United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001. [ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 11-2925673 -------------------------------------------------------------------------------- (State or other (IRS Employer jurisdiction of incorporation) Identification Number) 100 Maiden Lane, New York, New York 10038 -------------------------------------------------------------------------------- (Address of principal executive offices) (212) 898-8855 -------------------------------------------------------------------------------- (Issuer's telephone number) -------------------------------------------------------------------------------- (Former name, former address or former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. X Yes ____ No --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,729,779 shares of Common Stock, par value $.001 per share, were outstanding at May 15, 2001. INDEX

~~September~~Page ~~30,~~Part ~~December~~I ~~31, 2000 1999 (unaudited)~~ -~~---------------------------------~~ ~~ASSETS~~Financial ~~(Note~~Information 3)Item ~~---------------~~1. ~~Current~~Financial ~~Assets~~Statements ~~Cash~~Consolidated $balance ~~328,162~~sheets $3 ~~500,931~~Consolidated ~~Accounts~~statements ~~receivable,~~of ~~less~~operations ~~allowance~~4 ~~for~~Consolidated ~~doubtful~~statements ~~accounts~~of ~~1999~~cash ~~$475,000,~~flows ~~2000 $482,368~~ 5~~,744,891~~ ~~5,899,113 Inventory 2,241,453 2,269,133 Prepaid expenses and other 545,810 640,581 Refundable income taxes~~ - ~~212,940~~6 ~~Deferred~~Notes ~~income~~to ~~taxes~~consolidated ~~151,000~~financial ~~243,000~~statements ~~-------------------------------~~7 ~~Total current assets 9,011,316 9,765,698~~ -~~------------------------------~~ ~~Deferred~~11 ~~Income~~Item ~~Taxes - 286,000 Property and Equipment, net (Note 1)~~ 2~~,509,745~~. ~~2,719,818 Intangible Assets, net (Note 1) 15,067,895 14,397,587 ------------------------------- $ 26,588,956 $27,169,103 =============================== LIABILITIES AND STOCKHOLDERS~~Management's ~~EQUITY~~Discussion ~~------------------------------------~~and ~~Current~~Analysis ~~Liabilities~~of ~~Note~~Financial ~~payable~~Condition ~~(Note~~and 3)Results ~~$ 4,751,951 $ 4,923,858 Current maturities~~ of ~~long-term~~Operations debt (Note 3) 808,000 811,000 Accounts payable 2,606,350 4,338,918 Advances from principal stockholder (Note 2) 574,934 - Income taxes payable 391,378 - Accrued expenses 1,226,017 1,496,169 Customer deposits 1,751,395 1,811,515 ------------------------------- Total current liabilities 12~~,110,025~~ ~~13,381,460~~ -~~------------------------------~~ ~~Long-Term~~15 ~~Debt,~~Part ~~less~~II ~~current maturities (Note 3) 3,800,620 3,210,495 Advances from and Note Payable~~-~~Principal~~ ~~Stockholder~~Other ~~less~~Information ~~current~~Item ~~portion (Note 2) 2,000,000 2,733,742 Deferred Income Taxes 789,000 884,000 Commitments and Contingencies (Notes 3 and 5) Stockholders' Equity (Note~~ 1). ~~Preferred~~Legal ~~stock,~~Proceedings ~~12%~~16 ~~cumulative;~~Item $4.~~001~~ ~~par~~Submission ~~value,~~of ~~authorized~~Matters ~~1,000,000~~to ~~shares;~~a ~~issued~~Vote ~~5,160 shares; total liquidation preference~~ of ~~outstanding~~Security ~~shares~~Holders ~~$5,160,000~~16 5Item ~~5 Common stock, $~~6.~~001~~ ~~par~~Exhibits ~~value, authorized 20,000,000 shares; issued~~ and ~~outstanding~~Reports ~~3,729,779~~on ~~shares~~Form ~~3,730 3,730 Additional paid~~8-inK ~~capital~~16 ~~9,652,241~~Signatures 10,160,491 Retained earnings (deficit) (1,766,665) (3,204,820) ------------------------------- 7,889,311 6,959,406 ------------------------------- $ 26,588,956 $27,169,103 ===============================17

2 NATIONS FLOORING, INC. AND SUBSIDIARY Consolidated Balance Sheets

~~1999~~March 31, December 31, 2001 ASSETS (Note 3) 2000 (unaudited) --------------- ---------------- ~~Net sales (Note 4) $ 41,208,493 $ 45,739,734 Cost of sales 30,664,804 34,469,309~~ ------------------~~-------------~~ ~~Gross~~Current ~~profit~~Assets ~~10,543,689~~Cash 11$ 447,~~270,425~~400 ~~Selling~~$ 516,342 ~~general~~Accounts ~~and~~receivable, ~~administrative~~less ~~expenses:~~allowance ~~Related~~for ~~party~~doubtful ~~consulting~~accounts ~~fees~~2000 ~~180~~$475,000, ~~180~~2001 $535,000 ~~Related~~5,662,949 ~~party~~5,894,486 ~~rent~~Inventory ~~expense~~2,012,077 ~~(Note~~2,379,977 4)Prepaid ~~30,000~~expenses -and ~~Executive~~other ~~severance~~538,255 ~~package~~572,123 ~~(Note~~Income 6)taxes -receivable ~~908~~72,~~250~~905 ~~Other~~75,087 7Deferred income taxes 230,~~701,401~~000 9272,~~611,219~~000 ---------------------------------- ~~7,911,401~~Total ~~10,699,469~~current ~~Amortization~~assets ~~and depreciation 854~~8,~~480~~963,586 ~~975~~9,~~279~~710,015 ---------------------------------- ~~Operating~~Property ~~income~~and ~~(loss) 1~~Equipment,~~777,808~~ ~~(404,323)~~net ~~Other Income~~ (~~expense):~~Note ~~Other income (expense~~1), ~~net 4~~2,~~581~~763,731 ~~(194~~2,~~058)~~703,067 ~~Related~~Intangible ~~party~~Assets, ~~interest~~net ~~expense~~ (~~161,250)~~Note ~~(157,919~~1) ~~Interest expense (579~~14,~~121)~~193,305 ~~(699~~13,~~455)~~989,023 ---------------------------------- ~~Income~~$ 25,920,622 $26,402,105 ================================== Liabilities and Stockholders' Equity Current Liabilities Note payable (~~loss~~Note 3) ~~before~~$ ~~income~~7,782,156 ~~taxes~~$ 17,~~042~~577,~~018~~792 Current maturities of long-term debt (1Note 3) 106,~~455~~000 106,~~755)~~285 ~~Provision~~Accounts ~~(benefit)~~payable ~~for~~4,138,895 ~~income~~5,510,305 ~~taxes~~Accrued ~~370~~expenses 1,~~380~~489,930 ~~(482~~1,~~000)~~154,330 Customer deposits 1,252,967 1,104,203 ---------------------------------- ~~Net~~Total ~~income~~current ~~(loss)~~liabilities ~~671~~14,~~638 (973~~769,~~755)~~945 ~~Dividends on preferred stock 464~~15,~~400 464~~452,~~400~~915 ---------------------------------- ~~Net~~Long-Term ~~income~~Debt, less current maturities (~~loss~~Note 3) ~~applicable~~504,657 to481,103 ~~common~~Advances ~~stockholders~~from $and ~~207,238~~Note $Payable-Principal Stockholder (1Note 2) 2,~~438~~731,~~155)~~858 ~~===============================~~2,785,615 ~~Basic~~Deferred ~~net~~Income ~~income~~Taxes 651,000 651,000 Commitments and Contingencies (~~loss~~Note 3) ~~per~~Stockholders' ~~common~~Equity ~~share~~ (Note 1) $Preferred 0stock, 12% cumulative; $.06001 par value, authorized 1,000,000 shares; issued 5,160 shares; total liquidation preference of outstanding shares $5,160,000 (05 5 Common stock, $.~~39)~~001 ~~===============================~~par ~~Dilutive~~value, ~~net~~authorized ~~income~~20,000,000 ~~(loss)~~shares; ~~per~~issued ~~common~~and ~~share~~outstanding 3,729,779 shares 3,730 3,730 Additional paid-in capital 10,203,291 10,203,291 Retained earnings (~~Note~~deficit) 1(2,943,867) $(3,175,554) ~~0.05~~---------------------------------- 7,263,159 7,031,472 ---------------------------------- $ ~~(0.39)~~25,920,622 $26,402,105 ==================================

See Notes to Consolidated Financial Statements 3 NATIONS FLOORING, INC. AND SUBSIDIARY

~~1999~~CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, 2000 2001 ------------------------------------------- Net sales ~~(Note 4)~~ $ 1514,~~986~~279,~~363~~691 $ 15,~~710~~142,~~208~~283 Cost of sales 1110,~~885~~915,~~766~~443 11,~~838~~400,~~018~~376 ------------------------------------------- Gross profit 43,~~100~~364,~~597~~248 3,~~872~~741,~~190~~907 Selling, general and administrative expenses: Related party consulting fees 60,000 60,000 ~~Executive severance package (Note 6) - 908,250~~ Other 23,~~784~~036,~~383~~764 3,~~116~~186,~~387~~659 ------------------------------------------- 23,~~844~~096,~~383~~764 43,~~084~~246,~~637~~659 ------------------------------------------- Amortization and depreciation ~~306~~354,~~673~~919 ~~289~~306,~~662~~501 ------------------------------------------- Operating income (loss) ~~949,541~~ (~~502~~87,~~109~~435) 188,747 Other Income (expense): Other income (expense), net ~~(100) (186~~1,~~438)~~823 153 Related party interest expense (Note 2) (48,750) (6083,~~419~~757) Interest expense (~~209~~214,~~507~~237) (~~241~~224,~~753~~030) ------------------------------------------- ~~Income~~Loss ~~(loss)~~ before income taxes ~~691~~(348,~~184~~599) (~~990~~118,~~719~~887) Provision ~~(benefit)~~ for income ~~taxes~~tax ~~238~~benefit (118,000) (~~338~~42,000) ------------------------------------------- Net ~~income~~loss (~~loss~~230,599) ~~453,184~~ (~~652~~76,~~719~~887) Dividends on preferred stock 154,800 154,800 ------------------------------------------- Net ~~income (~~loss) applicable to common stockholders $ ~~298~~(385,~~384~~399) $ (~~807~~231,~~519~~687) =========================================== Basic and ~~dilutive~~Dilutive net ~~income (~~loss) per common share (Note 1) $ (0.0810) $ (0.2206) ===========================================

See Notes to Consolidated Financial Statements. 4 NATIONS FLOORING, INC. AND SUBSIDIARY

~~1999~~CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months ended March 31, 2000 2001 ------------------------------------ Cash Flows from Operating Activities Net ~~income (~~loss) $ ~~671~~(230,~~638~~599) $ (~~973~~76,~~755~~887) Depreciation ~~193~~112,~~852~~543 ~~304~~102,~~971~~219 Amortization ~~660~~242,~~628~~376 ~~670~~204,~~308~~282 Deferred income taxes 9016,000 (~~283~~42,000) Provision for bad debts ~~198~~73,~~241~~410 ~~251~~59,~~202~~750 ~~Rent expense in lieu of note receivable payments to Realty 30,000 - Issuance of stock options for executive severance package (Note 6) - 508,250 Write off of pre-acquisition and other costs - 146,439~~ Changes in assets and liabilities, ~~net of business acquisition:~~ (Increase) decrease in accounts receivable (1177,~~235,706)~~288 (~~405~~291,~~424~~287) (Increase) decrease in inventory ~~(427~~231,~~429)~~975 (27367,~~680~~900) Increase in prepaid expenses and other (~~202~~176,~~129~~893) (~~210~~33,~~716~~869) Increase in refundable income taxes -(127,125) (~~212~~2,~~940~~182) Increase in accounts payable ~~423~~450,~~370~~997 1,~~732~~371,~~568~~410 Increase (decrease) in advances from principal stockholder (7114,~~786~~850) ~~158~~53,~~808~~757 Decrease in income taxes payable - (391,378) -- Increase (decrease) in accrued expenses ~~739~~95,~~709~~788 ~~270~~(335,~~152~~599) Increase (decrease) in customer deposits ~~802~~9,~~868~~422 60(148,~~120~~764) ------------------------------------ Net cash provided by operating activities $ 1468,~~873,256~~954 $ 1492,~~597,925~~930 ------------------------------------ Cash Flows from Investing Activities ~~Advances to employees and related parties, net $ (37,033) $ -~~ Purchase of property and equipment ~~(261,107)~~$ (~~488~~160,~~133~~746) ~~Payments~~$ ~~for Acquisition for Kemper~~ (141,~~500,000~~555) - Acquisition cost expenditures (4927,~~636~~290) ~~(30,494)~~-- ------------------------------------ Net cash used in investing activities $ (1188,~~847,776~~036) $ (~~518~~41,~~627~~555) ------------------------------------ Cash Flows from Financing Activities ~~Advances~~ (~~payments~~Payments) advances on note payable, ~~net~~ $ ~~634~~20,~~444~~041 $ (~~353~~204,~~093~~365) Principal payments on long-term debt (4524,~~689~~387) (8923,~~036~~268) Cash dividends paid on preferred stock (~~464~~154,~~400~~800) (~~464~~154,~~400~~800) ------------------------------------ Net cash ~~provided by (~~used in) financing activities $ ~~124~~(159,~~355~~146) $ (~~906~~382,~~529~~433) ------------------------------------ Net increase in cash $ ~~149~~121,~~835~~772 $ ~~172~~68,~~769~~942 Cash, beginning ~~212,183~~ 328,162 447,400 ------------------------------------ Cash, ending $ ~~362~~449,~~018~~934 $ ~~500~~516,~~931~~342 ====================================

See Notes to Consolidated Financial Statements. 5 NATIONS FLOORING, INC. AND SUBSIDIARY

~~1999~~CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited) Three Months ended March 31, 2000 2001 ------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ ~~595~~163,~~296~~469 $ ~~707~~237,~~273~~415 Income taxes $ 60384,~~530~~503 $ ~~405,318 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES Equipment acquired through financing agreement $ - $ 26,911 Realty acquisition: (Note~~ 4~~) Common stock issued $ 1~~,254,158 $ - Liabilities assumed 668,930 - Elimination of intercompany amounts (451,989) - Assets acquired (1,471,099) - ---------------------------------- Net cash paid $ - $ - ==================================194

See Notes to Consolidated Financial Statements. 6 NATIONS FLOORING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATMENTS Note 1. Nature of Business and 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. 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. Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, the accompanying consolidated financial statements reflect all material adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of the results which will be reported for the entire year. 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. 7 NATIONS FLOORING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATMENTS Note 1. Nature of Business and Summary of Significant Accounting Policies (continued) 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 and March 31, 2001 the Company's cash balances were maintained at financial institutions in Nevada, Illinois, South Carolina, 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 $461,079 and $539,161 at December 31, 2000 and March 31, 2001, respectively. 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, 2000 and March 31, 2001:

Depreciation December 31, ~~September~~March 3031, Lives ~~1999~~ 2000 2001 ---------------------------------~~-------------------------------~~ Land -- $ ~~664~~645,~~000~~400 $ 645,400 Building 20 781,000 781,000 Furniture and equipment 7 1,~~351~~539,~~635~~568 1,~~517~~570,~~674~~179 Autos and trucks 5 ~~170~~218,~~543~~208 ~~184~~218,~~496~~208 Leasehold improvements 3 -7 ~~491~~954,~~492~~214 ~~843~~965,~~929~~158 ---------------------------------~~-----~~ 34,~~458~~138,~~670~~390 34,~~972~~179,~~499~~945 Less accumulated depreciation and amortization ~~948~~1,~~925~~374,659 1,~~252~~476,~~681~~878 ---------------------------------~~-----~~ Property and equipment, net $ 2,~~509~~763,~~745~~731 $ 2,~~719~~703,~~818~~067 =================================~~=====~~

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 and March 31, 2001. Intangible assets Intangible assets consist of the following at December 31, 2000 and March 31, 2001:

~~Nine~~December ~~Months~~31, ~~Ended~~March ~~Three Months Ended September 30~~31, ~~September~~2000 ~~30,~~2001 --------------------------------- Goodwill $17,864,367 $17,864,367 Covenants not-to--compete 125,000 125,000 Debt issuance costs 292,904 292,904 --------------------------------- ~~1999~~18,282,271 ~~2000~~18,282,271 ~~1999~~Less ~~2000~~accumulated ~~-------------------~~amortization 4,088,966 4,293,248 -------------- -------------- -----~~-------~~ ~~Basic~~Intangible ~~shares 3~~assets,~~709,870~~ ~~3,729,779~~net 3$14,~~729~~193,~~779~~305 3$13,~~729~~989,~~779~~023 ~~Dilutive shares 3,888,319 3,729,779 3,908,227 3,729,779~~=================================

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 3). 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. 8 NATIONS FLOORING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATMENTS Note 1. Nature of Business and Summary of Significant Accounting Policies (continued) 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. 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 loss per common share Basic and dilutive net loss per common share is computed based on net loss and the following weighted average number of common shares outstanding for the three months ended March 31:

~~December 31, September 30, 1999~~ 2000 2001 -------------~~-------~~ -------------~~------~~ ~~Revolving~~Basic ~~line~~shares ~~of credit $4~~3,~~751~~729,~~951~~779 ~~$ 4~~3,~~923~~729,~~858~~779 ~~Term~~Dilutive ~~loan~~shares $3,~~950~~729,~~000~~779 $ 3,~~425~~729,~~000~~779

Dilutive net loss per share reflects the effect of the inclusion of the incremental shares issuable upon the exercise of outstanding stock options. Dilutive net loss per share for the three months ended March 31, 2000 and 2001 is the same as the basic net loss per share as the inclusion of incremental shares for outstanding stock options would have been anti-dilutive. Dividends on preferred stock, which totaled $154,800 for both the three months ended March 31, 2000, and 2001, 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 $254,482 and $371,186 for the three months ended March 31, 2000 and 2001, 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. The company has also adopted a self insurance program for its employee health insurance. The plan has a stop loss reinsurance limit of $20,000 per individual insured per year. 9 NATIONS FLOORING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATMENTS Note 1. Nature of Business and Summary of Significant Accounting Policies (continued) 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. Note 2. Advances From and Note Payable - Principal Stockholder The Company has an unsecured note payable totaling $2,785,615 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. 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 described in Note 3. 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 the entire note has been classified as long term at December 31, 2000 and March 31, 2001. Total interest expense of $48,750 and $83,757 relating to the amounts owed to Branin has been reflected in the accompanying consolidated statements of operations for the three months ended March 31, 2000 and 2001, respectively. Accrued interest of $241,676 and $325,433 is included in the balance of Advances from and Note Payable-Principal Stockholder at December 31, 2000 and March 31, 2001. Note 3. Note Payable and Long-Term Debt The Company, through its subsidiary CBI, has a credit agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"), consisting of a $5,000,000 term loan and a $5,000,000 revolving line of credit. Advances on the revolving line of credit are further limited by the company's levels of eligible accounts receivable and inventory. The term loan requires quarterly payments of $175,000. CBI has 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. 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 31, 2001) plus 2.75% and 3.25% per annum, in connection with advances under the revolving line and term loan, respectively. 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 financial covenants which, among others, requires CBI to maintain minimum levels of tangible net worth and debt coverage. In connection with this Credit Facility, Branin has agreed that the advances from and notes payable to Branin (see Note 2) will be subject to certain subordination and payment limitation requirements. 10 NATIONS FLOORING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATMENTS Note 3. Note Payable and Long-Term Debt (continued) At December 31, 2000, the Company was in violation of certain financial covenants related to the Credit Facility. The Company was not in violation of any financial covenants related to the Credit Facility as of March 31, 2001. Fleet has not waived the December 31, 2000 violations, and subsequent compliance with covenants does not constitute a waiver under the credit facility, and accordingly the portions of the term note due beyond March 31, 2002, totaling $2,375,000 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 are as follows:

~~Number~~December ~~Description~~31, ofMarch ~~Exhibits~~31, ~~Page~~2000 ~~No.~~2001 ------ --------- -------------- --~~------~~ 11Revolving ~~Computation~~line of ~~Earnings~~credit ~~per~~$ ~~Share~~4,532,156 23$ 274,502,792 ~~Financial~~Term ~~Data~~loan ~~Schedule~~$ ~~(filed~~3,250,000 ~~only~~$ ~~electronically with the SEC) 24~~3,075,000

Gross profit increased by $377,659 to $3,741,907 for the three months ended March 31, 2001 from $3,364,248 for the three months ended March 31, 2000, representing an increase of 11.2%. This increase resulted primarily from the increase in sales volume and from an increase in the gross profit percentage (24.7% in 2001 and 23.6% in 2000). The increase in gross profit percentage is due to management's continuing efforts to maximize gross profit in all areas of the business. Selling, general and administrative expenses increased by $149,895 to $3,246,659, for the three months ended March 31, 2001 from $3,096,764 for the three months ended March 31, 2000. During the first quarter of 2000, the Company started work on an operation in Myrtle Beach, S.C., which opened in July, 2000. The inclusion of the Myrtle Beach operation accounted for $88,458 of this increase. The remaining increase of $61,437 was comprised primarily of approximate increases in rent of $50,000, and advertising of $94,000 partially offset by approximate decreases in professional fees of $83,000. As a percentage of sales, selling, general and administrative expenses decreased to 21.4% in 2001 from 21.6% in 2000. Amortization and depreciation expense decreased to $306,501 in 2001 from $354,919 in 2000, due to the expiration of certain intangible assets in the second quarter of 2000. 12 As a result of the above changes operating income (loss) changed by $276,182 to income of $188,747 for the three months ended March 31, 2001 from a loss of $87,435 for the three months ended March 31, 2000. Interest expense increased by $44,800 to $307,787 for the three months ended March 31, 2001 from $262,987 for the three months ended March 31, 2000. The primary reason for the increase in interest expense was the consolidation of advances to Branin into an interest bearing note in August 2000. Income tax benefit changed by $76,000 to a benefit of $42,000 in 2001 from a benefit of $118,000 in 2000 due to the decrease in loss before income taxes. Net loss changed by $153,713 to a loss of $76,886 for the three months ended March 31, 2001 from a loss of $230,599 for the three months ended March 31, 2000. EBITDA increased by $229,540 to $495,201 for the three months ended March 31, 2001 from $265,661 for the three months ended March 31, 2000. This increase in EBITDA was due primarily to increased sales volume and the related increase in gross profit. Liquidity and Capital Resources Cash provided by operating activities was $468,954 and $492,930 for the three months ended March 31, 2000 and 2001, respectively. In the three months ended March 31, 2001 operations provided positive cash flows despite the net loss due to the inclusion of non-cash charges in net loss and certain significant changes in working capital items. The changes in the working capital resulted in a working capital deficit of $5,742,900 at March 31, 2001 as compared to a working capital deficit of $5,806,362 at December 31, 2000. Included in such deficit is $7,577,792, 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 2001, net loss included significant non-cash charges of amortization of $204,282 and depreciation of $102,219. Additionally, cash was provided by increases in accounts payable of $1,371,410. The increase in accounts payable reflects the use of trade credit to partially finance the net loss for the quarter ended March 31, 2001. These sources of cash from operations were partially offset by the use of cash to increase inventory by $367,900, accounts receivable by $291,287 and to reduce accrued expenses by $335,599 and customer deposits by $148,764. The increase in accounts receivable was due to a temporary slowdown in the collection on open accounts. The increase in inventory was partially due to the conversion of one of the Las Vegas retail stores into a warehouse outlet. For 2000, net loss included significant non-cash charges of amortization of $242,376 and depreciation of $112,543. Additionally, cash was provided by decreases in accounts receivable of $177,288 and inventory of $231,975, increases in accounts payable of $450,997, accrued expenses of $95,788 and customer deposits of $9,422. The declines in accounts receivable and inventory from December 31, 1999 reflect the decline in sales between the quarter ended March 31, 2000 and the quarter ended December 31, 1999. The increase in accounts payable reflects the use of trade credit to partially finance the net loss for the quarter ended March 31, 2000. These sources of cash from operations were partially offset by the use of cash to reduce the year end tax liability of $391,378 and the amount owed to the Company's principal stockholder of $14,850 and the increase in prepaid expenses and other of $176,893 due primarily to a deposit made against fees owed to Barbican (see below) and to reflect the tax benefit of $127,125. During the three months ended March 31, 2000 and 2001, cash used in investing activities was $188,036 and $41,555, respectively, used primarily to purchase equipment and leasehold improvements. Cash used in financing activities during such periods was $159,146 and $382,433, respectively, used primarily to make payments on the Company's credit facilities and to pay the dividends on the Company's preferred stock. The Company has an unsecured note payable totaling $2,785,615 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 (see Note 2 of Notes to Consolidated Financial Statements). As of April 30, 2001, the Company was indebted to Branin for $2,813,534. Prior to his resignation, this note payable consisted of interest and non-interest bearing advances. 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. 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 the entire note has been classified as long term at December 31, 2000 and March 31, 2001. Total interest expense of $48,750 and $83,757 relating to the amounts owed to Branin has been reflected in the accompanying consolidated statements of operations for the three months ended March 31, 2000 and 2001, respectively. Accrued interest of $241,676 and $325,433 is included in the balance of Advances from and Note Payable-Principal Stockholder at December 31, 2000 and March 31, 2001. 13 The Company had an oral consulting agreement with Branin for certain management advisor services. The agreement called for monthly payments of $20,000. Effective May 1, 2001, the agreement was mutually terminated. The Company, through its subsidiary CBI, has a credit agreement (the "Credit Facility") with Fleet Capital Corporation ("Fleet"), consisting of a $5,000,000 term loan and a $5,000,000 revolving line of credit. The term loan requires quarterly payments of $175,000. CBI has 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. 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 31, 2001) plus 2.75% and 3.25% per annum, in connection with advances under the revolving line and term loan, respectively. 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 financial covenants which, among others, requires CBI to maintain minimum levels of tangible net worth and debt coverage. In connection with this Credit Facility, Branin has agreed that the advances from and notes payable to Branin (see Note 2 of Notes to Consolidated Financial Statements) 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. The Company was not in violation of any financial covenants related to the Credit Facility as of March 31, 2001. Fleet has not waived the December 31, 2000 violations, and subsequent compliance with covenants does not constitute a waiver under the credit facility, and accordingly the portions of the term note due beyond March 31, 2002, totaling $2,375,000 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 are as follows:

At March 31, 2001, the Company had no availability under the term loan and approximately $100,000 available under the revolving line of credit. The Company has a mortgage note payable with a financial institution secured by the Company's land and building of $432,572 and $425,179 outstanding at December 31, 2000 and March 31, 2001, respectively. The note 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 obligations including capital leases of $178,085 and $162,210 outstanding at December 31, 2000 and March 31, 2001, respectively. The notes bear interest at an approximate average of 13% and mature between June 2001 and September 2005. 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. During 2000, the Company opened one location in Myrtle Beach, S.C. The Company funded this new location with its existing working capital. A portion of the initial capital costs for this location was provided by the Company's suppliers in exchange for agreements by the Company to feature the suppliers' products at this facility. 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. 14 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 March 31, 2001, 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. On March 22, 2001, the Company signed an agreement with an underwriter to use its best efforts in a proposed $1,000,000 private placement of convertible debt, to be followed by a public offering with expected gross proceeds of approximately $15,000,000. 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. 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. Item 3 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 Fleet. Based upon the balance of the Fleet debt at March 31, 2001, 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 $75,000 per year. 15 PART II. OTHER INFORMATION ITEM 1. 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 and March 31, 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K. None 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant had duly caused this report to be signed by the undersigned, thereunto duly authorized. May 21, 2001 /s/ Facundo Bacardi ------------------------------------- Facundo Bacardi Chairman of the Board and President (Principal Executive Officer) May 21, 2001 /s/ William V. Poccia ------------------------------------- William V. Poccia Executive Vice President of Finance and Secretary (Principal Financial and Accounting Officer) 17

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