these
expense reductions, will allow the Company to improve its operating results.
However, there can be no assurance that these actions will be successful.

         Amortization and depreciation expense increased to $1,355,388 in 2000
from $1,189,198 in 1999 primarily due to increased amortization expense relating
to the Kemper acquisition and increased depreciation as the result of current
year equipment purchases, partially offset by decreased amortization expense
relating to a fully amortized covenant not-to-compete.

         As a result of the above changes and excluding the effects of the
severance charges, operating income decreased by $2,119,809 to $473,529 for the
year ended December 31, 2000 from $2,593,338 for the year ended December 31,
1999. Other income (expense) changed by $143,893 to expenses of $139,312 for the
year ended December 31, 2000 from income of $4,581 for the year ended December
31, 1999. Included in other expense is the write off of pre-acquisition fees and
loan fees of $146,439 relating to financing that was not obtained. Interest
expense increased to $1,166,219 in 2000 from $1,015,447 in 1999. Interest
expense was affected by higher average borrowings required to support the
current operations.

         Income taxes changed from an expense of $553,000 in 1999 to a benefit
of $274,000 in 2000 as the result of the change in the income (loss) before
taxes.

         Net income (loss) changed from net income of $1,029,472 in 1999 to a
net loss of $558,002 in 2000 for the reasons discussed above.

         EBITDA decreased by $1,002,569 to $2,779,967 for the year ended
December 31, 2000 from $3,782,536 for the year ended December 31, 1999. This
decrease in EBITDA was due primarily to the increase in selling, general and
administrative expenses.

         Fiscal Years Ended December 31, 1998 and 1999

         Total revenues increased by $13,113,394 from $45,000,387 for the year
ended December 31, 1998 to $58,113,781 for the year ended December 31, 1999,
representing an increase of 29.1%. The components of this increase are as
follows:

         Residential Contract                      $ 6,332,507
         Residential Replacement                     5,548,246
         Commercial                                    820,476
         Other                                         412,165
                                                   -----------
                                                   $13,113,394
                                                   ===========


                                       12
<PAGE>

         In September and November of 1998 and in June 1999 the Company acquired
floorcovering operations in Utah, Idaho, and Washington, D.C. respectively, and
in January 1999, the Company opened two additional retail locations in Las
Vegas. Those operations accounted for $9,634,022 of the total increase in sales,
including residential contract sales of $3,622,326 and residential replacement
sales of $6,011,696. The remaining $3,479,372 increase is attributable
principally to higher residential contract sales and commercial sales in the Las
Vegas market. The Company's existing Las Vegas residential replacement
operations incurred small declines in sales, principally as the result of sales
diverted from those locations by the Company's new Las Vegas showrooms. Prices
for the Company's products were not significantly changed.

         Gross profit increased by $3,720,670 from $11,093,094 for the year
ended December 31, 1998 to $14,813,764 for the year ended December 31, 1999,
representing an increase of 33.5%. The Company's gross profit percentage
increased from 24.7% in 1998 to 25.5% in 1999 due principally to the Company's
debt restructuring completed in May 1998, which provided the Company with
greater liquidity and thus allowed it to take advantage of vendor offered early
payment discounts.

         Selling, general and administrative expenses increased by $2,855,518
from $8,175,710 for the year ended December 31, 1998 to $11,031,228 for the year
ended December 31, 1999. The inclusion of the Utah, Idaho and Washington, D.C.
operations acquired in 1998 and 1999 and the new retail locations opened in 1999
accounted for $2,363,270 of this increase. The remaining increase of $492,248 is
due to increases in general administrative expenses required to accommodate the
Company's expanded operations. This $492,248 increase was comprised primarily of
approximate increases in salaries of $141,000, supplies of $105,000, travel of
$88,000, insurance of $49,000 and bank charges of $29,000. As a percentage of
sales, selling, general and administrative expenses increased from 18.2% in 1998
to 19.0% in 1999.

         Amortization and depreciation expense increased from $1,132,331 in 1998
to $1,189,198 in 1999 primarily as a result of the Company's Kemper acquisition
in June 1999.

         As a result of the above changes operating income increased by $808,285
from $1,785,053 for the year ended December 31, 1998 to $2,593,338 for the year
ended December 31, 1999. Other income (expense) changed by $289,392 from
expenses of $284,811 for the year ended December 31, 1998 to income of $4,581
for the year ended December 31, 1999, primarily as a result of the effect of the
refinancing of the Company's debt in May 1998. Interest expense decreased from
$1,165,341 in 1998 to $1,015,447 in 1999. Interest expense was affected by (i)
higher average borrowings required to support the increases in the Company's
sales, offset by (ii) lower effective interest rates as the result of the
Company's May 1998 debt restructuring and (iii) the elimination of $1,000,000 of
related party debt, of which $500,000 was extinguished in December 1998 through
the issuance of preferred stock and $500,000 was extinguished in March 1999
through the merger with Realty.

         Income taxes increased from $120,000 in 1998 to $553,000 in 1999 due to
the increase in income before income taxes. Net income (loss) changed by
$2,823,297 from a net loss of $1,793,825 for the year ended December 31, 1998 to
net income of $1,029,472 for the year ended December 31, 1999 due to above
changes and to the classification of dividends on preferred stock of $466,000
which prior to the Company's reorganization in November 1998 were recorded as an
expense in arriving at net income. After the merger of CBH into the Company
those dividends became dividends paid by the parent company, which are charged
directly to retained earnings and are accounted for as a deduction from net
income (loss) in determining net income (loss) applicable to common
stockholders. Included in the net loss for 1998 is a one time charge of
$1,542,726 of amortization of the original discount on the preferred stock of
CBH resulting from the issuance of Nations' preferred stock for the CBH
preferred stock in the November 1998 reorganization (merger of CBH into
Nations), and the write off of unamortized debt issuance costs of $232,000
relating to the Company's debt refinance in May 1998 (approximately $1,694,000,
net of tax). Excluding these one-time charges, the net income (loss) for the
years ended December 31, 1998 and 1999 was approximately $(100,000) and
$1,030,000, respectively.

         EBITDA increased by $865,152 from $2,917,384 for the year ended
December 31, 1998 to $3,782,536 for the year ended December 31, 1999. This
increase in EBITDA was due primarily to the increases in sales and gross profit
previously discussed, offset in part by costs incurred in new locations in Las
Vegas, Utah and Myrtle Beach along with other general increases in corporate
administrative costs.

Income Taxes

         The Company recorded income tax expense of $120,000 and $553,000 in
1998 and 1999, and income tax benefit of $274,000 in 2000. These amounts
represent effective rates of 35.8% in 1998, 35.0% in 1999 and 32.9% in 2000. The
primary reason for minor fluctuations in the Company's effective tax rate are
the increasing impact of state income taxes. In 2000, the Company's effective
tax rate declined as a result of the Company having certain state income tax
liabilities despite reporting a loss for Federal income tax purposes.


                                       13
<PAGE>

Liquidity and Capital Resources

         Cash provided by (used in) operating activities was $(479,016),
$2,462,348 and $2,421,474 for the years ended December 31, 1998, 1999, and 2000
respectively. In each of 1998, 1999 and 2000 the cash provided by (used in)
operations differed significantly from net income (loss), due to the inclusion
of non-cash charges in net income and certain significant changes in working
capital items. The changes in the working capital resulted in a working capital
deficit of $5,806,362 at December 31, 2000. Included in such deficit is
$7,782,156, the current portion of the amount due to Fleet Capital Corporation
("Fleet") under the credit agreement (the "Credit Agreement") discussed below.
The Company's growth and acquisition strategy will require significant
additional cash.

         For fiscal 2000, net loss included significant non-cash charges of
amortization of $924,590, depreciation of $430,798 and the stock compensation
included in the executive severance expense of $551,050. Additionally, cash was
provided by increases in accounts payable of $1,532,545 and accrued expenses of
$213,913 and a decrease in inventory of $229,376. These sources of cash from
operations were partially offset by the increase in accounts receivable,
decrease in customer deposits and the change in income taxes payable/receivable.
Accounts payable increased as the Company's borrowings under its revolving line
of credit approached its $5,000,000 limit. At that level, although the Company's
level of accounts receivable and inventory could support higher borrowings on
the basis of typical borrowing terms (including the borrowing base calculated
under the Credit Agreement but for the $5 million revolving credit limit
imposed), the Company has minimal available working capital borrowing capacity,
and as a result, while paying within vendor terms, has increased its reliance on
vendor credit to finance its purchases and was unable to take full advantage of
vendor discounts at times during the year 2000. Until the company is able to
restructure or refinance its current credit facility, the company anticipates
continuing to use vendor credit to finance its operations.

         For fiscal 1999, net income included significant non-cash charges of
amortization of $892,289 and depreciation of $296,909. Additionally, cash was
provided by increases in accounts payable of $613,348, accrued expenses of
$611,842, income taxes payable of $391,378 and customer deposits of $176,441.
These sources of cash from operations were partially offset by the increase in
accounts receivable and inventory. The increases in accounts payable, accrued
expenses, accounts receivable and inventory generally are the result of the
expansion of the Company's sales and operations.

         For fiscal 1998, net income included significant non-cash charges of
$1,542,726 for the amortization of the discount relating to CBH's preferred
stock, amortization of $909,600, depreciation of $222,731 and the write off of
loan fees and other of $291,361. Additionally, cash was provided by increases in
accrued expenses of $236,050 and customer deposits of $258,277. These sources of
cash from operations were partially offset by the use of cash to decrease
accounts payable as the result of and using the liquidity added by the May 1998
refinancing, and the increase in accounts receivable and inventory reflect
increased sales in the fourth quarter of 1998.

         During the years ended December 31, 1998, 1999 and 2000, cash used in
investing activities was $528,734, $1,886,574 and $649,655, respectively, used
primarily for business acquisitions in 1998 and 1999 and to purchase equipment
and leasehold improvements in all three years. Cash provided by (used in)
financing activities during such periods was $989,710, $(459,795) and
$(1,652,581), respectively. The net financing cash inflows in 1998 were
principally the result of additional advances from stockholders or related
parties, as the payments required under the Company's credit facility were
effectively funded through the Company's May 1998 refinancing. The 1999 net
financing cash outflows reflect the funds used to pay the dividends on the
Company's preferred stock partially offset by a net increase in credit facility
borrowings. The 2000 financing cash outflows reflect the funds used to pay the
dividends on the Company's preferred stock and to reduce credit facility
borrowings.

         As of the close of business on June 30, 1999, Carpet Barn, Inc. a
Delaware corporation ("CBI"), a wholly owned subsidiary of Nations Flooring,
Inc. ("Nations"), entered into an Asset Purchase Agreement (the "Kemper
Agreement") with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned
subsidiary of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired
certain assets of DuPont (the "Assets") for an aggregate purchase price of
$1,800,000 plus the assumption of certain liabilities. The source of such funds
was the working capital of CBI, including primarily funds borrowed pursuant to
Credit Facility with Fleet Capital Corporation.

         The Assets purchased by CBI under the Kemper Agreement consist of all
of the properties and assets previously used by DuPont in the business of
retailing, distributing and installation of residential floor covering products
and flooring systems under the "Kemper" name in the greater Washington D.C.
area.


                                       14
<PAGE>

         The operations of Kemper came under the control of Nations effective as
of July 1, 1999, and the acquisition was accounted for as a purchase.
Accordingly, Nations recorded the assets acquired and liabilities assumed, at
their fair values, and the results of Kemper's operations have been included in
Nations' results of operations commencing July 1, 1999. See Note 2 of Notes to
Consolidated Financial Statements.

         Under the terms of an Agreement and Plan of Merger (the Agreement)
filed with the State of Delaware on March 29, 1999, C.B. Realty of Delaware,
Inc. ("Realty") merged with and into Nations. In accordance with the Agreement,
each shareholder of Realty was issued 597.25 shares of Nations' common stock for
each share of Realty's common stock. A total of 59,725 shares of Nations' common
stock were issued.

         The Realty acquisition was accounted for as a purchase for financial
reporting purposes. Under generally accepted accounting principles, a purchase
business combination is recorded on the basis of the fair value of the
consideration paid (common stock issued) or the fair value of the net assets
acquired, whichever is more readily determinable. The common stock of Nations
has not been actively traded, and, in determining the number of shares of
Nations stock to be offered in the acquisition of Realty, the Board of Directors
of Nations, due to the related party ownership of Realty, determined to offer a
smaller number of shares than the number of shares that would have been implied
by the fair value of the assets acquired, resulting in an effective per share
value above the current fair value of Nations common stock, which would also be
antidilutive in nature and would therefore be beneficial to Nations.
Accordingly, the combination was recorded on the basis of the fair value of
Realty's net assets, which reflected recent appraisals of Realty's land and
building. For income tax purposes the combination was a tax free exchange, as a
result of which the assets of Realty were transferred to Nations at Realty's tax
basis. A deferred tax liability, for the future tax effects of the difference
between the fair value recorded for financial reporting purposes and such tax
basis, was recorded and included in the purchase price. See Note 2 of Notes to
Consolidated Financial Statements.

         Prior to the combination, Nations leased its principal Las Vegas
facility from Realty under an operating lease expiring in April 2004. The
results of operations for the years ended December 31, 1998 and 1999 include
rent expense paid under such lease of $115,071 and $30,000, respectively.
Additionally, at the time of the combination, Nations was indebted to Realty
under a 12% unsecured demand note in the amount of $500,000, and Realty was
indebted to Nations under a 10% installment note having a remaining balance of
$80,779. Both balances were eliminated in recording Nation's acquisition of
Realty.

         During May 1997, the Company received an unsecured advance from a
shareholder and director of the Company in the amount of $500,000. This advance
was repaid through the issuance of 500 shares of the Company's preferred stock
in December 1998. This advance bore interest at 12% per annum, payable monthly.
Total interest expense of $55,000 relating to this advance has been reflected in
the accompanying consolidated financial statements for the year ended December
31, 1998.

         The Company has an unsecured note payable totaling $2,731,858 from
Branin Investments, Inc. (Branin), which is 100% owned by Philip A. Herman, who
until August 18, 2000 was the Chairman of the Board and President of Nations.
Prior to his resignation, this note payable consisted of interest and
non-interest bearing advances. As an additional consideration of his
resignation, the Company agreed to consolidate all of the advances, both
interest and non-interest bearing into one interest-bearing note. The note bears
interest at 13% per annum, payable monthly and is due at the earlier of May 2003
or the date on which the Company completes a public offering of its equity
securities or a refinancing of its bank debt owed pursuant to the Credit
Facility with Fleet described below. In addition, Branin has agreed to
subordinate its rights to receive principal and interest payments to the
obligation under the Credit Facility. In light of these terms, $1,500,000 of the
advance was classified as long-term at December 31, 1999 and the entire note has
been classified as long term at December 31, 2000. Total interest expense of
$195,000 and $241,676 relating to the amounts owed to Branin has been reflected
in the accompanying consolidated statements of operations for the years ended
December 31, 1999 and 2000, respectively. Accrued interest of $241,676 is
included in the balance of Advances from and Notes Payable-Principal Stockholder
at December 31, 2000. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.


                                       15
<PAGE>

         On May 19, 1998, the Company, through its subsidiary CBI, entered into
a credit agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet"), containing a $5,000,000 term loan and a $5,000,000 revolving line of
credit. Subsequent to entering into the Credit Facility, Fleet merged with
BankBoston Corp to become an affiliate of Fleet Boston Financial. Advances under
the revolving line of credit are limited to the Company's collateral base as
defined by the Credit Facility. The term loan requires quarterly payments of
$175,000. CBI pledged substantially all of its assets to secure the Credit
Facility and Nations has pledged all of the common stock of CBI, to secure its
guarantee of the Credit Facility. Fees payable to Fleet totaled $125,000. In
addition, a finder's fee of $100,000 was paid to a person associated with
Branin. The term and revolving portions of the Credit Facility are due on May
18, 2003. All borrowings under the Credit Facility bear interest payable monthly
at the base rate per annum announced from time to time by Fleet (5.15% at March
15, 2001) plus 2.75% and 3.25% per annum, in connection with advances under the
revolving line and the term loan, respectively. At December 31, 2000, the
Company's collateral base exceeded $5,000,000. The Credit Facility also contains
provisions that excess cash flow over certain defined levels will be used to
repay principal under the term loan. The Credit Facility contains covenants
requiring CBI to maintain minimum levels of tangible net worth and debt
coverage. In connection with this Credit Facility, Branin agreed that the notes
payable to and advances from it are subject to certain subordination and payment
limitation requirements. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.

         At December 31, 2000, the Company was in violation of certain financial
covenants related to the Credit Facility. Fleet has not waived those violations,
accordingly the portions of the term note due beyond December 31, 2001, totaling
$2,550,000 have been reflected as currently due. Fleet has not notified the
Company of its intent to demand payment of amounts outstanding under the Credit
Facility and, although there can be no assurance in this regard, the Company
believes Fleet will continue to make funds available under the Credit Facility.

         Amounts outstanding under the Credit Facility at December 31 are as
follows:

                                                        1999              2000
                                                    -----------      -----------

Revolving line of credit                            $ 4,751,951      $ 4,532,156
Term loan                                             3,950,000        3,250,000

         The Company's business strategy contemplates acquisitions in new
markets and expansion of operations in existing markets. The Company's currently
available capital resources severely limit the Company's ability to execute this
plan.

         During 1999, the Company opened two new locations in Las Vegas and
during 2000, opened one location in Myrtle Beach, S.C. The Company funded these
new locations with its existing working capital. A portion of the initial
capital costs for these locations was provided by the Company's suppliers in
exchange for agreements by the Company to feature the suppliers' products at
these facilities. The Company anticipates that a portion of the capital
requirements for any new locations will be funded by its suppliers, although
there can be no assurance that the Company will be able to effect such an
arrangement. Any new facilities will require additional resources until they
become profitable, and there can be no assurance as to the amount of time
required before they can become profitable, if ever.

         The Company believes that its cash flow from operations and funds
available from the Fleet Credit Facility or its replacement will be adequate to
fund existing operations for 2001. Although planned 2001 operations are not
projected to eliminate or reduce the Company's working capital deficit which
existed at December 31, 2000, the Company believes that the Fleet Credit
Facility or its replacement will allow it to operate with a working capital
deficit until such time as operations will eliminate it. However, since the
Company was in violation of certain covenants and since Fleet has not waived
those violations, there can be no assurance that Fleet will continue to advance
funds under the Credit Facility.

         The Company recognizes that additional capital is needed to fund its
acquisition and growth strategy as well as any working capital requirements not
provided by Fleet. Accordingly, the Company is in negotiations with lenders to
obtain a credit relationship to replace Fleet if needed. In addition, the
Company is seeking to raise equity funds to further its acquisition strategy.
The Company is currently in discussions with an underwriter to negotiate a
commitment to underwrite a future equity offering by the Company. There can be
no assurance that any of these efforts will be successful. The failure to obtain
working capital financing to replace or supplement the Fleet facility, if
needed, and the failure to obtain additional debt or equity capital would
adversely affect the Company's pursuit of its growth strategies.


                                       16
<PAGE>

Other

         The Company believes that its revenues are not materially affected by
inflation and that any increased expenses due to inflationary pressures will be
offset, over time, by corresponding increases in prices it charges to its
customers.

         Effective January 1, 2000, the Company adopted a self-insurance program
for its employee health insurance. The plan has a stop loss reinsurance limit of
$20,000 per individual per year. Management does not believe that the costs of
the self-insurance program will be materially different than the prior program.

Item 7a Quantitative and Qualitative Disclosures about Market Risk

         Like virtually all commercial enterprises, the Company is exposed to
the risk ("market risk") that the cash flows to be received or paid relating to
certain financial instruments could change as a result of changes in interest
rate, exchange rates, commodity prices, equity prices and other market changes.
Market risk is attributed to all market risk sensitive financial instruments,
including long term debt.

         The Company does not engage in trading activities and does not utilize
interest rate swaps or other derivative financial instruments or buy or sell
foreign currency, commodity or stock indexed futures or options. Additionally,
with the exception of the Fleet credit facility, the interest on all of the
Company's debt is payable at fixed interest rates. Accordingly, the Company's
exposure to market risk is limited to the potential affect of changes in
interest rates on the cash flows (payments) relating to its variable rate debt
with is its debt with Fleet. Based upon the balance of the Fleet debt at
December 31, 2000, a hypothetical immediate and sustained increase of 1% in
Fleet's announced rate (which generally varies with the interest rates
established by the Federal Reserve Bank) would have the affect of increasing the
Company's interest expense by approximately $80,000 per year.

Item 8. Financial Statements and Supplementary Data

 CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated balance sheets                                                F-3

  Consolidated statements of operations                                      F-4

  Consolidated statements of stockholders' equity                            F-5

  Consolidated statements of cash flows                                F-6 - F-7

  Notes to consolidated financial statements                          F-8 - F-18

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

         None


                                       17
<PAGE>

                                    Part III.

Item 10. Directors and Executive Officers of the Registrant

         The following table sets forth certain information with respect to the
directors and executive officers of the Company.

Name                   Age     Position
----                   ---     --------
Facundo Bacardi        55      Chairman of the Board and President
Paul Kramer            68      Director
Andrew Levinson        52      Director
Thomas H. O'Mara       60      Director
William V. Poccia      55      Secretary and Executive Vice President of Finance
Steven M. Chesin       39      Chief Operating Officer

         The number of directors on the Board is presently fixed at five, whose
terms are perpetual.

         Facundo Bacardi has been a director of the Company since June 2, 1995
and is a member of the Stock Option Plan Committee. He also serves as a director
of Suramericana de Inversiones, S.A., an investment company located in Panama,
and has served in that capacity since 1990. Mr. Bacardi is also an heir to the
controllers of the Bacardi rum company, a worldwide manufacturer and one of the
largest family-owned companies in the world. He is currently an advisor to the
Board of Directors for Bacardi International, the holding company for all of the
Bacardi companies worldwide. From 1979 to 1991, Mr. Bacardi was in charge of the
manufacturing and distribution division for Central America.

         Paul Kramer has been a director since March 1998. Since August 1994,
Mr. Kramer has been a principal of Kramer & Love, a consulting firm providing
advisory services in the areas of acquisitions and restructuring. Prior thereto,
from October 1992, Mr. Kramer also provided financial advisory services. From
1954 to 1968, Mr. Kramer was employed by, and from 1968 to 1992, was a partner
in Ernst & Young, the accounting firm.

         Andrew Levinson has been a director since January 2000. Mr. Levinson
has been a partner with Phillips Nizer Benjamin Krim & Ballon, LLP ("Phillips
Nizer"), a law firm, since March 2001. Prior to that he was a partner with
Herzfeld & Rubin, PC, a law firm, since August 1996. From January 1987 to August
1996, Mr. Levinson was a partner with Shereff, Friedman, Hoffman and Goodman,
LLP, a law firm. During 1999, 2000, 2001, Herzfeld & Rubin, PC has rendered
legal services to the Company. Since March 2001, Phillips Nizer has rendered
legal services to the Company.

         Thomas H. O'Mara was elected a director in February 2001. Mr. O'Mara is
the Chief Financial Officer of CTA Industries, Inc., a manufacturer of acoustic
and thermal insulation for the construction and automotive industries. Prior to
joining CTA Industries, Inc. Mr. O'Mara was a Financial Consultant and Chief
Financial Officer of Benchmark Oncology. Mr. O'Mara had been President of Kemp
Industries, a manufacturer of hydraulic components, from 1983 to 1987 and
Financial Vice President and then President of the L.P. Thebault Company, a
regional commercial printing company from 1975 to 1983. Mr. O'Mara had also been
a manager in the Management Services department of the New York office of Arthur
Young & Co., an accounting firm.

         William Poccia has been Executive Vice President of Finance of the
Company since August 6, 1996. Effective August 18, 2000, Mr. Poccia's duties
also included certain duties previously performed by the prior President. From
October 1995 to August 1996, Mr. Poccia served as a financial consultant to the
Company in the employ of Branin. Prior to that time, Mr. Poccia served as
Director of Audit for Participants Trust Company, a securities depository for
mortgage-backed securities.

         Steven Chesin has been Senior Vice President and Chief Operating
Officer of Carpet Barn, Inc. since July 28, 1995. Effective August 18, 2000, Mr.
Chesin's duties also included certain duties previously performed by the prior
President. Prior to joining the Company, Mr. Chesin served, as President of
Steve's Floorcovering, Inc., a floorcovering installation specialist and senior
certified carpet inspector, from its founding in 1977 to the Company's
acquisition of Steve's Floorcovering, Inc. in July 1995.


                                       18
<PAGE>

         Pursuant to an employment agreement dated as of July 1, 1998 between
Mr. Chesin and the Company, Mr. Chesin is serving as Senior Vice President and
Chief Operating Officer of Carpet Barn, Inc. for a three-year period, with
successive one-year automatic extensions to his employment unless either party
gives the other at least 90 days' notice of termination prior to the end of any
term. Pursuant to the agreement, Mr. Chesin's annual salary is $150,000 per year
and may be increased at the Company's discretion. Mr. Chesin is also eligible to
receive a bonus equal to two percent of the increase in EBITDA over the prior
fiscal year. Mr. Chesin will receive two months' severance pay, plus an
additional month's severance pay for each full year of employment that has
elapsed, if the agreement terminates due to Mr. Chesin's total disability.

Item 11. Executive Compensation

Summary Compensation Table

         The following table sets forth for the fiscal years ended December 31,
1998, 1999 and 2000 the compensation for services in all capacities to the
Company of the persons who were at December 31, 2000 the executive officers of
the Company who received salary and bonus in excess of $100,000.

<TABLE>
<CAPTION>
                                                    Annual Compensation
                                            ---------------------------------        Long Term         All Other
                                             Salary         Bonus       Other     Compensation (3)   Compensation
                                            --------        ------      -----     ----------------   ------------
<S>                                            <C>           <C>          <C>           <C>               <C>
Philip A. Herman
  Chairman of the Board
  and President(1)
   Year ended December 31, 1998             $108,493            $0         $0          300,000             $0
   Year ended December 31, 1999              182,692        17,500          0          175,000              0
   Year ended December 31, 2000              130,769        20,000          0                0        908,250 (2)

William V. Poccia
  Executive Vice-President of Finance
  and Secretary
   Year ended December 31, 1998              116,378             0          0          125,000              0
   Year Ended December 31, 1999              138,654        12,500          0           75,000              0
   Year Ended December 31, 2000              150,000        18,000          0                0              0

Steven M. Chesin
  Chief Operating Officer
   Year ended December 31, 1998              125,000        10,768          0           75,000              0
   Year Ended December 31, 1999              138,654        12,500          0           75,000              0
   Year Ended December 31, 2000              150,000        18,000          0                0              0

</TABLE>

(1) Mr. Herman was Chairman of the Board and President of the Company prior to
    his resignation on August 18, 2000.

(2) Accrued severance pay of $400,000 payable $16,667 per month for 24 months
    commencing September 2000, and 475,000 stock options valued at $508,250.

(3) Represents the number of common shares underlying stock options granted
    during the year.

Director Compensation

         Compensation. Beginning with the fourth quarter of 1999, directors
receive quarterly fees of $3,000 each. Directors are eligible to participate in
the Company's 1997 Stock Option Plan.


                                       19
<PAGE>

1997 Stock Option Plan

         The Company adopted the 1997 Stock Option Plan (the "Option Plan") on
February 26, 1997, in order to provide an incentive to non-employee directors
and to officers and certain other key employees of and consultants to the
Company by making available to them an opportunity to acquire a proprietary
interest or to increase their proprietary interest in the Company. Shareholders
approved the adoption of the Option Plan on March 19, 1997. The Option Plan
provides for the award of options (each an "Award") representing or
corresponding to up to 1,250,000 shares of common stock of the Company. Any
Award issued under the Option Plan, which is forfeited, expires or terminates
prior to vesting or exercise will again be available for Award under the Option
Plan.

         The Option Plan is administered by the Committee, as defined in the
Option Plan. The Committee consists of Facundo Bacardi. The Committee has the
full power and authority, subject to the provisions of the Option Plan, to
designate participants, grant Awards and determine the terms of all Awards. The
Committee has the right to make adjustments with respect to Awards granted under
the Option Plan in order to prevent dilution of the rights of any holder.
Non-employee directors, including members of the Committee are not eligible to
receive discretionary Awards under the Option Plan but automatically receive
upon becoming such a director and each year thereafter non-qualified stock
options ("NQSO's") to purchase 10,000 shares of common stock of the Company at
an exercise price equal to the fair market value on the date of grant. Members
of the Committee are disinterested within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, and outside directors within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code").

         Options Issued Under the Option Plan. The terms of specific options are
determined by the Committee. Options granted may be NQSO's or incentive stock
options within the meaning of Code Section 422 ("ISO's"). The exercise price per
share for a non-qualified option is subject to the determination of the
Committee. Incentive stock options may not be granted at less than 100% of the
fair market value at the date of grant. Each option will be exercisable for the
period or periods specified in the option agreement, which will not exceed 10
years from the date of grant.

         Upon the exercise of an option, the option holder pays to the Company
the exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash and, with the consent of the Committee, shares of common
stock of Nations Flooring, Inc., other securities (including options) or other
property. The period after termination of employment during which an option may
be exercised is as determined by the Committee. In the absence of any specific
determination by the Committee, the following rules will apply. The unexercised
portion of any option granted under the Option Plan will generally be terminated
(a) 30 days after the date on which the optionee's employment is terminated for
any reason other than (i) cause, (ii) retirement or mental or physical
disability or (iii) death; (b) immediately upon the termination of the
optionee's employment for cause; (c) three months after the date on which the
optionee's employment is terminated by reason of retirement or mental or
physical disability; or (d)(i) 12 months after the date on which the optionee's
employment is terminated by reason of the death of the employee, or (ii) three
months after the date on which the optionee shall die if such death shall occur
during the three-month period following the termination of the optionee's
employment by reason of retirement or mental or physical disability.


                                       20
<PAGE>

         During 1998, 1999 and 2000, options to purchase 1,565,000 shares of the
Company's common stock were granted to the directors, officers and employees of
the Company, of which 620,000 were forfeited and 985,000 are outstanding as of
December 31, 2000. No options have been exercised.

<TABLE>
<CAPTION>
<S>     <C>
                                    Options Granted in Last Fiscal Year
-------------------------------------------------------------------------------------------------------------
                                                                                     Potential realizable
                                                                                       value at assumed
                                                                                     annual rates of stock
                                                                                    price appreciation for
                              Individual grants                                           option term
-------------------------------------------------------------------------------    --------------------------

                      Number of    Percent of total
                      securities       options        Exercise
                      underlying      granted to       or base
                       options       employees in       price      Expiration
Name                 granted (#)     fiscal year       ($/Sh)         date            5% ($)      10% ($)
-------------------------------------------------------------------------------    --------------------------

None


                  Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
-------------------------------------------------------------------------------------------------------------

                                                   Number of securities            Value of unexercised
                                                  Underlying unexercised           in-the-money options
                     Shares                        Options at FY-End (#)               At FY-End ($)
                   acquired on    Value        --------------------------------------------------------------
Name                exercise    realized ($)   Exercisable    Unexercisable    Exercisable   Unexercisable
-------------------------------------------------------------------------------------------------------------
William Poccia          0           0            118,333          91,667         15,000           7,500
Steven Chesin           0           0             75,000          75,000          9,000           4,500
</TABLE>

         The Company accounts for the grant of employee and director stock
options using the intrinsic value model of APB No. 25. Management believes use
of the minimum value method is appropriate as the Company's common stock has not
been quoted or traded since July 1997.


                                       21
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth certain information as of March 1, 2001,
regarding (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of common stock, (ii) each director,
nominee and Named Executive Officer of The Company and (iii) all officers and
directors as a group. Unless otherwise indicated the address is deemed to be
that of the Company.

<TABLE>
<CAPTION>
                                                  Common Stock                       Preferred Stock
                                  --------------------------------------------- ---------------------------

                                      Shares       Shares Under                     Shares
                                  Beneficially     Exercisable     Percentage    Beneficially   Percentage
Name and Address                      Owned        Options (2)      of Class        Owned        of Class
----------------                  -------------------------------------------------------------------------
<S>                                     <C>                <C>           <C>               <C>           <C>
Facundo Bacardi (1)                  1,440,298          50,000        32.8%             0             0

Philip A. Herman (3)                   397,388         475,000        19.2%         2,025         39.2%

William Poccia                             675         118,333         2.6%             5             *
Tom O'Mara                                   0          10,000            *             0             0
Paul Kramer                                  0          40,000                          0             0
Andrew Levinson                              0          20,000            *             0             0
Steven M. Chesin                             0          75,000         1.6%             0             0
All Directors and Executive          1,440,973         313,333        38.3%             5             *
Officers (6 persons)
</TABLE>

* Less than 1%.

1)  Includes an aggregate of 1,440,298 shares held by various affiliates of Mr.
    Bacardi (including 941,900 shares held by Icarus Investments Ltd., 1,816
    shares held by Delphic Investments Ltd., 246,280 shares held by Global
    Recovery Assets, Int'l., 186,755 shares held by Designed Investments Ltd.
    and 63,547 shares held by Marvest, Inc.). Excludes 500 shares held by family
    members of Mr. Bacardi. Mr. Bacardi disclaims beneficial ownership of the
    shares held by such family members.

2)  Includes shares under options exercisable on December 31, 2000 and options
    which become exercisable within 60 days thereafter.

3)  Includes 340,139 shares held by Branin Investments, Inc. Excludes 43,943
    held by family members of Mr. Herman. Mr. Herman disclaims beneficial
    ownership of shares held by such family members.


                                       22
<PAGE>

Item 13. Certain Relationships and Related Transactions.

         The Company has an unsecured note payable totaling $2,731,858 from
Branin, which is 100% owned by Philip A. Herman, who until August 18, 2000 was
the Chairman of the Board and President of Nations. Prior to his resignation,
this note payable consisted of interest and non-interest bearing advances. As an
additional consideration of his resignation, the Company agreed to consolidate
all of the advances, both interest and non-interest bearing into one
interest-bearing note. The note bears interest at 13% per annum, payable monthly
and is due at the earlier of May 2003 or the date on which the Company completes
a public offering of its equity securities or a refinancing of its bank debt
owed pursuant to the Credit Facility with Fleet (as describe in Note 3 of Notes
to Consolidated Financial Statements. In addition, Branin has agreed to
subordinate its rights to receive principal and interest payments to the
obligation under the Credit Facility. In light of these terms, $1,500,000 of the
advance was classified as long-term at December 31, 1999 and the entire note has
been classified as long term at December 31, 2000. Total interest expense of
$195,000 and $241,676 relating to the amounts owed to Branin has been reflected
in the accompanying consolidated statements of operations for the years ended
December 31, 1999 and 2000, respectively. Accrued interest of $241,676 is also
reflected in the consolidated financial statements at December 31, 2000 and is
included as Advances from and Notes Payable-Principal Stockholder. See Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources with respect to these and other
advances made by Branin on behalf of the Company.

         The Company has an oral agreement to pay for consulting services of
$20,000 per month to Branin. This agreement was entered into for the purpose of
receiving management advisory services regarding operations management,
financing and acquisitions.

         On July 7, 2000, the United States Securities and Exchange Commission
("SEC") filed a complaint against Philip Herman, Branin, Millennium and another
individual. In the complaint, the SEC alleges the defendants made false and
misleading statements in the offering and sale of unregistered securities of
Millennium, in violation of the anti-fraud and registration provisions of the
federal securities laws. The complaint seeks an order against the defendant
enjoining them from future violations of such laws, requiring disgorgement of
"ill-gotten gains" plus prejudgment interest and assessing civil penalties. The
case is in the preliminary discovery stage. Mr. Herman has advised the Company
that he has filed an answer denying the principal allegations in the complaint
on behalf of himself, Branin and Millennium and has indicated that he believes
he has meritorious defenses for the allegations in the complaint and intends to
defend against such allegations vigorously. Neither the Company nor its officers
or directors are named in this complaint. Accordingly, the Company does not
believe any finding resulting from the resolution of this complaint will have a
direct adverse financial impact on the Company.

Item 14. Exhibits and Reports on Form 8-K


         (a) Consolidated Financial Statements

             Consolidated balance sheets                                     F-3

             Consolidated statements of operations                           F-4

             Consolidated statements of stockholders' equity                 F-5

             Consolidated statements of cash flows                     F-6 - F-7

             Notes to consolidated financial statements               F-8 - F-18

         (b) Reports on Form 8-K

             None

         (c) Exhibits

             2.1   Agreement and Plan of Exchange, dated as of June 1, 1995,
                   among the Company, Carpet Barn Holdings, Inc. ("CBH") and the
                   holders of common Stock of CBH (incorporated by reference
                   from Exhibit 1 of the Company's Report on Form 8-K (June 2,
                   1995) (the "June Form 8-K")).

             2.2   Asset Purchase Agreement, dated as of June 1, 1995, between
                   Carpet Barn Acquisition Corp. ("CBAC") and Carpet Barn, Inc.
                   ("Carpet Barn") (Incorporated by reference from Exhibit 3 of
                   the June Form 8-K).


                                       23
<PAGE>

             2.3   Amendment, dated June 1, 1995, to Asset Purchase Agreement
                   (Incorporated by reference from Exhibit 4 of the June Form
                   8-K).

             3.1   Certificate of Incorporation, dated July 19, 1988, of the
                   Company (Incorporated by reference from Exhibit 3(a) of the
                   Company's Registration Statement on Form S-18 (33-29942-NY)
                   filed October 20, 1989 (the "1989 Registration Statement")).

             3.2   By-laws of the Company (incorporated by reference from
                   Exhibit 3(b) of the 1989 Registration Statement).

             3.3   Amended and Restated Certificate of Incorporation of CBH
                   (incorporated by reference from Exhibit 3.3 of the Company's
                   Annual Report on Form 10-K for the period ended December 31,
                   1995 (the "Form 10-K")).

             3.4   Certificate of Amendment to Amended and Restated Certificate
                   of Incorporation of CBH (incorporated by reference from
                   Exhibit 3.4 of the Form 10-K).

             3.6   Certificate of Incorporation of Nations Flooring, Inc.
                   (incorporated by reference from Exhibit 3.6 of the Company's
                   Registration Statement on Form S-1 (333-19871) filed January
                   16, 1997 ("1997 Registration Statement")).

             3.7   By-laws of Nations Flooring, Inc. (incorporated by reference
                   from Exhibit 3.7 of the 1997 Registration Statement).

             9.1   Voting Trust Agreement, dated May 30, 1995, between Philip A.
                   Herman and certain shareholders of the Company (incorporated
                   by reference from Exhibit 2 of the June Form 8-K).

             10.7  Terms of preferred stock, par value $.01 per share, stated
                   value $1,000 per share, of CBH (incorporated by reference
                   from Exhibit 12 of the June Form 8-K).

             10.8  Employment Agreement, dated as of July 28, 1995, between CBI
                   and Steven Chesin (incorporated by reference from Exhibit 1
                   of the Company's Report on Form 10-Q for the quarterly period
                   ended June 30, 1995 (the "June 1995 Form 10-Q)).

             10.9  Form of Promissory Note issued in the offering of short-term
                   notes of CBH (incorporated by reference from Exhibit 11 of
                   the June Form 8-K).

             10.10 Lease, dated June 1, 1995, between CB Realty of Delaware,
                   Inc. ("CB Realty") and CBAC (incorporated by reference from
                   Exhibit 10.13 of the Form 10-K).

             10.11 First Amendment to Lease Agreement, dated August 1, 1995,
                   between CB Realty and CBAC (incorporated by reference from
                   Exhibit 10.14 of the Form 10-K).

             10.12 Promissory Note, dated June 1, 1995 from CB Realty in favor
                   of CBAC (incorporated by reference from Exhibit 10.15 of the
                   Form 10-K).

             10.13 Employment Agreement, dated as of May 28, 1996, between CBI
                   and Alan Ember. (incorporated by reference from Exhibit 10.15
                   of the 1997 Registration Statement).

             10.14 Credit Facility, dated May 19, 1998, between CBI and Fleet
                   Capital Corporation. (Incorporated by reference from Exhibit1
                   of the June 1998 Form 10-Q).

             10.15 Agreement and Plan of Merger, dated March 23, 1999, between
                   the Registrant and Realty. (Incorporated by reference from
                   Exhibit 1 of Form 8-K dated March 29, 1999).


                                       24
<PAGE>

             10.16 Promissory Note dated May 19, 1998, between Realty and
                   MetLife. (Incorporated by reference from Exhibit 2 of Form
                   8-K\A-1 dated March 29, 1999).

             10.17 Commercial Deed of Trust, Security Agreement, Assignment of
                   Leases and Rents and Fixture Filing dated May 19, 1998 by
                   Realty in favor of MetLife. (Incorporated by reference from
                   Exhibit 3 of Form 8-K\A-1 dated March 29, 1999).

             10.18 Assignment of Rents and Leases dated May 19, 1998 between
                   Realty and MetLife. (Incorporated by reference from Exhibit 4
                   of Form 8-K\A-1 dated March 29, 1999).

             10.19 Loan Modification Agreement dated March 31, 1999 between the
                   Registrant and G.E. Capital. (Incorporated by reference from
                   Exhibit 5 of Form 8-K\A-1 dated March 29, 1999).

             10.20 Asset Purchase Agreement effective as of June 30, 1999 by and
                   among Carpet Barn and DuPont. (Incorporated by reference from
                   Exhibit 1 of Form 8-K dated June 30, 1999).


                                       25
<PAGE>

                      NATIONS FLOORING, INC. AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 2000


<PAGE>

INDEPENDENT AUDITOR'S REPORT                                                 F-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated balance sheets                                                  F-3

Consolidated statements of operations                                        F-4

Consolidated statements of stockholders' equity                              F-5

Consolidated statements of cash flows                                  F-6 - F-7

Notes to consolidated financial statements                            F-8 - F-18



                                      F-1
<PAGE>


                          Independent Auditor's Report


To the Board of Directors
Nations Flooring, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of Nations
Flooring, Inc. and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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 Nations Flooring,
Inc. and subsidiary as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with generally accepted accounting principles.


/s/ McGladrey & Pullen, LLP


McGladrey & Pullen, LLP
Las Vegas, Nevada

March 1, 2001


                                      F-2
<PAGE>

NATIONS FLOORING, INC.  AND SUBSIDIARY

Consolidated Balance Sheets
December 31, 1999 and 2000

<TABLE>
<CAPTION>
<S>                                                                                  <C>               <C>

ASSETS (Note 4)                                                                      1999             2000
                                                                                ----------------------------
Current Assets
  Cash                                                                          $    328,162    $    447,400
  Accounts receivable, less allowance for doubtful
    accounts $475,000 (Note 5)                                                     5,744,891       5,662,949
  Inventory                                                                        2,241,453       2,012,077
  Prepaid expenses and other                                                         545,810         538,255
  Deferred income taxes (Note 6)                                                     151,000         230,000
  Income taxes receivable (Note 6)                                                         -          72,905
                                                                                ----------------------------
                   Total current assets                                            9,011,316       8,963,586
                                                                                ----------------------------

Property and Equipment, net (Note 1)                                               2,509,745       2,763,731
Intangible Assets, net (Note 1)                                                   15,067,895      14,193,305
                                                                                ----------------------------
                                                                                $ 26,588,956    $ 25,920,622
                                                                                ============================
Liabilities and Stockholders' Equity
Current Liabilities
  Note payable (Note 4)                                                         $  4,751,951    $  7,782,156
  Current maturities of long-term debt (Note 4)                                      808,000         106,000
  Accounts payable                                                                 2,606,350       4,138,895
  Advances from principal stockholder (Note 3)                                       574,934               -
  Income taxes payable (Note 6)                                                      391,378               -
  Accrued expenses                                                                 1,226,017       1,489,930
  Customer deposits                                                                1,751,395       1,252,967
                                                                                ----------------------------
                       Total current liabilities                                  12,110,025      14,769,945
                                                                                ----------------------------

Long-Term Debt, less current maturities (Note 4)                                   3,800,620         504,657
Advances from and Notes Payable-Principal Stockholder,
    less current portion (Note 3)                                                  2,000,000       2,731,858
Deferred Income Taxes (Note 6)                                                       789,000         651,000

Commitments and Contingencies (Notes 7 and 8)

Stockholders' Equity (Notes 1, 9 and 11)
  Preferred stock, 12% cumulative; $.001 par value,
    authorized 1,000,000 shares; issued 5,160 shares;
    total liquidation preference of outstanding shares
    of $5,160,000                                                                          5               5
  Common stock, $.001 par value, authorized 20,000,000
    shares; issued 3,729,779 shares                                                    3,730           3,730
Additional paid-in capital                                                         9,652,241      10,203,291
Retained earnings (deficit)                                                       (1,766,665)     (2,943,867)
                                                                                ----------------------------
                                                                                   7,889,311       7,263,159
                                                                                ----------------------------
                                                                                $ 26,588,956     $25,920,622
                                                                                ============================
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

NATIONS FLOORING, INC.  AND SUBSIDIARY

Consolidated StatementS of OPERATIONS
Years Ended December 31, 1998, 1999, and 2000

<TABLE>
<CAPTION>
                                                                                     1998               1999            2000
                                                                                ------------------------------------------------
<S>                                                                                 <C>                <C>              <C>
Net sales (Note 5)                                                              $ 45,000,387       $ 58,113,781     $ 62,742,607
Cost of sales Note 4)                                                             33,907,293         43,300,017       46,981,699
                                                                                ------------------------------------------------
   Gross profit                                                                   11,093,094         14,813,764       15,760,908

Selling, general and administrative expenses:
  Related party consulting fees (Note 8)                                             252,500            240,000          240,000
  Related party rent expense (Note 2)                                                115,071             30,000                -
  Executive severance expense (Note 11)                                                    -                  -          951,050
  Other                                                                            7,808,139         10,761,228       12,740,941
                                                                                ------------------------------------------------
                                                                                   8,175,710         11,031,228       13,931,991
Amortization and depreciation                                                      1,132,331          1,189,198        1,355,388
                                                                                ------------------------------------------------
  Operating income                                                                 1,785,053          2,593,338          473,529

Other Income (expense):
  Related party interest expense (Notes 2 and 3)                                    (274,500)          (210,000)        (241,676)
  Interest expense (Note 4)                                                         (890,841)          (805,447)        (924,543)
  Other income (expense), net (Note 10)                                             (284,811)             4,581         (139,312)
                                                                                ------------------------------------------------

    Income (loss) before income taxes, dividends to preferred
      stockholders of subsidiary and amortization
      of discount on preferred stock of subsidiary                                   334,901          1,582,472         (832,002)

 Provision for income taxes (benefit) (Note 6)                                       120,000            553,000         (274,000)
                                                                                ------------------------------------------------

    Income (loss) before dividends to preferred
      stockholders of subsidiary and amortization of
      discount on preferred stock of subsidiary                                      214,901          1,029,472         (558,002)

Dividends to preferred stockholders of subsidiary                                    466,000                  -                -
Amortization of discount on preferred stock of subsidiary                          1,542,726                  -                -
                                                                                ------------------------------------------------

  Net income (loss)                                                               (1,793,825)         1,029,472         (558,002)

Dividends on preferred stock                                                          98,200            619,200          619,200
                                                                                ------------------------------------------------

Net income (loss) applicable to common stockholders                             $ (1,892,025)      $    410,272     $ (1,177,202)
                                                                                ================================================


Basic net income (loss) per common share (Note 1)                               $      (0.52)      $       0.11     $      (0.32)
                                                                                ================================================
Dilutive net income (loss) per common share (Note 1)                            $      (0.52)      $       0.10     $      (0.32)
                                                                                ================================================
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

NATIONS FLOORING, INC.  AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                        Preferred Stock           Common Stock                       Retained
                                       Shares                  Shares                  Paid-In       Earnings
                                    Outstanding    Dollars   Outstanding   Dollars     Capital      (Deficit)
                                    ---------------------------------------------------------------------------
<S>                                          <C>      <C>         <C>       <C>           <C>            <C>
Balance, December 31, 1997                    -          -   3,787,647      3,788      3,050,240      (284,912)

Issuance of preferred stock (Note 1)      4,660          5           -          -      4,659,995             -

Issuance of preferred stock (Note 3c)       500          -           -          -        500,000             -

Issuance of common stock (Note 4)             -          -      27,657         27        193,573             -

Retirement of treasury stock                  -          -    (145,250)      (145)        (5,665)            -

Dividends on preferred stock                  -          -           -          -              -       (98,200)

Net loss                                      -          -           -          -              -    (1,793,825)
                                    ---------------------------------------------------------------------------

Balance December 31, 1998                 5,160          5   3,670,054      3,670      8,398,143    (2,176,937)

Issuance of common stock (Note 2)             -          -      59,725         60      1,254,098             -

Dividends on preferred stock                  -          -           -          -              -      (619,200)

Net income                                    -          -           -          -              -     1,029,472
                                    ---------------------------------------------------------------------------

Balance December 31, 1999                 5,160        $ 5   3,729,779    $ 3,730   $  9,652,241  $ (1,766,665)

Issuance of stock options (Note 11)           -            -         -          -        551,050             -

Dividends on preferred stock                  -            -         -          -              -      (619,200)

Net loss                                      -            -         -          -              -      (558,002)
                                    ---------------------------------------------------------------------------

Balance December 31, 2000                 5,160        $ 5   3,729,779    $ 3,730   $ 10,203,291  $ (2,943,867)
                                    ===========================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                       Treasury
                                                         Stock       Total
                                                      -----------------------
<S>                                                        <C>        <C>
Balance, December 31, 1997                              (5,810)    2,763,306

Issuance of preferred stock (Note 1)                         -     4,660,000

Issuance of preferred stock (Note 3c)                        -       500,000

Issuance of common stock (Note 4)                            -       193,600

Retirement of treasury stock                             5,810             -

Dividends on preferred stock                                 -       (98,200)

Net loss                                                     -    (1,793,825)
                                                      -----------------------

Balance December 31, 1998                                    -     6,224,881

Issuance of common stock (Note 2)                            -     1,254,158

Dividends on preferred stock                                 -      (619,200)
                                                             -
Net income                                                         1,029,472
                                                      -----------------------

Balance December 31, 1999                               $    -   $ 7,889,311

Issuance of stock options (Note 11)                          -       551,050

Dividends on preferred stock                                 -      (619,200)
                                                             -
Net loss                                                            (558,002)
                                                      -----------------------

Balance December 31, 2000                               $    -   $ 7,263,159
                                                      =======================
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1999, and 2000

<TABLE>
<CAPTION>
                                                                                  1998            1999              2000
                                                                            ----------------------------------------------
<S>                                                                                <C>              <C>              <C>
Cash Flows from Operating Activities
  Net income (loss)                                                         $ (1,793,825)    $ 1,029,472       $  (558,002)
  Depreciation                                                                   222,731         296,909           430,798
  Amortization                                                                   909,600         892,289           924,590
  Deferred income taxes                                                          120,000          98,000          (313,000)
  Provision for bad debts                                                        189,836         289,426           362,055
  Rent expense in lieu of note receivable payments from Realty                   115,071          30,000                 -
  Issuance of stock options                                                            -               -           551,050
  Amortization of discount on preferred stock of subsidiary                    1,542,726               -                 -
  Write off of deferred offering costs and other                                 291,361               -           146,439
  Changes in assets and liabilities, net of business acquisitions:
    Increase in accounts receivable                                             (894,528)     (1,338,193)         (280,113)
    (Increase) decrease in inventory                                            (511,859)       (342,924)          229,376
    Increase in prepaid expenses and other                                        (3,311)       (240,003)         (108,390)
    Increase in income taxes receivable                                                -               -           (72,905)
    Increase (decrease) in accounts payable                                   (1,118,599)        613,348         1,532,545
    Increase (decrease) in advances from principal stockholder                   (42,546)        (45,637)          156,924
    Increase (decrease) in income taxes payable                                        -         391,378          (295,378)
    Increase in accrued expenses                                                 236,050         611,842           213,913
    Increase (decrease) in customer deposits                                     258,277         176,441          (498,428)
                                                                            ----------------------------------------------

            Net cash provided by (used in) operating activities             $   (479,016)    $ 2,462,348       $ 2,421,474
                                                                            ----------------------------------------------

Cash Flows from Investing Activities
  Advances to employees and related parties, net                            $    (35,777)    $   (30,839)      $         -
  Purchase of property and equipment                                            (323,139)       (306,149)         (619,161)
  Payments for business acquisitions                                            (164,254)     (1,500,000)                -
  Acquisition cost expenditures                                                   (5,564)        (49,586)          (30,494)
                                                                            ----------------------------------------------

            Net cash used in investing activities                           $   (528,734)    $(1,886,574)      $  (649,655)
                                                                            ----------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1999, and 2000

<TABLE>
<CAPTION>
                                                                                  1998            1999              2000
                                                                            ----------------------------------------------
<S>                                                                                <C>              <C>              <C>
Cash Flows from Financing Activities
  (Payments) advances on note payable                                       $ (2,935,943)    $   239,738       $  (919,795)
  Proceeds from related party advance                                            500,000               -                 -
  Principal payments on long-term debt                                        (4,436,718)        (80,333)         (113,586)
  Proceeds from long-term debt                                                 5,000,000               -                 -
  Proceeds from note payable                                                   2,487,371               -                 -
  Proceeds from notes payable-principal stockholder                              500,000               -                 -
  Cash dividends paid on preferred stock                                               -        (619,200)         (619,200)
  Debt issuance costs                                                           (125,000)              -                 -
                                                                            ----------------------------------------------

            Net cash provided by (used in) financing activities             $    989,710     $  (459,795)      $(1,652,581)
                                                                            ----------------------------------------------
            Net increase (decrease) in cash                                      (18,040)        115,979           119,238

Cash, beginning                                                                  230,223         212,183           328,162
                                                                            ----------------------------------------------
Cash, ending                                                                $    212,183     $   328,162       $   447,400
                                                                            ==============================================

Cash payments for:
  Interest                                                                  $    934,177     $   782,101       $   707,273
                                                                            ==============================================
  Income taxes, net of refunds, $203,296 in 1998,
    none in 1999 and 2000                                                   $   (201,419)    $    63,390       $   405,318
                                                                            ==============================================

SUPPLEMENTAL SCHEDULE OF NONCASH
    INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends paid through increase
  in advances from principal stockholder (Note 3b)                          $    564,200     $         -       $         -
Repayment of advance from stockholder through
  issuance of preferred stock                                               $    500,000     $         -       $         -
Loan fees added to note payable                                             $    136,332     $         -       $         -
Equipment acquired through financing agreement                              $     35,803     $    85,204       $    65,623
Realty merger (Note 2)                                                      $          -     $ 2,003,867       $         -
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-7
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Summary of Significant Accounting Policies

Nature of business

Nations Flooring, Inc. (Nations or Company) was organized under the laws of the
State of Delaware.

The Company sells floorcoverings and related products through its residential
contract, residential replacement and commercial operating segments in Nevada,
Utah, Idaho, South Carolina and metropolitan Washington, DC. The Company
believes that the economic and other characteristics of its three operating
segments meet the aggregation criteria outlined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Accordingly, segment information is not presented since the
Company's operating segments are aggregated for reporting purposes. The Company
grants credit principally to new-homebuilders.

A summary of the Company's significant accounting policies follows.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiary, Carpet Barn, Inc. (CBI). All material intercompany accounts and
transactions are eliminated in consolidation. Prior to the merger on November
16, 1998 of Carpet Barn Holdings, Inc. (CBH), a subsidiary of Nations, into
Nations, the dividends attributed to CBH preferred stock dividends were included
as dividends to preferred stockholders of subsidiary on the consolidated
statements of operations. As a result of the merger, the discount related to the
previously outstanding CBH preferred stock was charged against the results of
operations for the year ended December 31, 1998, in a manner similar to
dividends on subsidiary preferred stock.

Preferred stock

The holders of the 12% cumulative preferred stock of Nations have an aggregate
of 16% of the votes of the outstanding shares of the common stock of Nations.

In the event the Company is liquidated, no distributions shall be made to the
holders of shares of stock ranking junior to the preferred stock, unless, prior
thereto, the holders of shares of preferred stock shall have received a
liquidation preference payment of $1,000 per share plus all accrued and unpaid
dividends through the date of such payment. Also, until all accrued and unpaid
dividends and distributions on preferred stock have been paid in full, the
Company shall not declare or pay dividends on, make any other distributions on,
or redeem, purchase or otherwise acquire for consideration any shares of stock
ranking junior to the preferred stock.

The preferred stock may be redeemed at the option of the Board of Directors at a
call price per share equal to its stated value plus any accrued and unpaid
dividends through the date of redemption. If no call has been made, the Company
is required to call the preferred stock for redemption at the call price on a
date not later than seven days after the closing of an underwritten public
offering.

Use of estimates in the preparation of financial statements

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 disclosures 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.

Cash

During the periods presented, the Company maintained cash balances which, at
times, were in excess of federally insured limits. The Company has experienced
no losses in such accounts. At December 31, 2000 the Company's cash balances
were maintained at financial institutions in Nevada, Illinois, Idaho and
Virginia.

Inventory

Inventory consists primarily of carpet and vinyl and is stated at the lower of
cost (first-in, first-out method) or market. Included in inventory is
work-in-process of $530,648 and $461,079 at December 31, 1999 and 2000,
respectively.


                                      F-8
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Summary of Significant Accounting Policies
(continued)

Property and equipment

Building, furniture and equipment, autos and trucks and leasehold improvements
are stated at cost, less accumulated depreciation and amortization. Depreciation
is provided on the straight-line and accelerated methods for financial reporting
purposes. Amortization is provided on the straight-line basis over the shorter
of the economic life of the asset or the lease term.

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                 Depreciation
                                                    Lives           1999             2000
                                                               ----------------------------
<S>                                                   <C>             <C>              <C>

Land                                                   -       $   664,000      $   645,400
Building                                              20           781,000          781,000
Furniture and equipment                                7         1,351,635        1,539,568
Autos and trucks                                       5           170,543          218,208
Leasehold improvements                               3 -7          491,492          954,214
                                                               ----------------------------
                                                                 3,458,670        4,138,390
Less accumulated depreciation and amortization                     948,925        1,374,659
                                                               ----------------------------
Property and equipment, net                                    $ 2,509,745      $ 2,763,731
                                                               ============================
</TABLE>

The Company assesses the impairment of long-lived assets, identifiable
intangibles and costs in excess of net assets of business' acquired (goodwill),
by comparison to the projected undiscounted cash flows to be derived from the
related assets. The Company has concluded that no impairment in the carrying
amount of long-lived assets, identifiable intangibles and goodwill existed at
December 31, 2000.

Intangible assets

Intangible assets consist of the following at December 31:

                                                        1999             2000
                                                   -----------------------------

Goodwill                                           $ 17,870,417     $ 17,864,367
Covenants not-to-compete                                700,000          125,000
Debt issuance costs                                     292,904          292,904
                                                   -----------------------------
                                                     18,863,321       18,282,271
Less accumulated amortization                         3,795,426        4,088,966
                                                   -----------------------------
Intangible assets, net                             $ 15,067,895     $ 14,193,305
                                                   =============================

Goodwill is being amortized using the straight-line method over fifteen to
twenty-five years.

The Company incurred financing costs related to bank financing (see Note 4).
These costs are being amortized on the effective interest method over the term
of the debt.

The Company has also entered into covenants not-to-compete in connection with
certain business acquisitions. The covenants are being amortized on the
straight-line method over the five-year terms of the agreements.

Income taxes

The Company provides for deferred taxes 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 effect of changes in tax laws and rates on the date of
enactment.


                                       F-9
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Summary of Significant Accounting Policies
(continued)

Vendor cooperative marketing and purchase discounts

The Company participates in various advertising and marketing programs with
suppliers. Certain of the Company's costs incurred in connection with these
programs are reimbursed. The Company records these reimbursements when earned.
The Company also records accounts payable net of anticipated purchase discounts.

Basic and dilutive net income (loss) per common share

Basic and dilutive net income (loss) per common share is computed based on net
income (loss) and the following weighted average number of common shares
outstanding:
                                       1998           1999           2000
                                    ---------      ---------      ---------

Basic shares                        3,670,054      3,714,848      3,729,779
Dilutive shares                     3,670,054      3,942,232      3,729,779

Dilutive net income (loss) per share reflects the effect of the inclusion of the
incremental shares issuable upon the exercise of outstanding stock options.
Dilutive net income (loss) per share for the years ended December 31, 1998 and
2000 is the same as the basic net income (loss) per share as the inclusion of
incremental shares for outstanding stock options would have been anti-dilutive.
Dividends on preferred stock, which totaled $98,200, $619,200 and $619,200 for
the years ended December 31, 1998, 1999 and 2000, respectively, reduced the
earnings available to common stockholders in the computation of earnings per
share.

Revenue recognition

Revenue is recorded for commercial and retail floorcovering sales upon
installation.

Advertising

All costs related to marketing and advertising the Company's products are
expensed in the period incurred.

Advertising expense, net of cooperative advertising earned, was $784,736,
$1,080,494 and $1,259,384 for the years ended December 31, 1998, 1999 and 2000,
respectively.

Self Insurance

The Company is a member of a self-insured group for its workers compensation
coverage. Estimated costs resulting from any non-insured losses are accrued by a
charge to income when the incident that gives rise to the loss occurs. To date
there have been no non-insured losses.

Accounting for Stock-Based Compensation

The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees and directors in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, under which
compensation expense, if any, is based on the difference between the exercise
price of an option, or the amount paid for an award, and the market price or
fair value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation arrangements
involving non-employees are accounted for under Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, (SFAS 123)
under which such arrangements are accounted for based on the fair value of the
option or award.

Fair value of financial instruments

The carrying amounts of financial instruments including cash, accounts
receivable, employee and other receivables, accounts payable, accrued expenses
and customer deposits approximate their fair values because of their short
maturities.

The carrying amounts of note payable and long-term debt approximate their fair
values because the interest rates on these instruments are at market rates.

Although management expects a substantial portion of amounts due to stockholders
to be paid in the near term, it is not practicable to estimate the fair value of
these amounts, as they have no stated repayment terms. Management does not
believe fair value of such amounts, if determined, would differ materially from
their recorded amounts.


                                      F-10
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Acquisitions

Kemper

As of the close of business on June 30, 1999, CBI entered into an Asset Purchase
Agreement with DuPont Flooring Systems, Inc. (DuPont) (a wholly owned subsidiary
of E.I. DuPont De Nemours and Company) pursuant to which CBI acquired certain
assets of DuPont (the "Assets") for an aggregate purchase price of $1,800,000
plus the assumption of certain liabilities. The source of such funds was the
working capital of CBI, including funds borrowed pursuant to Credit Facility
with Fleet Capital Corporation.

The Assets purchased by CBI under the Agreement consist of all of the properties
and assets previously used by DuPont in the business of retailing, distributing
and installation of residential floor covering products and flooring systems
under the "Kemper" name in the greater Washington D.C. area.

The operations of Kemper came under the control of Nations effective July 1,
1999 and the acquisition was accounted for as a purchase. Accordingly, Nations
recorded the assets acquired and liabilities assumed, at their fair values, and
the results of Kemper's operations have been included in Nations' results of
operations commencing July 1, 1999. The net book value of the assets acquired by
Nations was approximately $1,308,000, comprised of current assets, principally
inventory and accounts receivable, of approximately $1,138,000, and equipment
and leasehold improvements of approximately $170,000. Nations assumed current
liabilities, comprised of accounts payable, accrued expenses and customer
deposits of approximately $467,000. Additionally, Nations acquired a receivable
from DuPont for cash equal to the customer deposits of approximately $231,000
previously transferred to DuPont by Kemper. The tangible assets acquired and
liabilities assumed were principally recorded at their book values, which
approximated their fair values, and the remaining purchase price of
approximately $729,000 was recorded as a covenant not-to-compete and goodwill.

The components of the purchase price and the allocation to the assets acquired
and assumed were as follows:

Components of purchase price:

  Cash paid
        Financed through borrowings under line of credit             $ 1,500,000
        Financed through short term obligation to DuPont                 300,000
                                                                     -----------
                                                                       1,800,000
  Liabilities assumed                                                    466,915
                                                                     -----------
                                                                     $ 2,266,915
                                                                     ===========

Allocated to:

  Fair value of net tangible assets acquired                         $ 1,307,591
  Receivable from DuPont to fund customer deposits                       230,819
  Covenant not-to-compete                                                100,000
  Goodwill                                                               628,505
                                                                     -----------
                                                                     $ 2,266,915
                                                                     ===========

Realty

Under the terms of an Agreement and Plan of Merger (the Agreement) filed with
the State of Delaware on March 29, 1999, C.B. Realty of Delaware, Inc. (Realty)
merged with and into Nations. In accordance with the Agreement, each shareholder
of Realty was issued 597.25 shares of Nations' common stock for each share of
Realty's common stock. A total of 59,725 shares of Nations' common stock were
issued.

The acquisition was accounted for as a purchase for financial reporting
purposes. Under generally accepted accounting principles, a purchase business
combination is recorded on the basis of the fair value of the consideration paid
(common stock issued) or the fair value of the net assets acquired, whichever is
more readily determinable. The common stock of Nations has not been actively
traded, and, in determining the number of shares of Nations stock to be offered
in the acquisition of Realty, the Board of Directors of Nations, due to the
related party ownership of Realty, determined to offer a number of shares with
an effective per share value above the current fair value of Nations common
stock which would also be antidilutive in nature and would therefore be
beneficial to Nations. Accordingly, the combination was recorded on the basis of
the fair value of Realty's net assets, which reflect recent appraisals of
Realty's land and building.

For income tax purposes the combination was a tax-free exchange, as a result of
which the assets of Realty were transferred to Nations at Realty's tax basis. A
deferred tax liability, for the future tax effects of the difference between the
fair value recorded for financial reporting purposes and such tax basis, was
recorded and included in the purchase price.


                                      F-11
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Acquisitions (continued)

The components of the purchase price and the allocation to the assets acquired
and assumed were as follows:

Components of purchase price:

    Common stock issued                                              $ 1,254,158
    Deferred tax liability recorded                                      185,000
                                                                     -----------
                                                                       1,439,158
    Liabilities assumed                                                  564,709
                                                                     -----------
                                                                     $ 2,003,867
                                                                     ===========

Allocated to:

    Land and building                                                $ 1,445,000
    Related party receivables                                            532,768
    Other                                                                 26,099
                                                                     -----------
                                                                     $ 2,003,867
                                                                     ===========

Prior to the combination, Nations leased its principal Las Vegas facility from
Realty under an operating lease expiring in April 2004. The results of
operations for the years ended December 31, 1998 and 1999 include rent expense
paid under such lease of $115,071and $30,000 respectively.

At the time of the combination, Nations was indebted to Realty under a 12%
unsecured demand note in the amount of $500,000, and Realty was indebted to
Nations under a 10% installment note having a remaining balance of $80,779. Net
interest expense of $37,000 and $15,000 relating to these notes has been
reflected in the accompanying consolidated statements of operations for the
years ended December 31, 1998 and 1999, respectively. Both balances have been
eliminated in recording Nations' acquisition of Realty.

Other

On September 18, 1998, the Company purchased the net assets of Merrill's Carpet
and Tile, Inc. (Merrill's) a floorcovering retailer located in St. George, Utah
pursuant to an asset purchase agreement. Under the purchase agreement, the
Company purchased substantially all the assets of Merrill's in exchange for
$200,000, of which approximately $164,000 was paid at closing. The acquisition
was accounted for as a purchase and operations of Merrill's subsequent to the
acquisition are included with those of the Company. Net assets purchased were
comprised of equipment of $50,000, and current assets, primarily inventory and
accounts receivable of $25,000. The remaining $125,000 of the purchase price was
allocated to goodwill and a covenant not-to-compete.

In November 1998, the Company purchased a small builder floorcovering business
in Boise, Idaho (Trinity) by agreeing to complete contracts in progress. The
operations of Trinity prior to its acquisition by the Company were
insignificant.

Pro Forma Information

The following pro forma information indicates what Nations' results of
operations for the years ended December 31, 1998 and 1999 would have been had
the above acquisitions taken place at January 1, 1998 and 1999, respectively.
This pro forma information is presented for illustrative purposes only, and is
not intended to necessarily indicate what the actual results of operations would
have been if the companies had been combined during those periods, or what the
future results of operations may be:

<TABLE>
<CAPTION>
                                                                         1998               1999
                                                                    ------------       ------------
<S>                                                                 <C>                <C>
Revenues                                                            $ 51,300,854       $ 61,445,071
Net income (loss) applicable to common stockholders                 $ (1,598,076)      $    613,034
Basic net income (loss) per share                                   $      (0.44)      $       0.17
Dilutive net income (loss) per share                                $      (0.44)      $       0.16

</TABLE>


                                      F-12
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Advances from and Note Payable - Principal Stockholder

The Company has an unsecured note payable totaling $2,731,858 from Branin
Investments, Inc. (Branin), which is 100% owned by Philip A. Herman, who until
his resignation on August 18, 2000 was the Chairman of the Board and President
of Nations. Prior to his resignation, this note payable consisted of interest
and non-interest bearing advances. As an additional consideration of his
resignation, the Company agreed to consolidate all of the advances, both
interest and non-interest bearing into one interest-bearing note. The note bears
interest at 13% per annum, payable monthly and is due at the earlier of May 2003
or the date on which the Company completes a public offering of its equity
securities or a refinancing of its bank debt owed pursuant to the Credit
Facility with Fleet as describe in Note 4. In addition, Branin has agreed to
subordinate its rights to receive principal and interest payments to the
obligation under the Credit Facility. In light of these terms, $1,500,000 of the
advance was classified as long-term at December 31, 1999 and the entire note has
been classified as long term at December 31, 2000. Total interest expense of
$195,000 and $241,676 relating to the amounts owed to Branin has been reflected
in the accompanying consolidated statements of operations for the years ended
December 31, 1999 and 2000, respectively. Accrued interest of $241,676 is
included in the balance of Advances from and Notes Payable-Principal Stockholder
at December 31, 2000.

Note 4. Note Payable and Long-Term Debt

On May 19, 1998, the Company, through its subsidiary CBI, entered into a credit
agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"),
containing a $5,000,000 a term loan and a $5,000,000 revolving line of credit.
Advances under the revolving line of credit are limited to the Company's
collateral base as defined by the Credit Facility. The term loan requires
quarterly payments of $175,000. CBI pledged substantially all of its assets to
secure the Credit Facility and Nations has pledged all of the common stock of
CBI to secure its guarantee of the Credit Facility. Fees payable to Fleet
totaled $125,000. In addition, a finders fee of $100,000 was paid to a person
associated with Branin. The term and revolving portions of the Credit Facility
are due on May 18, 2003. All borrowings under the Credit Facility bear interest,
payable monthly, at the base rate per annum announced from time to time by Fleet
(6.75% at December 31, 2000) plus 2.75% and 3.25% per annum, in connection with
advances under the revolving line and the term loan, respectively. At December
31, 2000, the Company's collateral base exceeded $5,000,000. The Credit Facility
also contains provisions that excess cash flow over certain defined levels will
be used to repay principal under the term loan. The Credit Facility contains
covenants requiring CBI to maintain minimum levels of tangible net worth and
debt coverage and places restrictions on the Company's ability to pay dividends.
In connection with this Credit Facility, Branin has agreed that the notes
payable to and advances from it (see Note 3) will be subject to certain
subordination and payment limitation requirements.

At December 31, 2000, the Company was in violation of certain financial
covenants related to the Credit Facility. Fleet has not waived those violations,
accordingly the portions of the term note due beyond December 31, 2001, totaling
$2,550,000 have been reflected as currently due. Fleet has not notified the
Company of its intent to demand payment of amounts outstanding under the Credit
Facility and although there can be no assurance in this regard, the Company
believes Fleet will continue to make funds available under the Credit Facility.

<PAGE>

Amounts outstanding under the Credit Facility at December 31 are as follows:

                                                        1999             2000
                                                    -----------      -----------

Revolving line of credit                            $ 4,751,951      $ 4,532,156
Term loan                                             3,950,000        3,250,000

In conjunction with the Realty merger (see Note 2), the Company assumed a
mortgage note payable with a financial institution secured by the Company's land
and building. The note, which has a balance due of $460,540 and $432,572 at
December 31, 1999 and 2000, respectively, bears interest at 9% and is due in
monthly payments of principal and interest totaling $5,690 with the balance due
May 2003.

CBI also has long-term notes payable of $198,080 and $178,085 outstanding at
December 31, 1999 and 2000, respectively. The notes bear interest at an
approximate average of 13.7% and mature between February 2001 and September
2005.

Aggregate maturities required on the long-term debt are due in future years as
follows at December 31, 2000:

         2001                                                          $ 106,000
         2002                                                             80,653
         2003                                                            406,929
         2004                                                             10,428
         2005                                                              6,647
                                                                       ---------
                                                                       $ 610,657
                                                                       =========


                                      F-13
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Note Payable and Long-Term Debt (continued)

During 2000, the Company had obtained a commitment letter from Barbican Capital
Partners, LLC (Barbican) for a $32,000,000 credit facility. The Company planned
to use the proceeds of the facility to refinance the Fleet Credit Facility and
acquire certain operations. The commitment expired on May 31, 2000. In
anticipation of consummating the Barbican credit facility, the Company incurred
pre-acquisition costs of approximately $30,000 in conjunction with several
uncompleted acquisitions. The Company also incurred approximately $115,000 in
costs associated with the financing not obtained. The pre-acquisition and
financing costs were written off during the year ended December 31, 2000, since
these acquisition negotiations were abandoned (see Note 10).

The Company is actively seeking a credit relationship to replace the Fleet
Credit Facility, if needed and provide the Company additional working capital.
In addition, the Company plans to raise equity funds to further its acquisition
strategy. The Company is currently in discussion with an underwriter to
negotiate a commitment to underwrite a future offering by the Company. There can
be no assurance that such contemplated replacement financing or equity offering
will be completed or that the funds raised will be sufficient to execute the
Company's strategy.

Note 5. Major Customers

Sales for the Company include sales to, and accounts receivable due from, the
following major customers:

<TABLE>
<CAPTION>
                                             Percent to Total Sales             Percent to Total Accounts
                                             Year Ended December 31,            Receivable at December 31,
                                            ------------------------            --------------------------
Customer                                    1998      1999      2000            1999                  2000
--------                                    ----      ----      ----            ----                  ----
<S>                                         <C>        <C>       <C>             <C>                   <C>
A                                           15%        15%       16%             15%                   14%
B                                           10%         6%        4%              3%                    2%
</TABLE>

Note 6. Income Taxes

The provision for income taxes (benefit) for the years ended December 31 is
comprised of the following:

                                          1998            1999          2000
                                       ----------      ---------     ----------

Current expense                        $        -      $ 455,000     $   39,000
Deferred tax expense (benefit)         $  120,000         98,000       (313,000)
                                       -----------------------------------------
                                       $  120,000      $ 553,000     $ (274,000)
                                       =========================================

<PAGE>

Deferred tax assets and liabilities consist of the following components as of
December 31:
                                                       1999              2000
                                                    ----------       ----------
Current deferred tax assets:
   Allowance for doubtful accounts                  $  139,000       $  139,000
   Accrued expenses                                     12,000           91,000
                                                    ---------------------------
   Total net current deferred tax asset                151,000          230,000
                                                    ---------------------------


Non current deferred tax assets (liabilities):
   Property and equipment                             (390,000)        (340,000)
   Intangible assets                                  (399,000)        (561,000)
   Non-qualified stock options                               -          250,000
                                                    ---------------------------
                                                      (789,000)        (651,000)
                                                    ---------------------------
                                                    $ (638,000)      $ (421,000)
                                                    ===========================

No valuation reserve was considered necessary at December 31, 1999 and 2000 as
management believes it is more likely than not that the deferred tax assets will
be realized in future years due to either offsetting deferred tax liabilities or
taxes attributable to future taxable income. The deferred tax liabilities are
inclusive of the deferred tax liability recorded in 1999 as a result of the
Realty merger (see Note 2).


                                      F-14
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Lease Commitments

The Company has entered into agreements to rent retail and warehouse space under
separate operating leases expiring through December 2006. Monthly lease payments
are net of taxes, insurance and utilities, and total approximately $106,000. The
monthly base rent will be adjusted annually to predetermined amounts, or to
reflect any increases in the Consumer Price Index. Approximate future minimum
lease commitment under these leases at December 31, 2000 is as follows:

         2000                              $ 1,132,169
         2001                                  936,592
         2002                                  878,189
         2003                                  738,878
         2004                                  338,569
         2005                                  150,785
                                           -----------
                                           $ 4,175,182
                                           ===========

Total rent expense under the above leases for the years ended December 31, 1998,
1999 and 2000 was $463,867, $1,170,868 and $1,672,252, respectively.

Note 8. Commitments, Contingencies and Related Party Transactions

Consulting agreements

The Company has an oral agreement to pay for consulting services of $20,000 per
month to Branin. This agreement was entered into for the purpose of receiving
management advisory services regarding operations management, financing, and
acquisitions.

Financing advisory fees

Branin acted as advisor to the Company in certain financing and equity
transactions consummated in 1995. In consideration of these advisory services
Branin is entitled to fees of approximately $650,000 only payable upon the
consummation of an underwritten public offering of the Company's common stock.
No amounts have been recorded in the accompanying consolidated financial
statements for these contingent fees.

Other

Also see Notes 1, 2, 3 and 4 for additional related party transactions.

Litigation

In December, 1999, BankBoston Development Company, LLC (BankBoston) filed a
lawsuit in the United States District Court for the District of Massachusetts
against Philip Herman, Branin and the Company. In its complaint, BankBoston
alleges, purportedly on behalf of itself and other stockholders of Millennium
Services Corporation (Millennium), a company the majority of whose common stock
is owned by Branin, that Mr. Herman breached his fiduciary duties to BankBoston
in connection with BankBoston's $500,000 investment in Millennium, that Branin
and the Company aided and abetted this breach and that all the defendants
engaged in fraudulent activities under federal securities laws, common law and
the Massachusetts blue sky laws in connection with the investment. The complaint
seeks damages of $1.5 million on the fiduciary duty claims and $500,000 on the
fraud claims, together with treble damages on the Massachusetts blue sky law
claim, interest, attorneys' fees and costs. The Company has filed an answer
denying the principal allegations in the complaint. The case is in the discovery
stage, but the Company believes it has meritorious defenses to the allegations
in the complaint and intends to defend against such allegations vigorously;
therefore, no liability has been recorded in the consolidated financial
statements as of December 31, 2000.

The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. The Company believes that the amount of any
ultimate liability with respect to these actions in the aggregate or
individually will not materially affect the results of operations, cash flows or
financial position of the Company.


                                      F-15
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Stock Option Plan

On March 19, 1997 the Company's stockholders adopted the 1997 Stock Option Plan
(the "Option Plan") to provide an incentive to non-employee directors and to
officers and certain other key employees of and consultants to the Company by
making available to them an opportunity to acquire common stock in the Company.
The Option Plan provides for the award of options representing or corresponding
up to 1,250,000 shares of common stock. The terms of specific options are
determined by the Committee as defined in the Option Plan. The exercise price
for a non-qualified option is subject to the determination of the Committee.
Incentive stock options may not be granted at less than 100 % of the fair value
of the common stock on the date of the grant. The options expire at varying
dates not to exceed 10 years from the date of grant. Any award issued under the
Option Plan which is forfeited, expires or terminates prior to vesting or
exercise will again be available under the Option Plan.

A summary of the status of the Company's fixed stock option plan as of December
31, 1998, 1999 and 2000 and activity during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                                 1998                            1999                          2000
                                          --------------------        ------------------------       -----------------------
                                                     Weighted-                       Weighted-                    Weighted-
Fixed Options, all of which had                       Average                         Average                      Average
Exercise prices equal to market                      Exercise                        Exercise                      Exercise
Value on the grant date                    Shares      Price            Shares         Price           Shares       Price
-------------------------------           --------------------        ------------------------       -----------------------
<S>                                        <C>          <C>             <C>             <C>          <C>            <C>
Outstanding at beginning of year           40,000       $ 7.00          595,000         $ 2.17       1,000,000      $ 2.57
Granted                                   585,000         2.00          405,000           3.15         575,000        2.51
Exercised                                       -            -                -              -               -           -
Forfeited                                  30,000         5.33                -              -         515,000        2.40
                                          --------------------        ------------------------       ---------------------
Outstanding at end of year                595,000       $ 2.17        1,000,000         $ 2.57       1,060,000      $ 2.59
                                          ====================        ========================       =====================

Options exercisable at year-end            70,000       $ 3.43          275,000         $ 2.49         851,667      $ 2.57
                                          ====================        ========================       =====================
Weighted-average minimum fair value
of options granted during the year                      $ 0.87                          $ 1.46                      $ 1.09
                                                        ======                          ======                      ======
</TABLE>

All options vest over a three-year period, with the exception of options granted
to directors and those granted in conjunction with severance agreements (see
Note 11) which options vest immediately.

The Company accounts for the grant of employee and director stock options using
the intrinsic value model of APB No. 25. Management believes use of the minimum
value method is appropriate as the Company's common stock has not been quoted or
traded since July 1997. The following table summarizes the effect on the
Company's consolidated financial statements if compensation expense for the
grant of such options had been measured using the minimum value requirements of
SFAS 123:

<TABLE>
<CAPTION>
                                                                     1998             1999              2000
                                                                -------------      ----------      -------------
<S>                                                                       <C>             <C>                <C>
Option life, in years                                                     10              10                 10
Risk free interest rate                                                 5.85%           6.45%              5.75%
Dividends                                                                  0               0                  0
Compensation expense                                            $    150,441       $ 287,304       $    391,052
Net income (loss)                                               $ (1,944,266)      $ 742,168       $   (949,054)
Net income (loss) applicable to common stockholders             $ (2,042,466)      $ 122,968       $ (1,568,254)
Basic and dilutive net income (loss) per common share           $      (0.56)      $    0.03       $      (0.42)
</TABLE>


                                      F-16
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Stock Option Plan (continued)

The following table summarizes information about fixed stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                                          Options Outstanding                       Options Exercisable
                              -------------------------------------------       ---------------------------
                                                Weighted-
                                                 average        Weighted-                         Weighted-
                                                remaining       average                            average
                                 Number        contractual      exercise          Number           exercise
Range of exercise prices      Outstanding         life           price          exercisable         price
------------------------      ----------------------------      ---------       ---------------------------
<S>                                <C>            <C>              <C>              <C>              <C>
      $  2.00                    255,000        7.3 years        $  2.00          180,000          $  2.00
      $  2.50                    555,000        9.6 years        $  2.50          555,000          $  2.50
      $  3.15                    230,000        8.5 years        $  3.15           96,667          $  3.15
      $  4.00                     10,000        6.5 years        $  4.00           10,000          $  4.00
      $ 10.00                     10,000        6.2 years        $ 10.00           10,000          $ 10.00
                               ---------                         -------          ------------------------
                               1,060,000                         $  2.59          851,667          $  2.57
                               =========                         =======          ========================
</TABLE>

Note 10. Other Income (Expense)

Other income (expense) consists of the following at December 31:

<TABLE>
<CAPTION>
                                                  1998           1999            2000
                                                 ---------------------------------------
<S>                                              <C>              <C>         <C>
Miscellaneous income, primarily interest         $   6,550        $ 4,581     $    7,127
Write off of:
  Pre-acquisition costs                                  -              -        (30,494)
  Loan fees and other                             (291,361)             -       (115,945)
                                                 ---------------------------------------
                                                 $(284,811)       $ 4,581     $ (139,312)
                                                 =======================================
</TABLE>

Note 11. Executive and Director Severance Agreement

On August 18, 2000, Philip Herman resigned his position as President and Chief
Executive Officer and relinquished his seat on the Board of Directors. As a
result of Mr. Herman's resignation all 475,000 stock options he held as the
result of previous awards under the Company's stock option plan expired.
Subsequent to Mr. Herman's resignation, the Board of Directors approved a
severance agreement providing for bi-weekly cash payments to Mr. Herman at the
rate of $200,000 per year for two years. As part of the severance agreement, the
Board of Directors approved a grant to Mr. Herman of 475,000 stock options at an
exercise price of $2.50 per share. The new options are fully vested, expire 10
years from the grant date and do not require continued employment for vesting or
exercise. As a result, the Company charged to expense in the third quarter of
fiscal 2000 an aggregate of $908,250, which included $508,250 representing the
fair value of the new stock options.

Effective October 24, 2000, Mr. John Katz resigned his position as a member of
the Company's Board of Directors. As a result of his resignation, all 40,000
stock options he held as the result of previous awards under the Company's stock
option plan expired. Subsequent to his resignation, the Board of Directors
approved a grant to Mr. Katz of 40,000 stock options at an exercise price of
$2.50 per share. The new options are fully vested, expire 10 years from the
grant date and do not require employment or director status to be exercised. The
Board of Directors also approved a one-time payment to Mr. Katz of $15,000. As a
result, the Company charged to expense in the fourth quarter of fiscal 2000 an
aggregate of $58,000, which included $43,000 representing the fair value of the
new stock options.


                                      F-17
<PAGE>

NATIONS FLOORING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Unaudited Quarterly Results of Operations

The following table summarizes quarterly unaudited results (in thousands except
for per share date) at each quarter ended:

<TABLE>
<CAPTION>
                                                                March 31,      June 30,    September, 30   December, 31
                                                                  2000           2000          2000            2000
                                                               ---------------------------------------------------------
<S>                                                            <C>            <C>            <C>            <C>
Net sales                                                      $ 14,280       $ 15,750       $ 15,710       $ 17,003
Cost of sales                                                  $ 10,916       $ 11,716       $ 11,838       $ 12,512
                                                               ---------------------------------------------------------
Gross profit                                                   $  3,364       $  4,034       $  3,872       $  4,491
                                                               =========================================================

Income applicable to common stock                              $   (386)      $   (245)      $   (808)      $    262
                                                               =========================================================

Basic income (loss) per common share                           $  (0.10)      $  (0.07)      $  (0.22)      $   0.07
                                                               =========================================================
Dilutive income (loss) per common share                        $  (0.10)      $  (0.07)      $  (0.22)      $   0.07
                                                               =========================================================


                                                                March 31,      June 30,    September, 30   December, 31
                                                                  1999           1999          1999            1999
                                                               ---------------------------------------------------------
Net sales                                                      $ 11,999       $ 13,224       $ 15,986        $ 16,905
Cost of sales                                                  $  8,898       $  9,881       $ 11,886        $ 12,635
                                                               ---------------------------------------------------------
Gross profit                                                   $  3,101       $  3,343       $  4,100        $  4,270
                                                               =========================================================

Income applicable to common stock                              $   (111)      $     20       $    298        $    203
                                                               =========================================================

Basic income (loss) per common share                           $  (0.03)      $   0.01       $   0.08        $   0.05
                                                               =========================================================
Dilutive income (loss) per common share                        $  (0.03)      $   0.01       $   0.08        $   0.04
                                                               =========================================================
</TABLE>


                                      F-18
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 27th day of March, 2000.

                                         NATIONS FLOORING, INC.

                                         By: /s/ Facundo Bacardi
                                             -----------------------------------
                                             Facundo Bacardi
                                             Chairman of the Board and President

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


<TABLE>
<CAPTION>
Signature                  Titles                                                 Date
---------                  ------                                                 ----
<S>                       <C>                                                     <C>
/s/ Facundo Bacardi        Chairman of the Board and President                    March 27, 2001
---------------------
Facundo Bacardi

/s/ Paul Kramer            Director                                               March 27, 2001
---------------------
Paul Kramer

/s/ Andrew Levinson        Director                                               March 27, 2001
---------------------
Andrew Levinson

/s/ William Poccia         Executive Vice President of Finance and Secretary      March 27, 2001
---------------------      (Principal Financial and Accounting Officer)
William Poccia
</TABLE>


                                       27

<PAGE>

                                  Exhibit Index



Exhibit     Name

2.1    Agreement and Plan of Exchange, dated as of June 1, 1995, among the
       Company, Carpet Barn Holdings, Inc. ("CBH") and the holders of common
       stock of CBH (incorporated by reference from Exhibit 1 of the Company's
       Report on Form 8-K (June 2, 1995) (the "June Form 8-K")).

2.2    Asset Purchase Agreement, dated as of June 1, 1995, between Carpet Barn
       Acquisition Corp. ("CBAC") and Carpet Barn, Inc. ("Carpet Barn")
       (incorporated by reference from Exhibit 3 of the June Form 8-K).

2.3    Amendment, dated June 1, 1995, to Asset Purchase Agreement (incorporated
       by reference from Exhibit 4 of the June Form 8-K).

3.1    Certificate of Incorporation, dated July 19, 1988, of the Company
       (incorporated by reference from Exhibit 3(a) of the Company's
       Registration Statement on Form S-18 (33-29942-NY) filed October 20, 1989
       (the "1989 Registration Statement")).

3.2    By-laws of the Company (incorporated by reference from Exhibit 3(b) of
       the 1989 Registration Statement).

3.3    Amended and Restated Certificate of Incorporation of CBH (incorporated by
       reference from Exhibit 3.3 of the Company's Annual Report on Form 10-K
       for the period ended December 31, 1995 (the "Form 10-K")).

3.4    Certificate of Amendment to Amended and Restated Certificate of
       Incorporation of CBH (incorporated by reference from Exhibit 3.4 of the
       Form 10-K).

3.6    Certificate of Incorporation of Nations Flooring, Inc. (incorporated by
       reference from Exhibit 3.6 of the Company's Registration Statement on
       Form S-1 (333-19871) filed January 16, 1997 ("1997 Registration
       Statement")).

3.7    By-laws of Nations Flooring, Inc. (incorporated by reference from Exhibit
       3.7 of the 1997 Registration Statement).

9.1    Voting Trust Agreement, dated May 30, 1995, between Philip A. Herman and
       certain shareholders of the Company (incorporated by reference from
       Exhibit 2 of the June Form 8-K).

10.7   Terms of preferred stock, par value $.01 per share, stated value $1,000
       per share, of CBH (incorporated by reference from Exhibit 12 of the June
       Form 8-K).

10.8   Employment Agreement, dated as of July 28, 1995, between CBI and Steven
       Chesin (incorporated by reference from Exhibit 1 of the Company's Report
       on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995
       Form 10-Q)).

10.9   Form of Promissory Note issued in the offering of short-term notes of CBH
       (incorporated by reference from Exhibit 11 of the June Form 8-K).

10.10  Lease, dated June 1, 1995, between CB Realty of Delaware, Inc. ("CB
       Realty") and CBAC (incorporated by reference from Exhibit 10.13 of the
       Form 10-K).


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<PAGE>


10.11  First Amendment to Lease Agreement, dated August 1, 1995, between CB
       Realty and CBAC (incorporated by reference from Exhibit 10.14 of the Form
       10-K).

10.12  Promissory Note, dated June 1, 1995 from CB Realty in favor of CBAC
       (incorporated by reference from Exhibit 10.15 of the Form 10-K).

10.13  Employment Agreement, dated as of May 28, 1996, between CBI and Alan
       Ember. (incorporated by reference from Exhibit 10.15 of the 1997
       Registration Statement).

10.14  Credit Facility, dated May 19, 1998, between CBI and Fleet Capital
       Corporation. (Incorporated by reference from Exhibit1 of the June 1998
       Form 10-Q).

10.15  Agreement and Plan of Merger, dated March 23, 1999, between the
       Registrant and Realty. (Incorporated by reference from Exhibit 1 of Form
       8-K dated March 29, 1999).

10.16  Promissory Note dated May 19, 1998, between Realty and MetLife.
       (Incorporated by reference from Exhibit 2 of Form 8-K\A-1 dated March 29,
       1999).

10.17  Commercial Deed of Trust, Security Agreement, Assignment of Leases and
       Rents and Fixture Filing dated May 19, 1998 by Realty in favor of
       MetLife. (Incorporated by reference from Exhibit 3 of Form 8-K\A-1 dated
       March 29, 1999).

10.18  Assignment of Rents and Leases dated May 19, 1998 between Realty and
       MetLife. (Incorporated by reference from Exhibit 4 of Form 8-K\A-1 dated
       March 29, 1999).

10.19  Loan Modification Agreement dated March 31, 1999 between the Registrant
       and G.E. Capital. (Incorporated by reference from Exhibit 5 of Form
       8-K\A-1 dated March 29, 1999).

10.20  Asset Purchase Agreement effective as of June 30, 1999 by and among
       Carpet Barn and DuPont. (Incorporated by reference from Exhibit 1 of Form
       8-K dated June 30, 1999).


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