RAGAR CORP, S-1/A, 1997-01-17

RAGAR CORP
S-1/A, 1997-01-17
HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
------------------------
NATIONS FLOORING, INC.

(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 2836, 2835 11-2925673
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization) Industrial Classification Code Number) Identification Number)
</TABLE>

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

100 MAIDEN LANE
NEW YORK, NEW YORK 10038
(Address, Including Zip Code and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------------------

PHILIP A. HERMAN
Chairman of the Board and President
Nations Flooring, Inc.
100 Maiden Lane
New York, New York 10038
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
------------------------------
COPIES TO:

<TABLE>
<S> <C>
ANDREW J. LEVINSON JAMES R. TANENBAUM
Herzfeld & Rubin, P.C. Stroock & Stroock & Lavan
40 Wall Street Seven Hanover Square
New York, New York 10005 New York, New York 10004
(212) 344-5500 (212) 806-5400
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED(1) SECURITY(2) OFFERING PRICE(2)
<S> <C> <C> <C>
Common Stock, $.001 par value..................... 2,300,000 $8.00 $18,400,000

TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $.001 par value..................... $6,344.83
</TABLE>

(1) Includes 300,000 shares subject to the Underwriters' over-allotment option.

(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE>
NATIONS FLOORING, INC.
CROSS-REFERENCE SHEET
Showing Location in Prospectus of
Information Required by Items of Form S-1

<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING CAPTION OR LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>

1. Forepart of the Registration Statement and Outside
Front Cover of Prospectus.......................... Outside Front Cover Page

2. Inside Front and Outside Back Cover.................. Inside Front and Outside Back Cover Pages

3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors

4. Use of Proceeds...................................... Use of Proceeds

5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting

6. Dilution............................................. Dilution

7. Selling Security Holders............................. Not Applicable

8. Plan of Distribution................................. Outside Front Cover Page; Underwriting

9. Description of Securities to be
Registered......................................... Description of Capital Stock; Dividend Policy; Shares
Eligible for Future Sale

10. Interests of Named Experts
and Counsel........................................ Not Applicable

11. Information with Respect to the
Registrant......................................... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Dividend Policy; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Certain Transactions; Principal Stockholders and
Holdings of Management; Financial Statements

12. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities........................................ Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 16, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS

2,000,000 SHARES

NATIONS FLOORING, INC.

COMMON STOCK

All of the shares of common stock, par value $.001 per share (the "Common
Stock"), are being sold by Nations Flooring, Inc. (the "Company"). Prior to this
offering (the "Offering"), there has been a limited public market for the Common
Stock of the Company. See "Price Range of Common Stock." It is currently
anticipated that the public offering price (the "Offering Price") will be
between $6.00 and $8.00 per share. For a discussion of factors considered in
determining the public offering price, see "Underwriting." Application has been
made to list the Common Stock on the Nasdaq National Market under the symbol
"NFLI."

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

THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) ISSUER(2)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>

(1) Does not reflect additional compensation to be received by the Underwriters
in the form of: (i) a non-accountable expense allowance equal to $
($ if the over-allotment option is exercised in full); (ii) warrants
granted by the Company to the Underwriters to purchase 200,000 shares of
Common Stock at a price equal to $ per share (the "Underwriters'
Warrants"). The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."

(2) Before deducting expenses of the Offering payable by the Company, estimated
at $450,000, excluding the Underwriters' non-accountable expense allowance.
See "Underwriting."

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 300,000 additional shares of Common Stock, on the same terms
and conditions set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Issuer will be $ ,
$ and $ , respectively. See "Underwriting."

The shares of Common Stock are being offered by the Underwriters, on the
terms and conditions set forth above, when, as and if delivered to and accepted
by the Underwriters, subject to the rights of the Underwriters to reject any
order in whole or part and certain other conditions. It is expected that
delivery of the certificates will be made at the offices of Chatfield Dean &
Co., 7935 E. Prentice Avenue, Suite 200, Greenwood Village, Colorado, on or
about , 1997.

CHATFIELD DEAN & CO.

The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made to
the Registration Statement, including the exhibits filed therewith, which may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, DC 20549 and at the Commission's regional offices: in
New York, Seven World Trade Center, 13th Floor, New York, New York 10048; and in
Chicago, Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Such information can also be obtained on the
internet at HTTP:// www.sec.gov. Copies of the Registration Statement may be
obtained from the Commission at its principal office upon payment of prescribed
fees. Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by reference to the applicable document
filed with the Commission.

The Company is currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and in accordance therewith is required to file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at its principal offices.

The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion expressed
thereon by the Company's independent certified public accountants.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION (INCLUDING THE FINANCIAL
STATEMENTS AND THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH
PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS
OTHERWISE INDICATED, THE INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES (I) THE
CONSUMMATION OF A MERGER (THE "MERGER") PURSUANT TO WHICH THE COMPANY WILL
REINCORPORATE IN DELAWARE AND CHANGE ITS NAME TO "NATIONS FLOORING, INC.", (II)
THE EFFECT OF A ONE-FOR-FOUR REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK
EFFECTED PRIOR TO THE DATE OF THIS PROSPECTUS AND (III) THAT THE UNDERWRITER'S
OVER-ALLOTMENT OPTION IS NOT EXERCISED. REFERENCES TO THE COMPANY HEREIN SHALL
MEAN THE COMPANY, INCLUDING THE OPERATIONS OF NATIONS FLOORING, INC. AND ITS
CONSOLIDATED SUBSIDIARIES, AND THE OPERATIONS OF THEIR PREDECESSORS, EXCEPT TO
THE EXTENT THAT THE CONTEXT REQUIRES OTHERWISE.

THE COMPANY

BUSINESS

Nations Flooring, Inc. (the "Company") is engaged in the business of selling
and installing floor coverings and selling wall coverings, window treatments and
certain related products, primarily for the residential housing market.
Currently, the Company is engaged in business in Las Vegas, Nevada, where its
sales of $40.3 million in 1995 and $31.3 million for the first nine months of
1996 have made it the largest seller and installer of floor coverings in such
market. The Company believes that its sales represent approximately 63% of the
Las Vegas new home market and are approximately 3.5 times those of its nearest
competitor. From its three facilities in Las Vegas, the Company sells
approximately 72% of its products to the new home market to or through new
homebuilders through its New Housing Division and approximately 28% of its
products to the retail replacement market directly to individual homeowners
through its Replacement Sales Division. New Housing Division sales are effected
primarily to or through new home builders who offer purchasers a wide selection
of basic grade floor coverings 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 possible upgrades on floor coverings, in
addition to purchasing wall coverings, window treatments and related products.
The Company believes that its new retail design center located in Las Vegas will
also enable it to continue to broaden its product lines and expand the sales of
its Replacement Sales Division. The Company has also recently established a
Commercial Division, which is its first entry into the commercial market,
including multi-family, office, retail store and small hotel projects.

The Company believes that the retail floor covering industry is highly
fragmented, with no single floor covering retailer, including national and large
regional chains, accounting for more than ten percent of the total market. Most
floor covering retailers operate a single store generating less than $1 million
in annual sales. The Company believes that small independent floor covering
retailers face competitive disadvantages resulting from limited purchasing
power, ineffective inventory control and inadequate resources for sales,
marketing and store management. Accordingly, the Company believes that
significant opportunities exist for floor covering retailers that can achieve
cost advantages and operating efficiencies through selective acquisitions and
internal growth.

3
<PAGE>
"big-box" facilities will have between 40,000 and 60,000 square feet per
facility and will focus on retail sales of all product lines in a warehouse-type
setting, as well as having a dedicated design center area. The Company believes
that this format will enable it to quickly capture a significant market share by
offering customers a pleasant shopping environment in which to fulfill all of
their floor and wall covering and related needs on a cash-and-carry or next-day
installed basis, although there can be no assurance as to the viability of this
approach. See "Business--Strategy."

ORGANIZATIONAL HISTORY

The Company was organized under the laws of Delaware on December 26, 1996 as
a wholly-owned subsidiary of Ragar Corp., which was organized under the laws of
the State of New York on July 14, 1988. Prior to the date of this Prospectus,
Ragar Corp. will merge into the Company, which was organized solely for the
purpose of effecting the Merger. The directors and executive officers of the
Company are the directors and executive officers of Ragar Corp. before the
Merger.

Ragar Corp. had no substantial operations prior to the acquisition of Carpet
Barn Holdings, Inc. ("CBH"). Ragar Corp. was organized to seek out a suitable
business for acquisition or merger and completed an initial public offering of
common stock, par value $.001 per share on January 9, 1990. On June 2, 1995,
Ragar Corp. acquired all of the common stock of CBH in exchange (the "Exchange")
for the issuance to the holders of common stock of CBH of an aggregate of
3,304,437 shares of Ragar common stock, pursuant to an Agreement and Plan of
Exchange, dated as of June 1, 1995 (the "Exchange Agreement"), among Ragar
Corp., CBH and the CBH stockholders. CBH, which was organized under the laws of
the State of Delaware on May 26, 1995, and its wholly-owned subsidiary, Carpet
Barn, Inc. ("CBI"), a Delaware corporation organized on January 9, 1995, were
formed for the purpose of acquiring the assets and operations of Carpet Barn,
Inc., a Nevada corporation ("Carpet Barn" or the "Predecessor Business"), a
retail carpet sales and installation business located in Las Vegas, Nevada.
Concurrently with completing the Exchange, the Company completed the acquisition
(the "Acquisition") of substantially all of the assets of Carpet Barn pursuant
to that certain Asset Purchase Agreement, dated as of June 1, 1995 (the
"Purchase Agreement"), between CBI and Carpet Barn. The current directors and
executive officers of the Company replaced the prior directors and executive
officers of the Company in connection with the Exchange.

The Company's principal executive offices are located at 100 Maiden Lane,
New York, New York 10038 and its telephone number is (212) 898-8888.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered................ 2,000,000 shares
Common Stock to be outstanding after
the Offering(1)................... 5,642,397 shares

Use of Proceeds..................... The Company intends to apply the net proceeds
received by it in the Offering for the partial
repayment of the Company's bank indebtedness, to
redeem the outstanding preferred stock issued by
CBH, to repay amounts advanced by Branin
Investments, Inc., an affiliate of the Company, and
for general corporate and working capital
requirements. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital
Resources" and "Certain Transactions."

Risk Factors........................ The Common Stock offered hereby is speculative and
involves a high degree of risk, including such
factors as the Company's capital requirements for
its growth strategy, leverage, dependence on
certain suppliers and manufacturers, dependence on
customers, lack of geographical diversity,
competition and other factors. See "Risk Factors."
Proposed Nasdaq National Market
Symbol............................ "NFLI"
</TABLE>

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

(1) Does not include (i) 1,250,000 shares of Common Stock reserved for issuance
upon the exercise of employee stock options, of which shares are
subject to options to be granted at the Offering Price upon completion of
the Offering, under the Company's 1997 Stock Option Plan (the "Option Plan")
and (ii) 200,000 shares of Common Stock issuable upon the exercise of the
Underwriters' Warrants. See "Management--1997 Stock Option Plan" and
"Underwriting."

THIS PROSPECTUS 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, THOSE DISCUSSED IN "RISK FACTORS"
AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."

5
<PAGE>
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 and the Predecessor Business. This
information should be read in conjunction with the Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The results of operations
of the Company are not comparable to those of the Predecessor Business, due
primarily to the amortization of intangible assets and interest expense on the
debt incurred in connection with the Acquisition. In addition, certain
information below is not shown for the Predecessor Business where such
information would not present a meaningful comparison. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NATIONS FLOORING, INC.
------------------------
PREDECESSOR BUSINESS PRO FORMA
--------------------------------------------------------- FOR
PERIOD PERIOD YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED DECEMBER
-------------------------------------------- JUNE 1, DECEMBER 31,
1991 1992 1993 1994 1995(1) 31, 1995(2) 1995(3)
----------- --------- --------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 26,892 $ 28,994 $ 34,530 $ 42,507 $ 16,363 $ 23,980 $ 40,343
Gross margin........................... 7,297 8,167 9,598 10,958 5,031 6,126 11,156
Income from operations................. 763 1,375 1,096 5,548 3,724 2,109 5,366
Net income............................. 837 925 1,114 4,888 3,737 489 1,997
Net income per common share(4)......... 0.08 0.45
Supplemental net income per common
share(7)............................. 0.11 0.40
Weighted average common shares
outstanding(4)....................... 3,645,791 3,639,732
Pro forma income tax effect(5)......... 284 315 379 1,662 1,271
Pro forma net income after taxes(5).... 553 610 735 3,226 2,466

DECEMBER
31, 1995
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(6)
Working capital (deficit).............. $ (3,757)
Total assets........................... 24,084
Long-term debt and capital lease
obligations, less current
maturities........................... 8,812
Stockholders' equity................... 6,487
</TABLE>

- ------------------------
(1) Information is presented for the Predecessor Business for the period from
January 1, 1995 through June 1, 1995, the date of the Acquisition, which was
accounted for as a reverse acquisition of the Company by CBH.
(2) Information is presented for the Company for the period from June 2, 1995
through December 31, 1995, due to the Acquisition.
(3) Gives effect to the Acquisition and the Financing (as defined herein) as if
such transactions had occurred on January 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and the Financial Statements.
(4) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.
(5) The Predecessor Business was taxed as an S corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended, (the "Code") so that in lieu
of payment of income taxes at the corporate level the stockholders
individually reported their pro rata share of the Predecessor Business'
items of income, deduction, loss and credit. Pro forma income tax has been
computed at an assumed rate of 34%.
(6) The December 31, 1994 balance sheet data are not presented as they are not
comparable to those of the Company because the Predecessor Business had a
substantially different capital structure and virtually no intangible
assets.
(7) Supplemental net income per common share has been calculated using the
number of shares used to calculate net income per common share plus
1,018,930 shares which would be required to be issued to repay $6,190,000 of
the indebtedness outstanding with First Source Financial, LLP, plus 767,078
shares which would be required to be issued to redeem $4,660,000 of
preferred stock issued by CBH. See "Use of Proceeds" and Note 1 of the Notes
to the Financial Statements.

6
<PAGE>
<TABLE>
<CAPTION>
NATIONS
FLOORING, NATIONS
PREDECESSOR INC. PRO FORMA FLOORING, INC.
BUSINESS JUNE 2, NINE(1) NINE MONTHS
JANUARY 1, 1995 1995 TO MONTHS ENDED ENDED
TO SEPTEMBER SEPTEMBER 30, SEPTEMBER 30,
JUNE 1, 1995 30, 1995 1995 1996
--------------- ----------- -------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................. $16,363 $13,526 $29,889 $31,303
Gross margin........................... 5,031 3,393 8,424 8,506
Selling, general and administrative.... 1,293 1,799 3,134 5,359
Amortization and depreciation.......... 14 372 831 902
Income from operations................. 3,724 1,222 4,459 2,245
Other income (expense)................. 13 (585 ) (1,308 ) (1,135 )
Income taxes........................... -- 219 1,074 382
Net income............................. 3,737 418 2,077 728
Net income per common share(2)......... 0.09 0.50 0.09
Supplemental net income per common
share(5)............................. 0.13
Weighted average common shares
outstanding(2)....................... 3,631,250 3,631,250 3,752,108

SEPTEMBER 30, 1996
-------------------------------
ACTUAL AS ADJUSTED(4)
-------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..............
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
$ (10,741) (3,251)
Notes payable and credit facility(3)...
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
12,503 6,313
Total assets...........................
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
23,677 24,400
Long-term debt and capital lease
obligations, less current
maturities...........................
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
100 100
Stockholders' equity...................
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
7,346 14,559
</TABLE>

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

(1) Gives effect to the Acquisition and the Financing (as defined herein) as if
such transactions had occurred on January 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and the Financial Statements.

(2) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.

(3) Notes payable and credit facility are classified as current liabilities at
September 30, 1996. See "Risk Factors-- Leverage and Credit Agreement
Defaults" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

(4) Gives effect to the net proceeds of this Offering. See "Use of Proceeds."

(5) Supplemental net income per common share has been calculated using the
number of shares used to calculate net income per common share plus
1,018,930 shares which would be required to be issued to repay $6,190,000 of
the indebtedness outstanding with First Source Financial, LLP, plus 767,078
shares which would be required to be issued to redeem $4,660,000 of
preferred stock issued by CBH. See "Use of Proceeds" and Note 1 of the Notes
to the Financial Statements.

7
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK BEING OFFERED HEREBY.

GROWTH STRATEGY

The Company is subject to various risks associated with its growth strategy.
To take advantage of the opportunities presented by the consolidation trend in
the floor covering industry the Company is pursuing a two-pronged growth
strategy. In markets in which the Company will pursue growth through
acquisition, the Company will seek to acquire existing floor covering businesses
that are dominant competitors in their region. In other selected markets, where
there is no dominant floor covering retailer and the Company believes it could
expand its strong relationships with regional homebuilders, the Company will
pursue growth through the development of new facilities. The Company's growth
strategy involves several risks, including the risk that the Company will be
unable to identify suitable acquisition candidates or to integrate and manage
them effectively once acquired. The Company's success will depend on such
factors as the difficulties, complications and delays frequently encountered in
connection with the acquisition or development of a new business, including, but
not limited to, competition, the need to develop and expand customer support
capabilities and market expertise, market acceptance and additional sales and
marketing expense. The Company's future operating results will depend
significantly upon its ability to successfully open and operate new stores and
acquire and integrate floor covering retailers. The process of integrating
acquired businesses into the Company's operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management attention. The Company has not determined the funding requirements of
its growth strategies. Limited capital resources exist currently for such
strategies and the proceeds of this Offering are not expected to provide
material resources for this purpose. There can be no assurance that the Company
will be able to expand its market presence in its current locations or
successfully enter other markets or that any such expansion will be profitable
or as profitable as existing operations. If the Company's management is unable
to manage growth effectively, its business, results of operations and financial
condition could be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," "Management-- Directors and Executive Officers" and "--Key
Employees."

LEVERAGE AND CREDIT AGREEMENT DEFAULTS

The Company is highly leveraged and is subject to the risks associated with
a highly leveraged company. The Company's ratio of indebtedness for borrowed
money to stockholders' equity at September 30, 1996 was 1.7:1. There can be no
assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing business can be obtained. The Company
incurred significant indebtedness in connection with the Acquisition pursuant to
a credit facility (the "Credit Agreement") with First Source Financial, LLP
("First Source"). The Company currently depends on the Credit Agreement for its
working capital needs. The Company is in violation of certain financial
covenants under the credit facility and there can be no assurance that First
Source will continue to advance funds under the facility or that it will
continue to refrain from accelerating the debt. The Company anticipates repaying
a portion of its indebtedness to First Source out of the net proceeds of the
Offering and is in discussions with other lenders to provide another credit
facility although there can be no assurance as to the timing or terms of any
such alternative financing. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

CAPITAL REQUIREMENTS

The Company's growth strategy will require significant capital resources.
The Company's future capital requirements will also depend on many other
factors, including cash flow from operations,

8
<PAGE>
competing market developments and the Company's ability to market its products
and services successfully. Capital is needed not only for acquisitions, but also
for the effective integration, operation and expansion of such businesses once
acquired, as well as for the operation and expansion of the Company's newly
developed facilities. Moreover, although the Company funded all of the initial
capital costs of developing its two new Las Vegas facilities with monies
provided by suppliers, and anticipates that the capital costs for additional new
facilities will be provided in part by suppliers, based in each case on expected
sales of their products, there can be no assurance that such funds will be
available or will be adequate for this purpose. In addition, the inventory and
other costs associated with opening "big-box" facilities are substantially
higher than those for the stores opened in Las Vegas. Accordingly, while the
Offering may provide a small amount of capital needed to pursue its aggressive
growth and acquisition strategy, the Company will need to raise additional
capital through the issuance of long-term or short-term indebtedness or the
issuance of its equity securities in private or public transactions, which could
result in dilution of existing equity positions, increased interest and
amortization expense, or decreased income to fund future expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DEPENDENCE ON SUPPLIERS AND MANUFACTURERS

The Company relies primarily on several independent high volume carpet
manufacturers for the production of its floor coverings, including Shaw
Industries, Inc. ("Shaw"), Mohawk Industries, Alladin Mills, Inc. and Tuftex (a
division of Queen Carpet Corp.). During the nine months ended September 30,
1996, the Company's top six suppliers accounted for $12,675,000 or 81.2% of the
Company's floor covering purchases. Although these manufacturers have been
reliable, high-quality producers, there can be no assurance that in the future
these manufacturers will be willing or able to meet the Company's requirements
on a timely basis or that their pricing policies will remain competitive.
Furthermore, certain of these suppliers and manufacturers have recently entered
the retail and/or commercial market and will compete, directly or indirectly,
with the Company. See "Business --Suppliers" and "--Competition."

ABSENCE OF SIGNIFICANT AMOUNTS OF INVENTORY

The Company has to date operated with very little inventory, relying instead
on its ability to obtain deliveries from manufacturers on the date of scheduled
installation of the carpeting or other floor covering, which has kept the
Company's inventory and warehousing costs low. The Company's policy of next-day
installation on purchases in the Las Vegas market is dependent on its ability to
schedule next-day "cut and drop" product deliveries from its suppliers, since it
currently maintains very low inventory levels. To date the Company's suppliers
have been able to satisfy its delivery requirements with overnight shipments
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 and would have material adverse effects on the
Company's business. See "Business--Strategy."

DEPENDENCE ON AND RELATIONSHIP WITH CUSTOMERS

The Company's top five customers, located primarily within Clark County,
Nevada, accounted for approximately 35%, 37%, 31% and 36% of the Company's net
sales in 1993, 1994, 1995 and the nine months ended September 30, 1996,
respectively. The Company has retained the majority of its pre-Acquisition
customers, including all of its top 20 pre-Acquisition customers. By remaining
competitive on prices and service, the Company has been successful in retaining
these customers and attracting new customers, despite the fact that certain
members of management of the Predecessor Business did not remain with the
Company. However, there can be no assurance that in the future, these customers
will

9
<PAGE>
continue to do business with the Company. Loss of any major customer or a
material reduction in sales attributable to a major customer would have a
material adverse effect upon the Company.

LIMITED EXPERIENCE OF EXECUTIVE OFFICERS WITH FLOOR COVERING BUSINESS

Prior to June 2, 1995, the Company was a development stage enterprise and
its primary activities were limited to locating an acceptable acquisition
candidate. On June 2, 1995, the Company consummated the Acquisition.
Accordingly, the Company and its executive officers, other than the Chief
Operating Officer of CBI have been involved in the carpet business only since
the Acquisition in June 1995. To date, the Company has not completed any further
acquisitions of floor covering retailers.

DEPENDENCE ON KEY OPERATING PERSONNEL

The success of the Company is largely dependent on the skills, experience
and efforts of its operating management. These managers include the persons in
charge of the Company's existing retail operations in Las Vegas and the planned
Phoenix, Arizona facilities, the Company's design center and the working
relationships with homebuilders and carpet installers. The Company maintains key
man life insurance policies on Philip Herman, Steve Chesin and Alan Ember in the
amount of $1 million each. The loss of the services of any of the members of the
Company's operating management could have a material adverse effect on the
Company's business and prospects. Competition for such personnel is intense.
While certain of these employees have employment agreements with the Company,
there can be no assurance that the Company will be successful in retaining such
personnel. The Company believes that its future success will also depend in part
upon its ability to attract, retain and motivate additional qualified personnel.
There can be no assurance that such personnel will be available to the Company.
See "Management--Key Employees."

CONFLICTS OF INTEREST

The Company has engaged in various transactions with persons or entities
affiliated with the Company. A significant number of these transactions have
been with Branin Investments, Inc. ("Branin"), a company of which Philip Herman,
the Company's Chairman of the Board and President, was president and which is
currently controlled by Facundo Bacardi, a director and significant stockholder
of the Company. Rather than employing Company personnel to provide executive
management- and acquisition-related services, the Company in the past utilized
the services of Branin, a merchant banking company engaged primarily in
arranging acquisitions and financing of business entities, in exchange for the
payment of certain consulting and similar fees. These fees include a fee,
payable upon consummation of the Offering, of approximately $650,000 for its
role as advisor to the Company in obtaining certain financing for the
Acquisition. Branin has agreed to waive this amount in exchange for increasing
its management consulting fee to $20,000 per month upon completion of the
Offering. Branin currently receives fees in the amount of $10,000 per month
(reduced from $40,000 per month (which included a $5,000 per month payment to
PAH Marketing, Inc., another entity controlled by Mr. Herman) prior to September
1, 1996) for management consulting services it provides the Company.
Furthermore, as of January 1, 1997 Branin had advanced $419,400 to the Company
to pay dividends to the preferred stockholders of CBH. There are no specific
repayment terms for this advance. However, approximately $300,000 is expected to
be repaid out of the proceeds of the Offering. In addition, C.B. Realty, Inc.,
which is owned by four stockholders of the Company, including a son of Mr.
Herman, owns the property previously owned by Carpet Barn and leases such
property to the Company. In connection with its acquisition of the property,
C.B. Realty, Inc., borrowed $288,000 from the Company, payable over three years
with interest at 10% per annum. The balance remaining unpaid on such loan as of
January 1, 1997 was approximately $214,000. The Company has appointed a
committee of independent directors which must approve any related party
transaction involving Mr. Herman or any other related party. See "Use of
Proceeds," "Management's Discussion and

10
<PAGE>
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Management," "Certain Transactions" and "Principal Stockholders and
Holdings of Management."

CONTROL OF THE COMPANY

The Company's directors and executive officers currently own beneficially
approximately 69.5% of the outstanding shares of Common Stock and will continue
to beneficially own 54.5% following the Offering. Since there are no cumulative
voting rights provided for in the Company's Certificate of Incorporation, these
persons are in a position to effectively control the election of the members of
the Board of Directors, control most corporate actions, including the merger or
sale of the Company or its assets, generally direct the affairs of the Company
and prevent a change in control of the Company. Pursuant to the Credit
Agreement, the officers and directors of the Company must continue to hold a
majority of the Company's outstanding shares. Furthermore, the shares held by
the Company's directors and officers are held in a voting trust (the "Voting
Trust") with Philip Herman as sole trustee. The Voting Trust will expire at the
earlier of (i) May 30, 2005 or (ii) upon repayment of all outstanding
obligations to First Source under the Credit Agreement. See "Principal
Stockholders and Holdings of Management."

HIGHLY COMPETITIVE BUSINESS

The floor covering market is extremely competitive. While the Company is
currently the dominant firm in the Las Vegas floor covering market, there is a
potential for new entrants seeking to penetrate the Company's market share.
Outside the Las Vegas market, the Company's primary competitors offer
substantially similar services as the Company, and some may have greater market
recognition and greater financial, technical, marketing and human resources than
the Company. Shaw, a company with significantly greater capital resources than
the Company, is the Company's greatest potential competitor and one of the
Company's primary suppliers. Shaw is both a manufacturer and, through recent
acquisitions, a significant retailer in the carpet and floor covering industry.
To date, Shaw has not entered the Las Vegas or Phoenix markets, but in the
future may enter Las Vegas or Phoenix or other markets where the Company may
establish a presence. There can be no assurance that the Company will be able to
compete successfully against existing companies or any new entrants to the
marketplace. See "Business--Competition."

CYCLICAL NATURE OF FLOOR COVERING INDUSTRY; SINGLE MARKET

The retail floor covering industry historically has been cyclical and the
overall levels of sales are influenced by a number of factors, including
consumer behavior and confidence in spending for durable goods, the level of
personal discretionary spending, interest rates, turnover in housing, the
condition of the residential and commercial construction industries (including
new housing starts and level of commercial construction) and the overall
strength of the economy. During cyclical economic downturns, which adversely
affect interest rates, housing turnover and residential and commercial
construction, the industry can be expected to experience a general decline in
sales and profitability, and such decline may be greater than the decline
experienced by the economy generally. A prolonged economic downturn would have a
material adverse effect on the Company.

Currently, approximately 72% of the Company's sales are through its New
Housing Division and 28% of sales are through its Replacement Sales Division.
The Company's performance will be dependent to a significant extent upon the
levels of new residential construction, residential replacement and remodeling
spending and non-residential construction, all of which are affected by such
factors as interest rates, inflation and employment. The level of new
residential construction in Clark Country, Nevada, the Company's sole current
market, declined in the year ended December 31, 1995, as compared to the prior
year. Declines in new residential and non-residential construction and
remodeling activity may have a materially adverse effect on the Company's
financial condition and results of operations. The Company is currently pursuing
the establishment of retail facilities in the Phoenix, Arizona market area in
early 1997.

11
<PAGE>
However, there can be no assurance that the Company will be able to establish a
facility in such market, or, if established, what its prospects will be. See
"Business."

RISKS GENERALLY ASSOCIATED WITH RETAILING

The Company is a specialty retailer of floor covering, primarily to or
through new home builders. As such, the Company is subject to various business
risks generally associated with the retailing industry. Such risks include
changes in consumer tastes, spending habits, national, regional or local
economic conditions and population and traffic patterns, any of which could
adversely affect the Company's future sales, expenses and profitability. There
can be no assurance that the Company will be able to successfully anticipate and
respond to changing conditions affecting consumer acceptance of its merchandise.
See "Business."

NEVADA DEPARTMENT OF EMPLOYMENT, TRAINING AND REHABILITATION DETERMINATION

On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company believes, based in part on a prior
determination by such Department classifying the Predecessor Business's
installers as independent contractors, that these installers are not employees
of the Company and the Company is not subject to these payments. Many, though
not all, of the Company's competitors also treat installers working under
similar arrangements as independent contractors. If the Company does not prevail
in this regard, it may be required to make payments to compensate for not paying
these taxes in the past and may also be subject to future payment of these taxes
for these installers, which would minimally decrease the Company's gross
margins. A more substantial cost would be incurred by the Company if the
installers were to be regarded as employees of the Company for Federal
withholding purposes. To date, there has been no indication that the Federal
government intends to require the Company to treat these installers as employees
of the Company. However, there can be no assurance that the Federal government
will not pursue such action in the future.

TERMINATION OF MARK SZPORKA

The employment of Mark Szporka, as the Company's Chief Financial Officer,
was terminated by the Company in August 1996. In connection with such
termination and pursuant to the terms of Mr. Szporka's employment agreement, the
Company has repurchased 145,250 shares of Common Stock from Mr. Szporka for the
aggregate amount of $5,810, an amount established in such employment agreement.
These shares had been placed in escrow at the completion of the Acquisition in
June 1995 and would have been released to Mr. Szporka if the Company had met
certain operating targets set out in his employment agreement. Mr. Szporka has
commenced a suit against the Company alleging wrongful and unlawful termination.
The Company believes it has meritorious defenses to such allegations and intends
to defend the matter vigorously. To the extent this action is unfavorably
resolved it could have a materially adverse effect on the financial condition of
the Company. See "Management--Employment Agreements."

INDOOR AIR QUALITY

The effect of carpeting and other floor covering products on indoor air
quality has been the subject of debate in recent years. Although there is some
question within the industry as to whether emissions from carpeting pose a
health hazard, there can be no assurance that researchers will not detect
hazardous levels of emissions from carpeting. The discovery of adverse health
effects resulting from carpeting, or the public perception thereof, could have a
material adverse effect on the Company's operations.

12
<PAGE>
MANAGEMENT INFORMATION SYSTEMS

The Company is currently completing the implementation of computerized
management information systems. Since the Acquisition, the Company has spent
approximately $170,000 implementing and upgrading management information
systems. The Company believes the systems in place at the time of the
Acquisition were inadequate and that the new management information systems
adequately meet its current management and reporting needs. However, if the
Company successfully implements its growth strategy, there can be no assurance
that the new management information systems will be adequate to meet its needs
in new markets. If the system is not sufficient for the Company's future needs,
the Company will be required to expend additional resources to upgrade the
system and may experience delays, increased costs and other inefficiencies as a
result of any such inadequacy.

NO ANTICIPATED DIVIDENDS

The Company has not previously paid any dividends on its Common Stock and
for the foreseeable future intends to continue its policy of retaining any
earnings to finance the development and expansion of its business. Furthermore,
pursuant to the Credit Agreement, CBH and CBI are prohibited from declaring
dividends or making other distributions on their capital stock, with certain
exceptions. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital
Resources."

DILUTION

Purchasers of the Common Stock offered hereby will incur an immediate and
substantial dilution in net tangible book value per share of the Common Stock
from the Offering Price. See "Dilution."

AUTHORIZATION OF PREFERRED STOCK

The Company's certificate of incorporation authorizes the issuance of
preferred stock with such designation, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company that might be considered desirable
by stockholders. Although the Company has no current intention of issuing any
shares of its preferred stock, there can be no assurance that the Company will
not do so in the future. The preferred stock reflected in the Company's balance
sheet is CBH preferred stock, which for accounting purposes, is treated as
preferred stock of the Company. The Company must redeem the CBH preferred stock
upon the consummation of the Offering. See "Description of Securities--Preferred
Stock."

NO ASSURANCE OF PUBLIC MARKET; VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been a limited public trading market for
the Common Stock. The Common Stock has been traded in the over-the-counter
market on the "electronic bulletin board" since September 1995. There can be no
assurance that a regular trading market for the Common Stock will develop after
the Offering or that, if developed, it will be sustained. In addition, there has
been significant volatility in the market price of securities of emerging
companies that often have been unrelated to the operating performance of such
companies and there can be no assurance that the market price will not decline
below the Offering Price herein. The Company believes that factors such as
failure to meet securities analysts' performance expectations and quarterly
variations in financial results could cause the market price of the Common Stock
to fluctuate substantially. These market fluctuations may adversely affect the
price of and market for the Common Stock. Assuming the Company's acceptance for
trading on

13
<PAGE>
the Nasdaq National Market, Chatfield Dean & Co., as representative of the
Underwriters (the "Representative") may from time to time following the
completion of this Offering act as a market-maker and otherwise effect
transactions in the Common Stock of the Company. The Representative is not
legally obligated by law or by contract to continue such trading, which may be
discontinued at any time. Any such cessation could have a material adverse
effect upon the price and liquidity of the Common Stock of the Company. The
Representative is subject to the supervision of various governmental and
self-regulatory organizations as well as certain capital requirements. Such
regulatory authorities periodically investigate and audit the activities of
broker-dealers, such as the Representative. In the event the Representative is
required to curtail or cease operations as a result of administrative actions
instituted by the regulatory authorities or because of lack of capital, the
price and liquidity of the Common Stock may be affected by the reduced
participation or complete absence of such Representative from the market. See
"Price Range of Common Stock" and "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

The shares sold in the Offering (other than shares which may be purchased by
"affiliates" of the Company) will be freely tradeable without restriction or
further registration under the Securities Act. In addition, 13,750 shares,
including the 12,500 shares sold by the Company in its initial public offering
in 1990, are freely tradeable without restriction or further registration under
the Securities Act. Approximately 276,750 additional shares are available for
immediate sale under Rule 144. The holders of of these shares available
for immediate sale under Rule 144 have agreed not to sell such shares prior to
without the consent of the Underwriters and the Company. The Company has
granted certain registration rights to these stockholders. In addition,
1,360,668 shares will become eligible for sale pursuant to Rule 144 in June
1997, and 36,313 shares will become so eligible in August, 1997. Moreover,
holders of an additional 62,590 shares which would become eligible for sale in
November 1997 and May 1998 pursuant to Rule 144 have agreed not to sell such
shares until , and the Company has granted these stockholders certain
registration rights. The 1,892,328 remaining shares of Common Stock are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144 and Rule
144A thereunder. No predictions can be made as to the effect, if any, that
market sales of shares of existing stockholders or the availability of such
shares for future sale will have on the market price of shares of Common Stock
prevailing from time to time. The prevailing market price of the Common Stock
after the offering could be adversely affected by future sales of substantial
amounts of Common Stock by existing stockholders. See "Certain Transactions,"
"Description of Capital Stock--Registration Rights," "Shares Eligible for Future
Sale" and "Underwriting."

14
<PAGE>
USE OF PROCEEDS

The aggregate net proceeds from the sale of the shares of Common Stock being
offered by the Company in the Offering, after deducting estimated offering
expenses and underwriting discounts and commissions, will be approximately $12.2
million (approximately $14.0 million if the Underwriter's over-allotment option
is exercised in full), assuming a public Offering Price of $7.00 per share, the
mid-point of the estimated range of the public Offering Price.

Approximately $6.2 million of the net proceeds to the Company will be used
to repay a portion of the indebtedness outstanding under its revolving credit
facility with First Source, which bears interest at the base rate of First
National Bank of Chicago from time to time in effect plus 2.25% per annum
(currently 10.5% per annum) and has a final maturity date of May 31,1999.
Approximately $4,660,000 of the net proceeds will be used to redeem all of the
preferred stock issued by CBH. Approximately $300,000 of the net proceeds will
be used to repay amounts advanced by Branin. Remaining net proceeds will be
allocated to general corporate and working capital purposes. Net proceeds
received by the Company as a result of the over-allotment option by the
Underwriters will be added to the Company's working capital. Pending such uses,
the Company will invest the proceeds in interest bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."

PRICE RANGE OF COMMON STOCK

The Common Stock has been quoted on the "electronic bulletin board" operated
by the NASD under the symbol "RAGC" since September 1995. The following table
sets forth, for the periods indicated, the high and low bid prices before and
after adjustment for the one-for-four reverse stock split, of the Common Stock
as reported on the "electronic bulletin board" operated by the NASD. Such
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
In connection with the Offering, application is being made to have the Company's
Common Stock listed on the Nasdaq National Market under the symbol "NFLI."

<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
-------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
Fiscal Year 1997:

First Quarter (through January 9, 1997)........................................ $ 3.25 $ 2.25 $ 13.00 $ 9.00

Fiscal Year 1996:

First Quarter.................................................................. 5.25 4.00 21.00 16.00
Second Quarter................................................................. 5.25 3.00 21.00 12.00
Third Quarter.................................................................. 3.75 2.25 15.00 9.00
Fourth Quarter................................................................. 3.75 2.25 15.00 9.00

Fiscal Year 1995:

Third Quarter.................................................................. 3.00 3.00 12.00 12.00
Fourth Quarter................................................................. 4.75 3.00 19.00 12.00
</TABLE>

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

(1) Adjustments reflect the arithmetical effect of the one-for-four reverse
stock split. The actual adjustments that would have occurred to the prices
for a share of the Common Stock as a result of the one-for-four reverse
stock split cannot be calculated, and "as adjusted" prices are not intended
to imply that the one-for-four reverse stock split will effect a
proportionate adjustment in the price of the Common Stock.

15
<PAGE>
As of December 31, 1996, there were approximately 368 record holders of the
Common Stock. The last sale price of the Common Stock on December 31, 1996 was
$2.75 ($11.00 as adjusted) per share as reported by the Automated Confirmation
Transaction Service.

DIVIDEND POLICY

The Company has not paid any dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board of Directors does not expect to declare
or pay any dividends in the foreseeable future. In addition, pursuant to the
Company's Credit Agreement with First Source, CBH and CBI are prohibited from
declaring dividends or making other distributions on their capital stock,
provided that CBI may pay dividends needed in order to permit (i) the payment by
CBH of dividends on its preferred stock, so long as (A) no default exists under
the Credit Agreement and (B) CBI's net worth (after giving effect to such
payment) is at least equal to its net worth on June 2, 1995 and (ii) the
redemption by CBH of its preferred stock, so long as (A) no default exists under
the Credit Agreement and (B) CBI's net worth (after giving effect to such
payment) is at least $7,000,000. In conjunction with a covenant waiver obtained
from First Source, the Company agreed to limit certain payments with respect to
outstanding securities of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

16
<PAGE>
DILUTION

The net tangible book value (deficit) of the Common Stock at September 30,
1996 was $(10,394,895) or $(2.85) per share. After giving effect to the sale of
2,000,000 shares of Common Stock in the Offering (after deductions of estimated
offering expenses and underwriting discounts and commissions) the pro forma net
tangible book value (deficit) at September 30, 1996 would have been $(2,904,895)
or $(0.51) per share. This represents an immediate increase in net tangible book
value of $2.34 per share to existing stockholders and an immediate dilution of
net tangible book value of $7.51 per share to new investors purchasing shares in
the Offering.

The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed Offering Price per share............................ $ 7.00
Net tangible book value (deficit) per share before the
Offering.............................................. $ (2.85)
Increase per share attributable to new investors........ 2.34
---------
Pro forma net tangible book value (deficit) per share after
the Offering (1).......................................... (0.51)
---------
Dilution per share to new investors (2)..................... 7.51
---------
---------
</TABLE>

The following table sets forth for existing stockholders and for new
investors the number and percentage of total outstanding shares of Common Stock
purchased, the total consideration and percentage of total consideration paid to
the Company, and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.................................. 3,787,647 65.4% $ 3,522,285 20.1% $ 0.93
New Investors.......................................... 2,000,000 34.6% 14,000,000 79.9% 7.00
---------- ----- ------------- -----
Total............................................ 5,787,647 100.0% $ 17,522,285 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

The foregoing table does not reflect the impact of (i) 1,250,000 shares of
Common Stock reserved for issuance upon the exercise of employee stock options,
of which shares are subject to options to be granted at the Offering Price
upon completion of the Offering, under the Option Plan, (ii) the Underwriters'
Warrants to purchase 200,000 shares of Common Stock at $ per share or
(iii) the exercise of the Underwriters' over-allotment option. See
"Management--1996 Stock Option Plan" and "Underwriting."

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

(1) Net tangible book value (deficit) per share is determined by dividing the
net tangible book value (deficit) of the Company (tangible assets less
liabilities) by the number of shares of Common Stock outstanding after
giving effect to the redemption of the preferred stock issued by CBH and
repayment of indebtedness outstanding under the Company's revolving credit
facility.

(2) Dilution is determined by subtracting pro forma net tangible book value
(deficit) per share after the Offering from the assumed $7.00 price per
share.

17
<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at (i) September 30, 1996 and (ii) as adjusted to give effect to the
sale of 2,000,000 shares of Common Stock by the Company in the Offering,
assuming an Offering Price of $7.00 per share, the mid-point of the estimated
range, after deducting estimated offering expenses and underwriting discounts,
and the anticipated application by the Company of the net proceeds received by
it. See "Use of Proceeds."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(3)
--------- --------------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Notes payable and credit facility...................................................... $ 12,503 $ 6,313
Long term debt, less current maturities................................................ 100 100
Stockholders' equity:
Preferred stock(1), $.01 par value ($1,000 stated value), 12% cumulative; 5,500 shares
authorized; 4,660 shares issued, 0 shares as adjusted................................ 4,660 --
Discount on preferred stock............................................................ (1,446) --
Common Stock, $.001 par value; 20,000,000 shares authorized; 3,787,647 shares issued
and outstanding; 5,787,647 shares as adjusted(2)..................................... 4 6
Additional paid-in capital............................................................. 3,518 14,220
Less cost of treasury stock (145,250) shares........................................... (6) (6)
Retained earnings...................................................................... 616 339
--------- -------
Total stockholders' equity............................................................. 7,346 14,559
--------- -------
Total capitalization................................................................... 19,949 20,972
--------- -------
--------- -------
</TABLE>

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

(1) Because the Acquisition was accounted for as a reverse acquisition, the
preferred stock of CBH is presented herein as preferred stock of the
Company. See the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.

(2) Does not include (i) 1,250,000 shares of Common Stock reserved for issuance
upon exercise of employee stock options, of which shares are subject
to options to be granted at the Offering Price upon completion of the
Offering, under the Option Plan and (ii) 200,000 shares of Common Stock
reserved for issuance upon exercise of the Underwriters' Warrants. See
"Management--1997 Stock Option Plan" and "Underwriting."

(3) Gives effect to the net proceeds of the Offering.

18
<PAGE>
SELECTED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The selected financial data presented below have been derived from the
financial statements of the Company and the Predecessor Business and are
qualified by reference to, and should be read in conjunction with, the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The
financial statements of Nations Flooring, Inc. and Subsidiaries as of December
31, 1995 and for the period from June 2, 1995 (commencement of operations)
through December 31, 1995, together with the report thereon of McGladrey &
Pullen, LLP, independent public accountants, are included elsewhere in this
Prospectus. The financial statements of Carpet Barn as of December 31, 1994 and
for the period from January 1, 1995 through June 1, 1995 and for the years ended
December 31, 1994 and 1993, together with the report thereon of McGladrey &
Pullen, LLP, independent public accountants, are included elsewhere in this
Prospectus. The selected historical financial data for the nine month periods
ended September 30, 1996 and 1995 have been derived from unaudited consolidated
financial statements and include, in the opinion of management, all normal
recurring adjustments necessary to present fairly the data for such periods. The
operating results for the nine-month period is not necessarily indicative of the
results that may be expected for a full year. The results of operations of the
Company are not comparable to those of the Predecessor Business, due primarily
to the amortization of intangible assets and interest expense on the debt
incurred in connection with the Acquisition. In addition, certain information
below is not shown for the Predecessor Business where such information would not
present a meaningful comparison. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
NATIONS
FLOORING, INC.
PREDECESSOR BUSINESS --------------------------
------------------------------------------------------------- PRO FORMA
FOR
YEARS ENDED DECEMBER 31, PERIOD ENDED PERIOD ENDED YEAR ENDED
---------------------------------------------- JUNE 1, DECEMBER 31, DECEMBER 31,
1991 1992 1993 1994 1995(1) 1995 1995(2)
------------- --------- --------- --------- ------------- ------------ ------------
(UAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 26,892 $ 28,994 $ 34,530 $ 42,507 $ 16,363 $ 23,980 $ 40,343
Gross margin............................ 7,297 8,167 9,598 10,958 5,031 6,126 11,156
Income from operations.................. 763 1,375 1,096 5,548 3,724 2,109 5,366
Net income.............................. 837 925 1,114 4,888 3,737 489 1,997
Net income per common share(4).......... 0.08 0.45
Supplemental net income per common
share(7).............................. 0.11 0.40
Weighted average common shares
outstanding(4)........................ 3,645,791 3,639,732
Pro forma income tax effect(5).......... 284 315 379 1,662 1,271
Pro forma net income after taxes(5)..... 553 610 735 3,226 2,466
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(6)
Working capital (deficit)..................... $ (3,757)
Total assets.................................. 24,084
Long-term debt and capital lease obligations,
less current maturities..................... 8,812
Stockholders' equity.......................... 6,487

<CAPTION>
<S> <C>
BALANCE SHEET DATA:(6)
Working capital (deficit).....................
Total assets..................................
Long-term debt and capital lease obligations,
less current maturities.....................
Stockholders' equity..........................
</TABLE>

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

(1) Information is presented for the Predecessor Business for the period from
January 1, 1995 through June 1, 1995, the date of the Acquisition, which was
accounted for as a reverse acquisition of the Company by CBH.

(2) Information is presented for the Company for the period from June 2, 1995
through December 31, 1995, due to the Acquisition.

(3) Gives effect to the Acquisition and the Financing (as defined herein) as if
such transactions had occurred on January 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and the Financial Statements.

(4) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.

(5) The Predecessor Business was taxed as an S corporation under Subchapter S of
the Code so that in lieu of payment of income taxes at the corporate level
the stockholders individually reported their pro rata share of the
Predecessor Business' items of income, deduction, loss and credit. Pro forma
income tax has been computed at an assumed rate of 34%.

19
<PAGE>
(6) The December 31, 1994 balance sheet data are not presented as they are not
comparable to those of the Company because the Predecessor Business had a
substantially different capital structure and virtually no intangible
assets.

(7) Supplemental net income per common share has been calculated using the
number of shares used to calculate net income per common share plus
1,018,930 shares which would be required to be issued to repay $6,190,000 of
the indebtedness outstanding with First Source Financial, LLP, plus 767,078
shares which would be required to be issued to redeem $4,660,000 of
preferred stock issued by CBH. See "Use of Proceeds" and Note 1 of the Notes
to the Financial Statements.

<TABLE>
<CAPTION>
NATIONS NATIONS
PREDECESSOR FLOORING, INC. PRO FORMA NINE(1) FLOORING, INC.
BUSINESS JUNE 2, 1995 TO MONTHS ENDED NINE MONTHS ENDED
JANUARY 1, 1995 TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
JUNE 1, 1995 1995 1995 1996
------------------- ----------------- ----------------- -----------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Sales............................... $ 16,363 $ 13,526 $ 29,889 31,303
Gross margin........................ 5,031 3,393 8,424 8,506
Selling, general and
administrative.................... 1,293 1,799 3,134 5,359
Amortization and depreciation....... 14 372 831 902
Income from operations.............. 3,724 1,222 4,459 2,245
Other income (expense).............. 13 (585) (1,308) (1,135)
Income taxes........................ -- 219 1,074 382
Net income.......................... 3,737 418 2,077 728
Net income per common share(2)...... 0.09 0.50 0.09
Supplemental net income per common
share(5).......................... 0.13
Weighted average common shares
outstanding(2).................... 3,631,250 3,631,250 3,752,108
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
------------ ---------------

<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................................................................... $ (10,741) $ (3,251)
Notes payable and credit facility(3)............................................................... 12,503 6,313
Total assets....................................................................................... 23,677 24,400
Long-term debt and capital lease obligations, less current maturities.............................. 100 100
Stockholders' equity............................................................................... 7,346 14,559
</TABLE>

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

(2) The weighted average common shares outstanding and net income per common
share for the Predecessor Business are not presented as they are not
comparable to those of the Company.

(3) Notes payable and credit facility are classified as current liabilities at
September 30, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

(4) Gives effect to the net proceeds of this Offering. See "Use of Proceeds."

20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company relates to the fiscal years ended December 31, 1995,
1994 and 1993 and the nine month periods ended September 30, 1996 and 1995 and
should be read in conjunction with the preceding Selected Financial Data and the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
All references to full years are to the applicable fiscal year of the Company.
All discussion of 1994 and 1993 financial information relates to financial
results of Carpet Barn. Discussion of information for 1995 relates to the pro
forma consolidated financial results of the Company and Carpet Barn for that
period.

Predecessor Business results have been adjusted for comparative purposes in
the following discussions. Compensation to the owner of the Predecessor Business
has been adjusted as the former owner is not involved in the Company's
operations and has been replaced by two individuals with employment agreements
at salaries considerably less than the former owner's compensation level.
Foreign currency contracts have also been removed from the discussion of results
from operations as the Predecessor Business speculated in these contracts only
during 1994 and had no positions at either the beginning or end of such year.
The Company is not and has no intention of being involved in these types of
speculative investments. Due to the fact that the Predecessor Business was a
Subchapter S corporation, the amount of owner's compensation and/or dividends
were directly related to personal income tax considerations. Therefore, the
amount of compensation and dividends paid each year by the Predecessor Business
to the former owner varied as his personal earnings increased or decreased.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1996 (ACTUAL) AND 1995 (ON A PRO FORMA
BASIS).

To facilitate the comparison between the nine month periods ended September
30, 1996 and 1995, the 1995 results have been adjusted on a pro forma basis
assuming the acquisitions described in Note 2 to the Financial Statements had
occurred on January 1, 1995.

<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS NATIONS FLOORING,
JANUARY 1, INC. NATIONS FLOORING,
1995 JUNE 2, 1995 PRO FORMA INC.
TO TO PRO FORMA NINE MONTHS ENDED NINE(1) MONTHS ENDED
JUNE 1, 1995 SEPTEMBER 30, 1995 ADJUSTMENTS(1) SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
-------------- -------------------- -------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
Sales.................. $ 16,363 $ 13,526 $ -- $ 29,889 $ 31,303
Gross margin........... 5,031 3,393 -- 8,424 8,506
Selling, general and
administrative....... 1,293 1,799 42(a) 3,134 5,359
Amortization and
depreciation......... 14 372 445(b) 831 902
Other income
(expense)............ 13 (585) (737)(c) (1,309) 2,246
Income taxes........... -- 219 855(d) 1,074 (1,135)
Net income............. 3,737 418 (2,078) 2,076 382
</TABLE>

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

(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1995:
(a) related party rent expense of $42; (b) amortization and depreciation of
$445; (c) interest expense of $737; and (d) corporate income taxes of $855
computed at an assumed rate of 34%. No compensation was received by the
owner of the Predecessor Business for the period January 1 to June 1, 1995.
The pro forma adjustments for

21
<PAGE>
income taxes takes into account that the Predecessor Business was a
Subchapter S corporation for income tax reporting purposes.

Total revenues increased by $1,415,972 to $31,303,170 for the nine months
ended September 30, 1996 from $29,889,198 for the nine months ended September
30, 1995, representing an increase of 4.7%. This increase is attributable
primarily to an increase in new home sales for the first three quarters of 1996
compared to the first three quarters of 1995 and to a lesser extent, the
increase in contract prices to new home buyers.

The gross margin increased from $8,423,717, for the nine months ended
September 30, 1995 to $8,506,347 for the nine months ended September 30, 1996,
representing an increase of 0.1%. This slight increase reflects the fact that
increased revenues resulted primarily from an increase in new home sales, which
generally have a lower gross margin than replacement sales, and further reflects
increases in contract prices to new home buyers, which began to take effect in
April 1996, offset by price increases from the Company's vendors.

Selling, general and administrative expenses increased from $3,133,918 for
the nine months ended September 30, 1995 to $5,358,700 for the nine months ended
September 30, 1996. This increase is due to the following changes: (1) increases
in salaries and related payroll taxes of $881,000, due primarily to an increase
in the number of employees, (2) an increase in the modification rate for
workers' compensation due to the change in ownership on June 2, 1995 of
$283,000, (3) an increase in promotion and travel and entertainment expenses of
$79,000, (4) professional expenses associated with the annual audit and required
public filings of $162,000, (5) an increase in advertising expense of $326,000,
(6) an increase in insurance expenses of $123,000 (7) an increase in bad debt
expenses of $81,000 and (8) an increase in related party payments consisting of
consulting fees and rents of $155,000.

Operating income decreased by $2,212,929 from $4,458,458 for the nine months
ended September 30, 1995 to $2,245,529 for the nine months ended September 30,
1996. Net income decreased from $2,077,219 for the nine months ended September
30, 1995 to $728,378 for the nine months ended September 30, 1996. These
decreases were due principally to the above-mentioned increases in selling,
general and administrative expenses.

22
<PAGE>
FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 (ON A PRO FORMA BASIS)

To facilitate the comparison between the years ended December 31, 1995 and
1994, the results of both years have been adjusted on a pro forma basis assuming
the acquisitions described in Note 2 to the Financial Statements occurred on
January 1, 1994 and carried through the year ended December 31, 1995.

<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS NATIONS FLOORING,
JANUARY 1, 1995 INC. PRO FORMA
TO JUNE 2, 1995 TO PRO FORMA YEAR ENDED
JUNE 1, 1995 DECEMBER 31, 1995 ADJUSTMENTS(1) DECEMBER 31, 1995
----------------- -------------------- -------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Sales................................ $ 16,363 $ 23,980 $ -- $ 40,343
Gross margin......................... 5,031 6,126 -- 11,156
Selling, general and
administrative..................... 1,293 3,337 42(a) 4,672
Amortization and
depreciation....................... 14 679 425(b) 1,118
Other income (expense)............... 13 (1,365) (989)(c) (2,341)
Income taxes......................... -- 255 774(d) 1,029
Net income........................... 3,737 489 (2,230) 1,996
</TABLE>

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

(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1995:
(a) related party rent expense of $42; (b) amortization and depreciation of
$425; (c) interest expense of $989; and (d) corporate income taxes of $774
computed at an assumed rate of 34%. No compensation was received by the
owner of the Predecessor Business for the period January 1, to June 2, 1995.
The pro forma adjustments for income taxes take into account that the
Predecessor Business was a Subchapter S corporation for income tax reporting
purposes.

<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS
YEAR ENDED PRO FORMA
DECEMBER 31, PRO FORMA YEAR ENDED
1994 ADJUSTMENTS(1) DECEMBER 31, 1994
----------------- -------------- -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Sales...................................................... $ 42,507 $ -- $ 42,507
Gross margin............................................... 10,958 -- 10,958
Selling, general and administrative........................ 5,381 (1,930)(a) 3,451
Amortization and depreciation.............................. 28 1,090(b) 1,118
Other income (expense)..................................... (659) (1,685)(c) (2,344)
Income taxes............................................... -- 1,365(d) 1,365
Net income................................................. 4,890 (2,218) 2,670
</TABLE>

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

(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1994:
(a) compensation of $2,030 paid to the owner of the Predecessor Business
adjusted for related party rent expense of $100; (b) amortization and
depreciation of $1,090; (c) interest expense of $2,341 adjusted to eliminate
the effect of loss on the sale of securities of $656; and (d) corporate
income taxes of $1,365 computed at an assumed rate of 34%. The pro forma
adjustments for income taxes take into account that the Predecessor Business
was a Subchapter S corporation for income tax reporting purposes.

Total revenues decreased from $42,506,987 for the year ended December 31,
1994 to $40,342,606 for the year ended December 31, 1995, representing a
decrease of 5.1%. The decrease can be attributed to a decrease in sales for new
tract homes partially offset by an increase in the replacement sales business.

23
<PAGE>
During 1995, it is estimated that new home unit sales volume decreased by
approximately 5.6% in the Las Vegas marketplace.

Although total revenues decreased, gross margin grew from $10,957,627 in
1994 to $11,156,397 in 1995 due to an increase in the gross margin percentage
from 25.8% in 1994 to 27.7% in 1995. This increase in gross margin percentage
can be attributed to an increase in higher margin replacement sales business.

Selling, general and administrative expenses increased by $1,220,208 from
$3,451.698 in 1994 to $4,671,906 in 1995. This increase is due to the following
approximate changes: (1) increases in salaries and related payroll taxes of
$288,000 due primarily to an increase in the number of employees, (2) an
increase in the modification rate for workers' compensation due to the change in
ownership on June 2, 1995 resulting in an increase of $220,000, (3) professional
fees associated with the acquisition and required public filings of $305,000 and
(4) related party payments consisting of consulting fees and rents of $315,000.

Operating income decreased by $1,021,438 from $6,387,381 in 1994 to
$5,365,943 in 1995. Net income decreased by $674,150 from $2,670,736 in 1994 to
$1,996,588 in 1995. These decreases were due to the above-mentioned increases in
selling, general and administrative expenses, partially offset by the increase
in gross margin.

FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1993 (ON A PRO FORMA BASIS)

To facilitate the comparison between the years ended December 31, 1994 and
1993, the results of both years have been adjusted on a pro forma basis assuming
the acquisitions described in Note 2 to the consolidated Financial Statements
occurred on January 1, 1993 and carried through the year ended December 31,
1994.

<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS
YEAR ENDED PRO FORMA PRO FORMA
DECEMBER 31, PRO FORMA YEAR ENDED YEAR ENDED
1993 ADJUSTMENTS(1) DECEMBER 31, 1993 DECEMBER 31, 1994
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Sales................................... $ 34,530 $ -- $ 34,530 $ 42,507
Gross margin............................ 9,598 -- 9,598 10,958
Selling, general and administrative..... 8,478 (5,450)(a) 3,028 3,452
Amortization and
depreciation.......................... 25 1,094(b) 1,119 1,119
Other income (expense).................. 18 (2,359)(c) (2,341) (2,343)
Income taxes............................ -- 1,058(d) 1,058 1,365
Net income.............................. 1,114 940 2,054 2,670
</TABLE>

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

(1) The pro forma adjustments reflect the following additional expenses that
would have been incurred had the Acquisition taken place on January 1, 1993:
(a) compensation paid to the owner of the Predecessor Business of $5,550
adjusted for related party rent expense of $100; (b) amortization and
depreciation of $1,094; (c) interest expense of $2,359; and (d) corporate
income taxes of $1,058 computed at an assumed rate of 34%. The pro forma
adjustments for income taxes take into account that the Predecessor Business
was a Subchapter S corporation for income tax reporting purposes.

Total revenues increased from $34,529,604 for the year ended December 31,
1993 to $42,506,987 for the year ended December 31, 1994, representing an
increase of 23.1%. Approximately $7,500,000 or 93% of the increase, can be
attributed to sales for new tract homes. During 1994, it is estimated that new
homes unit sales volume grew by approximately 33% in the Las Vegas marketplace.

24
<PAGE>
Gross margin grew from $9,598,265 in 1993 to $10,957,627 in 1994. However,
the gross margin percentage decreased from 27.8% in 1993 to 25.8% in 1994,
primarily due to a lower overall percentage of higher margin replacement sales
business.

Selling, general and administrative expenses increased by $423,894 from
$3,027,804 in 1993 to $3,451,698 in 1994. This increase is due to the following
approximate changes: (1) increases in salaries and related payroll taxes of
$155,000, and (2) and an increase in workers' compensation expense due to the
increased volume resulting in an increase of $158,000.

Operating income increased by $935,468 from $5,451,913 in 1993 to $6,387,381
in 1994. Net income increased by $617,409 from $2,053,327 in 1993 to $2,670,736
in 1994. These increases were due to the above-mentioned increases in gross
margin, partially offset by an increase in selling, general and administrative
expenses.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities of the Company's Las Vegas operations
was $3,460,569 and $2,946,385 for the year ended December 31, 1995 and the nine
months ended September 30, 1996 respectively. At September 30, 1996, the Company
had a working capital deficit of $(10,741,259). Included in such deficit is
$12,741,176 due to First Source under the credit agreement (the "Credit
Agreement") discussed below. The Company's growth and acquisition strategy will
require significant additional cash.

The results of operations of the Company have been impacted as a result of
the restructuring of the Company after the Acquisition. The Acquisition resulted
in amortization expense and interest expense of approximately $85,000 and
$198,000 per month, respectively. Subsequent to payment of the Company's
subordinated debt in April 1996 as described below, interest expense has
averaged $110,000 per month. Prior to the Acquisition, the Predecessor Business
had a positive tangible net worth in contrast to the Company, which has had a
negative tangible net worth due to the increase in intangibles and debt
resulting from the Acquisition.The Company is highly leveraged and is subject to
the risks associated with a highly leveraged Company. The Company's ratio of
indebtedness for borrowed money to stockholders equity at September 30, 1996 was
1.7:1.

In June 1995, in order to consummate its acquisition of Carpet Barn, the
Company, through its indirect subsidiary CBI, entered into the Credit Agreement
with First Source (the "Financing") pursuant to which First Source advanced to
CBI approximately $15,200,000 in term and revolving loans and CBH pledged to
First Source all of the common stock of CBI to secure CBI's obligations under
the Credit Agreement and CBH guaranteed CBI's debt obligations to First Source
under the Credit Agreement. Fees and expenses paid to First Source amounted to
$402,000, in addition to incurring other acquisition fees of $510,619. The
Credit Agreement contains covenants that limit CBI's ability to upstream monies
to CBH needed to pay principal and interest on the $1,940,000 aggregate
principal amount of its 12% subordinated notes (which were retired at par on May
1, 1996) issued by CBH in connection with the Acquisition (the "Notes") and to
pay dividends on the preferred stock, par value $.01 per share, stated value
$1,000 per share (the "CBH Preferred Stock"), of CBH. The term portion of the
Credit Agreement is due May 31, 1999 and the revolving portion is due May 31,
1997, subject to extension in certain circumstances to May 31, 1999. All
borrowings under the Credit Agreement bear interest at the base rate per annum
announced from time to time by The First National Bank of Chicago (8.25% at
January 10, 1997) plus 2.25% per annum (currently 10.5% per annum), payable
monthly. As of October 28, 1996, the Company had borrowed approximately
$2,620,000, leaving approximately $380,000 available from First Source under a
$3,000,000 working capital note and had no availability from First Source under
a $14,000,000 revolving note that had an outstanding balance and commitment of
$9,625,000.

The Credit Agreement contains covenants requiring CBI to maintain minimum
levels of tangible net worth, working capital and various ratios. During the
period from June 2, 1995 (commencement of operations) through September 30, 1996
the Company has failed to meet the following financial covenants:

25
<PAGE>
(1) adjusted net worth at June 30, 1995, (2) quarterly and annual interest
coverage ratios. On April 15, 1996 First Source waived, through June 1, 1996,
the covenant violations occurring prior to such time and agreed to negotiate in
good faith to amend such covenants by June 1, 1996 so that the Company could
reasonably expect to be in compliance with the amended covenants based on its
operating and cash flow budgets. In connection with obtaining the waiver the
Company agreed to limit certain payments, including principal payments of CBH's
subordinated debt, with the exception that such payments could be made from the
proceeds of newly acquired capital, if any. Payments of the CBH preferred stock
dividends have been made by Branin on behalf of the Company in the amount of
$46,600 per month. Consequently, as of January 1, 1997, the Company was
obligated to Branin in the amount of $419,400.

The Company had certain discussions with First Source in an effort to amend
such covenants but was unable to reach an agreement with First Source. The
discussions are not continuing at present, and the Company believes that the
covenants are not likely to be amended. Moreover, the waiver period has not been
extended beyond June 1, 1996, and therefore, the Company has been in violation
of the covenants since June 1, 1996. To date, First Source has still allowed the
Company to borrow up to the full capacity under the original terms of the Credit
Agreement and the Company has received no indication from First Source that they
intend to exercise their right under the Credit Agreement to accelerate the
maturity of the debt. Because First Source has maintained its right to
accelerate the maturity of the debt due to the covenant violations, the Company
has classified the debt as current on the September 30, 1996 consolidated
balance sheet.

The Company is currently exploring other financing options which are
available to it. The Company is currently having discussions with several other
lenders in this regard, however there can be no assurance that the Company will
be able to obtain alternate financing or that such financing will be on similar
or favorable terms. If First Source chooses to accelerate the maturity of the
debt or if the Company were to obtain alternate financing certain unamortized
debt acquisition costs classified as intangible assets would be charged to
expense. Such unamortized debt acquisition costs totaled $588,500 at September
30, 1996. Additionally, the Credit Agreement contains a prepayment penalty
clause requiring the Company to pay up to 2% of the then applicable revolving
loan commitment, as defined in the Credit Agreement, if the Company chooses to
terminate the Credit Agreement prior to May 31, 1999.

During the nine months ended September 30, 1996, cash used in investing
activities was $618,788. Cash used in financing activities during such period
was $2,949,434, used primarily to make principal payments on the Credit
Agreement and preferred stock dividends.

Immediately prior to the consummation of the Exchange and the Financing, CBH
privately sold an aggregate principal amount of $1,940,000 of its 12%
subordinated notes (the "Subordinated Notes") in a private placement (the "Note
Offering"), together with shares of CBH Common Stock, raising $1,940,000, and
privately sold an aggregate of 2,215 shares of CBH Preferred Stock (the
"Preferred Stock Offering"), together with shares of CBH Common Stock, raising
an aggregate of $2,215,000. The Subordinated Notes bore interest at 12% per
annum payable monthly. The first half of the principal due on November 30, 1995
was satisfied by the Company making principal payments of $560,000 and the
exchange of $820,000 of the Notes for 820 shares of 12% CBH Preferred Stock,
together with shares of Common Stock. In addition, $1,125,000 was raised in
connection with the sale of 1,125 shares of such 12% CBH Preferred Stock,
together with shares of Common Stock ($605,000 of which was raised in November
1995 and $520,000 of which was raised in May 1996). The proceeds were used to
make principal payments on the Subordinated Notes in November 1995 and May 1996.
In connection with the issuance of the 12% CBH Preferred Stock and Subordinated
Notes, the Company issued 687,611 shares of Common Stock. The newly issued
shares of 12% CBH Preferred Stock pay cumulative dividends, payable monthly, at
an annual rate of 12% of the stated value thereof and are redeemable upon
completion of the Offering by the Company. The 12% preferred stock issued in
November 1995 included a provision requiring the Company to redeem the stock
upon the tenth anniversary of its issuance. Subsequent to December 31, 1995 the
redemption provision was rescinded with the approval of the holders of such
stock. Because this redemption provision was rescinded

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the 12% preferred stock is classified as stockholders' equity at December 31,
1995 and at subsequent dates. The proceeds from this offering were used to pay
down outstanding debt and general corporate purposes.

CBH contributed the monies it raised in the Note Offering and the Preferred
Stock Offering to CBI in order for CBI to complete the Acquisition. In
connection with the Preferred Stock Offering and the Financing, a finder's fee
of $445,000 was paid to Michael H. Mindlin, a director of the Company. Branin,
which beneficially owns 313,353 shares of Common Stock of the Company and which
was controlled by Philip A. Herman, Chairman, President and a stockholder of the
Company, and which is currently controlled by Facundo Bacardi, a director and
stockholder of the Company, will be entitled to receive a fee equal to 3% of the
aggregate proceeds from the Note Offering, the Preferred Stock Offering and the
Credit Agreement upon the consummation of the Offering. The total of such fees
would be approximately $650,000. Branin has agreed to waive such fee in exchange
for increasing its management consulting fee discussed in the next two sentences
to $20,000 per month, effective upon completion of the Offering. In addition,
CBI entered into consulting arrangements with (a) Branin, pursuant to which CBI
paid $35,000 per month to Branin and (b) PAH Marketing, Inc. ("PAH"), a company
controlled by Philip A. Herman, pursuant to which CBI paid $5,000 per month to
PAH. These arrangements were modified as of September 1, 1996 to provide for
payments to Branin of $10,000 per month and to discontinue payments to PAH. In
addition, CBI entered into a consulting agreement with Capital Vision Group,
Inc. ("Capital"), a company controlled by Lawrence Fleischman, a former director
and stockholder of the Company, pursuant to which it paid $5,000 per month to
Capital from June 1995 through January 1996. These agreements were entered into
for the purpose of receiving management advisory services in the areas of
operations management, financing and acquisitions. See "Management," "Certain
Transactions" and "Principal Stockholders and Holdings of Management."

Immediately following the Exchange, the Company contributed to CBH
approximately $860,000 in cash, net of expenses (constituting substantially all
of its net assets). CBH, in turn, contributed such cash to CBI in order for CBI
to complete the Acquisition (together with funds provided to it in the Financing
and funds provided to it by CBH from funds raised in the Note Offering and the
Preferred Stock Offering). In connection with the Exchange, the Company agreed
to issue to designees of Gro-Vest Management Consultants, Inc. ("G-V") an
aggregate of 36,313 shares of Common Stock (constituting 1% of the outstanding
shares of Common Stock of the Company) as an advisory fee for G-V's role in
facilitating the consummation of the Exchange, conditioned on G-V's obtaining,
by July 31, 1995, lock-up agreements limiting sales of Common Stock by the
holders of at least 75% of the 250,000 shares of outstanding Common Stock
subject to registration rights granted to such holders on September 23, 1994 in
a private offering. The requisite lock-up agreements were obtained but have
since expired.

The Company opened two new locations in Las Vegas during 1996. The initial
capital costs for these two locations were provided in full 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 substantial 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. Primarily because of the larger store size and
significant inventory commitment, the investment required to open "big-box"
facilities will be substantially greater than the investment required to open
the two new Las Vegas facilities. While the Company anticipates that a portion
of the costs will be funded by the suppliers, a significant portion of such
costs will be borne by the Company. Moreover, these 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 cash flow generated by operations has been
sufficient for the Company's working capital needs for 1996, and is likely to be
sufficient for the Company's working capital needs during early 1997. Cash flow
from operations should be sufficient to cover operating expenses and should be
maintained or enhanced by the Company utilizing its business strategies.
However, the Company's growth and acquisition strategy will require substantial
cash for capital costs. See "Business--Strategy."

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EFFECT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the FASB issued Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Statement No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as stock
options and stock purchase plans. The statement generally suggests but does not
require stock-based compensation arrangements for employees be accounted for
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. Stock-based
compensation for nonemployees is required to be accounted for at the fair value
of the instruments issued or services received, whichever is more determinable.
Statement No. 123 will first be required for the Company's year ending December
31, 1996. Companies that do not elect to change their accounting for stock-based
compensation for employees are required to disclose the effect on net income and
earnings per share as if the provision of Statement No. 123 were applied. The
Company has decided not to adopt the accounting provisions of this statement for
employees' stock-based compensation arrangements. Moreover, the Company has not
paid any stock-based compensation that would be subject to Statement No. 123.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF.

In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG LIVED ASSETS TO BE DISPOSED OF.
Statement No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Statement No. 121 will first be
required for the Company's year ending December 31, 1996. Based on management's
preliminary analysis, the Company does not anticipate that the adoption of
Statement No. 121 will have a material impact on the consolidated financial
statements.

INFLATION

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.

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BUSINESS

INTRODUCTION

The Company is engaged in the business of selling and installing floor
coverings and selling wall coverings, window treatments and certain related
products, primarily for the residential housing market. Currently, the Company
is engaged in business in Las Vegas, Nevada, where its sales of $40.3 million in
1995 and $31.3 million for the first nine months of 1996 have made it the
largest seller and installer of floor coverings in such market. The Company
believes that its sales represent approximately 63% of the Las Vegas market and
are approximately 3.5 times those of its nearest competitor. From its three
facilities in Las Vegas, the Company sells approximately 72% of its products to
the new home market to or through new home builders through its New Housing
Division and approximately 28% of its products to the retail replacement market
directly to individual homeowners through its Replacement Sales Division. New
Housing Division sales are effected primarily to or through new home builders
who offer purchasers a wide selection of basic grade floor coverings 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 possible
upgrades on floor coverings, in addition to purchasing wall coverings, window
treatments and related products. The Company believes that its new retail design
center located in Las Vegas will also enable it to continue to broaden its
product lines and expand the sales of its Replacement Sales Division. The
Company has also recently established a Commercial Division, which is its first
entry into the commercial market, including multi-family, office, retail store
and small hotel projects.

The Company believes that the retail floor covering industry is highly
fragmented, with no single floor covering retailers, including national and
large regional chains, accounting for more than ten percent of the total market.
Most floor covering retailers operate a single store generating less than $1
million in annual sales. The Company believes that small independent floor
covering retailers face competitive disadvantages resulting from limited
purchasing power, ineffective inventory control and inadequate resources for
sales, marketing and store management. Accordingly, the Company believes that
significant opportunities exist for floor covering 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 floor covering 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 floor covering
retailer. The Company is reviewing various markets throughout the United States
to determine their desirability for expansion. The Company is also in the
process of negotiating with acquisition candidates in some of those markets and
believes it will be able to effect at least one such acquisition in early 1997.
The Company also anticipates opening two new "big-box" facilities in Phoenix,
Arizona in 1997 and is actively exploring the possibility of developing
additional stores in other sites in the southwestern United States where the
Company can expand its relationships with regional homebuilders. The planned
"big-box" facilities will have between 40,000 and 60,000 square feet per
facility and will focus on retail sales of all product lines in a warehouse-type
setting, as well as having a dedicated design center area. The Company believes
that this format will enable it to quickly capture a significant market share by
offering customers a pleasant shopping environment in which to fulfill all of
their floor and wall covering and related needs on a cash-and-carry or next-day
installed basis, although there can be no assurance as to the viability of this
approach.

INDUSTRY OVERVIEW

The retail floor covering industry in the United States (which includes
fixed and non-fixed carpeting and marble, ceramic tile, vinyl and wood flooring)
is estimated to have grown from approximately $11 billion in 1989 to
approximately $14.5 billion in 1995, up 32% over the 1989 level but only up 0.1%
over the 1994 level. Carpet and area rugs accounted for 68.7% of total dollar
sales in the industry in 1995 versus

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69.4% in 1994. Despite this growth in size, the industry has remained
fragmented. The Company believes that no single floor covering retailer,
including national and large retailers such as Color Tile, Home Depot and New
York Carpet World, accounts for more than ten percent of the total market. The
Company believes that while chains and mass merchandisers do not dominate the
floor covering industry, such companies do influence pricing, product selection
and service innovation. According to the most recent figures available, U.S.
floor covering sales volume reached approximately 2.5 billion square yards in
1995, down 0.4% from the prior year. By product sector, change in sales volume
in 1995 as compared to 1994 is as follows: carpet and area rugs declined by
1.7%, hardwood flooring increased by 5.6%, ceramic floor and wall tile increased
by 5.2%, and vinyl sheet and floor tile decreased by 2.4%.

The carpet industry's two primary markets are residential and commercial,
with the residential market (the market currently served by the Company)
accounting for approximately 75% of industry sales in 1995 and the commercial
market accounting for approximately 25% of such sales. 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.

STRATEGY

The Company's objective is to maintain its position as the leading provider
of floor coverings, wall coverings, window treatments and related products in
the Las Vegas residential market and to become the leading provider of floor
coverings, wall coverings, window treatments and related products in selected
markets throughout the United States. The Company is also seeking to become a
leading provider of floor coverings in the commercial market in Las Vegas and in
other markets. The Company's strategy includes the following:

LAS VEGAS MARKET

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 floor covering products. In addition, the Company intends to continue
its policy of next-day installation and of guaranteeing free repairs on carpets
it has installed for homeowners and home buyers for as long as they own their
homes. The Company also inspects all floor covering installations in new homes
before the customer moves in and has created a customer service department to
handle all complaints and installation problems. These programs have begun to
have a very positive effect on the Company's reputation with builders and home
buyers. 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 floor covering 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 very favorable pricing from its
suppliers, including payment discounts from most suppliers and cooperative
marketing contributions from others, including DuPont, Monsanto and Allied. The
Company is able to pass these savings along to customers and thus generally 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.

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ADDITION OF NEW PRODUCTS; DESIGN CENTERS. The Company also intends to
attract and maintain customers by adding complementary products to its current
offerings. The Company has targeted wall and window coverings as its first
significant product extensions and is anticipating further growth through the
addition of area rugs and through cleaning and maintenance programs, as well as
expansion of sales of hard floor coverings such as wood and tile. These new
lines will be promoted by sales personnel at the Company's stores and through
the Company's advertising campaigns. To that end, the Company has recently hired
a manager to implement these sales and marketing programs.

The Company further intends to increase market share and gross profit
margins through its operation of "design centers" in its retail sales
facilities. The design centers 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 has also opened a
satellite design center in the Las Vegas area for new home buyers who are
selecting floor coverings and other products to be installed in their new homes.
This satellite design center has been opened 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. The design center
primarily showcases higher price and higher profit margin products, particularly
area rugs, hard floor surfaces, such as wood and tile, and window and wall
coverings. Early results from operation of the new home design center show an
average increased sale of approximately $1,000 per new home sale. These sales
have a significantly higher gross profit margin. However, there can be no
assurance that the design center will continue to have a positive impact on the
Company's operations.

MAINTAIN NEW HOME MARKET SHARE IN LAS VEGAS; INCREASE REPLACEMENT SALES
PENETRATION. The Company intends to increase its core business through
continued advertising and marketing efforts, and recently opened a new retail
facility and a new home design center in other areas of Las Vegas. The Company's
main facility is located centrally, and the additional retail branch is located
in an area of Las Vegas with a large concentration of mature homes. Additional
retail centers in similar areas are being contemplated. The Company intends to
actively seek to increase its retail replacement sales through increased
consumer advertising, enhanced marketing, the opening of one or more new retail
locations and the addition of new products.

The Company also intends to expand upon its existing base of customers by
increasing its sales for new home projects with residential developers.
Homebuilders provide the Company's new home design center with the floor plans
of all the 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 home buyers. While the Company's sales in new residential homes
declined during 1995, such decline is directly attributable to the overall
decline in new home sales throughout Clark County. However, based on estimates
of the Las Vegas Homebuilder's Association, over the next 10 years, the total
new homes market for carpet in Las Vegas is projected to grow at an annual rate
of 5% to 10%. For 1996, the total market for floor covering for new homes in Las
Vegas is estimated to be $53.6 million, of which the Company expects to maintain
its market share of 63%, representing sales growth of 8.3% over the prior year.
However, there can be no assurance that the Las Vegas market will grow as
projected or that the Company will be able to retain its market share.

INVENTORY PRACTICES. In the Las Vegas market, the Company has been able to
maintain low warehousing costs by stocking small amounts of inventory. At the
same time, the Company has been able to provide its customers with next-day
installation on purchases in the Las Vegas market. 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 delivery requirements with overnight shipments 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

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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.

OTHER MARKETS

PURSUIT OF SELECTIVE ACQUISITIONS AND DEVELOPMENT OF NEW STORES. The Company
believes that because of the fragmented nature of the marketplace for floor
covering and related sales, significant consolidation opportunities exist, and
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
southwestern United States where there is no dominant competitor for expansion
through the development of new stores. The Company has entered into an
employment agreement with Alan Ember, the former district manager of Carpet Max,
to develop stores in Phoenix, Arizona and other markets in the southwestern
United States. Like Las Vegas, these areas are experiencing high growth in
population and home building. Expansion into these markets will be financed in
part by the suppliers of the Company's products, with such funding being applied
to the construction costs associated with the new facilities. 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. Additionally, the Company believes that it can compete
in these markets through its demonstrated ability to compete on service and
price. Furthermore, expansion of the Company should generate an increase in the
Company's buying power due to higher volume purchasing. Where the Company
expands into new markets through acquisition of existing companies, this should
allow the Company to provide lower prices than the stores could provide on a
stand-alone basis. However, there can be no assurance that such expansion will
be effected or, if effected, that any new facilities will be operated
profitably.

BIG-BOX STORE FORMAT. The Company's strategy for entering new markets
includes opening "big-box" stores with 40,000 to 60,000 square feet of
warehouse-type space stocked with significant inventories of the full range of
the Company's products, as well as customer service offices, which, among other
things, will provide customers with access to independent contractors who can
install these products on a next-day basis. These stores are intended to satisfy
all of a customer's floor, wall and window covering needs and to serve the
cash-and-carry market as well as the customers requiring installation service.
The Company believes that these stores can enable it quickly to achieve
meaningful market share in markets that do not have dominant competitors.
However, the Company's strategy in this regard is untested, and there can be no
assurance that such stores can be operated profitably or can achieve the market
penetration the Company anticipates.

In markets in which the Company intends to create "big-box" facilities, the
Company believes it can achieve next-day installation through the maintenance of
broad inventories from which purchases can be made on the spot by
"do-it-yourselfers" or which can be installed in a timely manner by independent
installation contractors who will maintain customer service offices on the
Company's premises. Maintenance of sufficient inventories in these facilities
will require a substantial amount of working capital, which will adversely
affect financial performance relative to the results of the Company's current
practices. The Company believes that these adverse effects will be fully offset
by economies of scale that can be achieved in cost of goods sold, delivery costs
and other operating costs, although there can be no assurance in this regard.

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The Company contemplates that retail facilities it opens, whether or not in
the "big-box" format, will have a dedicated design center 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,
including child care/entertainment centers, will increase the average total sale
price and gross margin for its sales, although there can be no assurance in this
regard.

OPERATIONS

BACKGROUND. The Company operates its business in Las Vegas, Clark County,
Nevada, where its sales represent approximately 63% of the residential floor
covering sales. At this time, all of the Company's operations are located in
this area.

The Las Vegas area is one of the fastest growing in the country, according
to regional publications. According to Las Vegas Perspective, an average of
4,000 persons relocate to Las Vegas each month, and the Las Vegas population has
grown by approximately 7.2% in the one-year period between 1993 and 1994, with a
similar percentage increase in the number of households during that time. More
than 40% of persons in Las Vegas have resided there for only five years or less,
and two-thirds of the area's residents own their own homes. The above statistics
underscore the high numbers of persons arriving in the Las Vegas area and the
potential strength of the retail floor covering market. In 1995, the Company had
a 63% share of the residential floor covering market.

The Phoenix market, into which the Company anticipates expanding through the
development of new stores, is the third fastest growing community in the United
States, according to regional publications. According to such publications, an
average of nearly 7,000 people relocate to the Phoenix area every month, and
building permits have remained steady over the last three years at a rate of
250,000 single family building permits issued per year. Because no single
retailer dominates the Phoenix floor covering market, the Company believes that
its strategies should enable it to quickly become a successful retailer in the
Phoenix market, although can be no assurance in this regard. See "--Strategy."

DIVISIONS. The Company operates through two divisions, the New Housing
Division and the Replacement Sales Division. A Commercial Division, serving the
multi-family, office, retail store and small hotel markets is being developed.

NEW HOUSING DIVISION. The Company's New Housing Division is responsible for
installation of carpeting in newly built homes. Salespersons in this division
deal with both home builders and buyers. In servicing the new home market, the
Company generally secures contracts from builders to carpet new homes. When the
builder sells a new home, in most cases the builder directs the home buyer to
the Company, which allows the buyer to choose the color of carpeting 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 most home buyers choose an upgraded carpet selection.

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

Through its New Housing Division, the Company has relationships with most of
the larger tract home builders in the Clark County area, with its five largest
customers accounting for $11.5 million, $15.9 million, $12.3 million and $11.2
million in sales in 1993, 1994, 1995, and the nine months ended September 30,
1996, respectively. During the past six years, the New Housing Division has
accounted for

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Company sales ranging from a low of $21.8 million in 1990 (56% of total Company
sales) to a high of $29.9 million in 1995 (74% of total Company sales). The
Company estimates that its market share of sales to new homes in Clark County
was 76%, 77% and 74% in 1993, 1994 and 1995, respectively.

Because the Division's sales are dependent on sales of new homes, such sales
are affected by interest rates prevailing in the home industry and by building
activity generally. Because the Company also services the carpet replacement
market, the adverse effects on the Company's sales by downturns in the business
cycle have been moderated.

REPLACEMENT SALES DIVISION. The Replacement Sales Division is responsible
for providing individual consumers who have existing homes with new or
replacement floor coverings. The Company is one of the top three retailers in
such consumer replacement sales in the Las Vegas area, chiefly because of its
large selection, low prices and quick installation time.

Customers wishing to purchase flooring may choose to approach the Company
with their own measurements and select a carpet at the Company's offices or to
have the Company send a salesperson to the customer with a line of samples.

Generally, the Company requires that replacement carpet 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 check directly to the Company upon completion of installation. The
Company's sales in the replacement sales market grew by $715,127 from $9,763,024
in 1994 to $10,478,151 in 1995. Although sales in the replacement sales market
through September 30, 1996, at $6,331,371, have fallen behind the pace set in
previous years, the Company believes that its retail design center approach can
significantly expand sales by its Replacement Sales Division, although there can
be no assurances in this regard.

CUSTOMERS

The Company has among its customers most of the larger home builders in
Clark County, Nevada, including Lewis Homes of Nevada, Inc. ("Lewis"), American
West Homes ("AWH") and Pardee Construction Company of Nevada. The Company has
developed its relationships with such builders over the past 24 years. In 1993,
1994, 1995 and the nine months ended September 30, 1996, five customers
accounted for approximately 35%, 37%, 31% and 36% of the Company's net sales,
respectively. In 1993, 1994, 1995 and the nine months ended September 30, 1996,
Lewis accounted for 11.3%, 12.5%, 11.3% and 14.1% of net sales, respectively. In
1993, 1994, 1995 and the nine months ended September 30, 1996, AWH accounted for
12.6%, 11.9%, 8.1% and 9.7% of net sales, respectively.

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, Aladdin Mills, Inc. and Tuftex (a division of
Queen Carpet Corp.) accounted for 77.0%, 74.3%, 87.8% and 81.2% of its total
purchases in 1993, 1994, 1995 and the nine months ended September 30, 1996,
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 were approximately $433,000,

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$465,000, $453,000 and $584,000 (representing 1.3%, 1.1%, 1.1% and 1.9% of net
sales) in 1993, 1994, 1995 and the nine months ended September 30, 1996,
respectively. The Company spent 51% of its 1995 advertising budget on print
advertising (including pre-printed newspaper inserts and print advertisements),
and 49% on television and radio advertising. The Company features in its
advertising its large selection and low prices and also features its free repair
guarantee on installation for as long as buyers own their homes. The Company
also receives cooperative advertising contributions, of up to 50% of the cost of
qualifying advertisements depending on the amount of the relevant products sold,
from mills and yarn companies by including in its advertising references to
brand name yarns (such as DuPont, Monsanto and Allied) or floor coverings (such
as Congoleum). The Company has located its main store on a centrally located,
heavily traveled street.

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 and improving selling skills. 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 floor covering industry is highly competitive and fragmented. According
to an industry publication, the nation's ten largest floor covering retailers in
terms of sales volume accounted for approximately 20% of all floor covering
sales in the United States in 1994, although none of such retailers dominated
the market. In 1995, Clark County, Nevada had approximately 104 outlets through
which carpet was sold.

Companies in the floor covering 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 include
Carpeteria, Carpets Galore, Cloud Carpets, Carpet Max, Albright and Adams
Brothers, all of which have stores located in Las Vegas.

In addition to the local and regional specialty chains, the Company competes
with national and regional home improvement centers (such as Home Depot and
Payless Cashways) and national department stores and specialty retailers (such
as Sears and Color Tile) which have branches in Las Vegas. 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.

A significant new entrant into the retail floor covering market in the
United States is Shaw Industries, Inc., the largest domestic manufacturer of
carpeting. To date, Shaw has not entered the Las Vegas or Phoenix markets.

While there is intense competition among providers of floor coverings in the
Las Vegas, Nevada market, the Company has successfully competed for customers on
the basis of price, reliability and quality of product, breadth of product line
and service.

35
<PAGE>
EMPLOYEES

As of January 10, 1997, the Company employed approximately 130 persons,
divided among its accounting, administrative, buying, sales and warehousing
departments. A substantial portion of the compensation of 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 recently obtained a $4.0 million excess liability umbrella insurance
policy. 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 affect on the Company.

PROPERTIES

The Company rents the property on which its principal Las Vegas operating
facility is located at an annual rent of approximately $100,000. See "Certain
Transactions." On such 44,000 square foot property the Company has located three
contiguous warehouses, a retail facility and administrative offices. The Company
has leased two additional facilities in Las Vegas, consisting of a retail
facility and the design center, containing a total of 9,446 square feet at an
annual rental of $111,610.

Prior to June 2, 1995, the Company maintained its business office at 134
West 72nd Street, New York, New York, using these offices on a rent-free basis.
The Company has changed its principal executive offices within New York, New
York to 100 Maiden Lane. These offices are also used on a rent-free basis.

LEGAL PROCEEDINGS

NEVADA DEPARTMENT OF EMPLOYMENT, TRAINING AND REHABILITATION DETERMINATION

On September 5, 1996, the Nevada Department of Employment, Training and
Rehabilitation notified the Company that it had made a determination that the
Company had failed to pay unemployment taxes with respect to certain floor
covering installers. The Company believes, based in part on a prior
determination by such Department classifying the Predecessor's installers as
independent contractors, that these installers are not employees of the Company
and the Company is not subject to these payments. Many, though not all, of the
Company's competitors also treat carpet installers working under similar
arrangements as independent contractors. If the Company does not prevail in this
regard, it may be required to make payments to compensate for not having paid
these taxes in the past and may also be subject to future payment of taxes for
these installers, which would decrease the Company's gross margins. A more
substantial cost would be incurred by the Company if the installers were to be
regarded as employees of the Company for Federal withholding purposes. To date,
there has been no indication that the Federal government intends to require the
Company to treat these carpet installers as employees of the Company. However,
there can be no assurance that the Federal government will not pursue such
action in the future.

TERMINATION OF MARK SZPORKA

36
<PAGE>
Mr. Szporka for $5,810. Mr. Szporka has commenced a suit against the Company
alleging he was wrongfully and unlawfully terminated. The Company believes it
has meritorious defenses to such allegations and intends to defend the matter
vigorously. See "Management--Employment Agreements."

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.

37
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's prospects are
also substantially dependent on certain key employees. See "--Key Employees."

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- ------------------------------------------
<S> <C> <C>

Philip A. Herman............................ 50 Chairman of the Board and President
Gary Peiffer................................ 45 Secretary and Director
Michael Mindlin............................. 55 Director
Facundo Bacardi............................. 51 Director
William Poccia.............................. 50 Chief Financial Officer
</TABLE>

The number of directors on the Board is presently fixed at five.

PHILIP A. HERMAN has been Chairman of the Board and President of the Company
since June 2, 1995, the date of consummation of the Exchange and the
Acquisition. Mr. Herman is also sole Voting Trustee of the voting trust that
holds a majority of the Company's outstanding shares of common stock. See
"Principal Stockholders and Holdings of Management." He also has served as a
principal of Branin since 1994. From 1992 to 1994, Mr. Herman served as a
principal of Americorp Securities, Inc. ("Americorp"), a retail brokerage firm,
and from 1989 to 1992 he served as principal of PAH Marketing Consultants Inc.,
a consulting firm. In January 1995, Mr. Herman and PAH entered into a consent
decree, without admitting any violation of law, with the Federal Trade
Commission ("FTC") pursuant to which Mr. Herman and PAH paid $40,000 to the FTC
and consented to being enjoined from participating in certain telemarketing
related activities.

GARY PEIFFER has been Secretary and a director of the Company since June 2,
1995. Mr. Peiffer has served as Vice Chairman of the Board, General Counsel and
a director of The Aegis Consumer Funding Group, Inc. ("Aegis"), a
publicly-traded automobile finance company since January 1994. Prior to joining
Aegis, Mr. Peiffer was a senior partner at the law firm of Jeffer, Hopkinson,
Vogel, Coomber & Peiffer from January 1983 through December 1993.

MICHAEL MINDLIN has been a director of the Company since June 2, 1995. He
also serves as President of Americorp, and has served in that capacity since
1992. Prior to that time, Mr. Mindlin served as Chief Operating Officer of
Aegis.

FACUNDO BACARDI has been a director of the Company since June 2, 1995. 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.

WILLIAM POCCIA has been Chief Financial Officer of the Company since August
6, 1996. 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.

SUMMARY COMPENSATION TABLE

The following table sets forth for the fiscal year ended December 31, 1996,
the compensation for services in all capacities to the Company of the person who
was at December 31, 1996 the President of the

38
<PAGE>
Company. No executive officers of the Company received salary and bonus in
excess of $100,000 during the fiscal year ended December 31, 1996.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
<S> <C> <C> <C>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ COMPENSATION $(1)
- ----------------------------------------------------- --------- --------- -----------------
Philip A. Herman..................................... 0 0 0
Chairman of the Board and President
</TABLE>

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

(1) Certain entities controlled by Mr. Herman received fees from the Company for
the year ended December 31, 1996 as set forth herein under "Certain
Transactions" and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

EXECUTIVE COMPENSATION

COMPENSATION. Prior to the Exchange, no officer or director of the Company
received remuneration from the Company. Directors do not currently receive fees
or other remuneration from the Company. The Company is currently contemplating
entering into an employment agreement with Mr. Herman pursuant to which Mr.
Herman will initially receive no base salary but may receive bonuses and may be
granted a base salary in the future, within the discretion of the Board of
Directors. William Poccia, Chief Financial Officer of the Company, is being
remunerated by the Company at the rate of $100,000 per year.

BONUS PLAN. In June 1995, the Company initiated a Management Bonus Program
(the "Bonus Plan") pursuant to which the Company could make available for
bonuses to certain members of management of the Company (including Steven Chesin
and Jeffrey Wiens) an aggregate amount equal to 2% of the Earnings Before Income
Taxes (as defined below) of the Company for each fiscal year, with the Company's
management to have the right to determine how such bonus amount would be
allocated among its members. If all of the members of the Company's management
issued a written statement recommending allocation, the bonus would be allocated
as such; and if no written statement was issued, the President of the Company
could allocate the bonus in his discretion. "Earnings Before Income Taxes" meant
earnings before income taxes of the Company for the relevant fiscal year. There
were no bonuses paid in 1995 or 1996. The Bonus Plan was terminated in October
1996. Those officers eligible for bonuses under the Bonus Plan will be eligible
to participate in the Option Plan.

EMPLOYMENT AGREEMENTS

MARK SZPORKA. Pursuant to a five-year employment agreement, dated as of
June 2, 1995, Mr. Szporka was employed as the Company's Chief Financial Officer
at an annual salary of $120,000 per year, subject to annual pay increases at the
Company's discretion. This employment was terminated for cause by the Company by
letter dated August 5, 1996. Pursuant to his employment agreement, Mr. Szporka
was entitled to participate in the Bonus Plan as a member of "management" for
any fiscal year during which he had been employed for at least six months. Mr.
Szporka's termination and severance provisions were comparable to those for Mr.
Chesin. In addition, Mr. Szporka, under the terms of his employment agreement,
purchased at $0.001 per share 217,875 shares of Common Stock on June 1, 1995.
72,625 shares were deemed to be consideration for services provided to the
Company prior to June 1, 1995 in connection with the acquisition of the business
of Carpet Barn. Such shares were deemed to be "founders shares" and were
considered to have been purchased at market value, and, therefore, no
compensation expense was recognized in the Company's consolidated financial
statements in connection with these shares. Also, pursuant to the employment
agreement, 145,250 shares of Common Stock ("Escrow Shares") were deposited into
an escrow account on June 1, 1995. All dividends on and voting rights of the
Escrow Shares belonged to the Company until such time as the Escrow Shares would
be released from escrow. Upon the first anniversary of Mr. Szporka's employment
and each of the following four such anniversaries, 29,050 of

39
<PAGE>
the Escrow Shares were to be released to Mr. Szporka together with all rights
and privileges thereto. In the event the Company did not meet certain operating
goals, as described in the employment agreement, the Company had the right to
repurchase those shares at $.01 per share. As of December 31, 1995, Mr.
Szporka's right to receive 17,030 of the Escrow Shares was canceled because the
Company did not meet certain operating goals described in the employment
agreement during the operating period then ended. As a result of the Company's
termination of Mr. Szporka's employment for cause, it became entitled to
repurchase the 145,250 Escrow Shares from Mr. Szporka for $.01 per share. Such
repurchase was effected in October 1996.

On September 11, 1996, Mr. Szporka sued the Company and its subsidiaries and
the Company's directors in District Court in Clark County, Nevada alleging that
his employment agreement was wrongfully terminated, that the Company violated
duties of good faith and fair dealing with him and that he was tortiously
discharged. He seeks unspecified compensatory damages in excess of $10,000,
punitive damages, injunctive and declaratory relief, attorney's fees and costs
and such other relief as the court deems just and equitable. The Company
believes that it has meritorious defenses and intends to vigorously pursue them.
Moreover, the Company is considering whether it has counterclaims against Mr.
Szporka.

KEY EMPLOYEES

The Company believes that the following employees of the Company are of
special value to the Company's existing floor covering business and to the
implementation of its growth strategy.

STEVEN CHESIN has been Senior Vice President and Chief Operating Officer of
Carpet Barn, Inc. since July 28, 1995. Prior to joining the Company, Mr. Chesin
served as President of Steve's Floor Covering, Inc., a carpet installer, from
its founding in 1977, when Mr. Chesin was only 15 years old, to the Company's
acquisition of Steve's in July 1995.

Pursuant to an employment agreement, dated as of July 28, 1995, between Mr.
Chesin and the Company, Mr. Chesin is serving as Senior Vice President and Chief
Operating Officer of Carpet Barn 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. His
current salary has been increased to $125,000 per year from its initial $75,000
level and is subject to annual pay increases at the Company's discretion. Mr.
Chesin was eligible to participate in the Bonus Plan until its termination in
October 1996. Mr. Chesin's employment is terminable for cause which includes the
Company's failure (a "Target Failure") to achieve net income equal to or greater
than (a) 75% of the projected net income for any fiscal quarter or (b) 85% of
the projected net income for any two consecutive fiscal quarters. 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 a Target Failure or Mr. Chesin's total disability.

JEFFREY WIENS has been Controller of the Company since July 1995. From 1988
to July 1995, Mr. Wiens served in various capacities, principally in the
Minneapolis, Minnesota office of McGladrey & Pullen, LLP, the Company's
independent auditors, including serving as a member of the audit staff from 1988
to July 1994 and as Manager from August 1994 to July 1995. Pursuant to an
employment agreement, dated as of July 5, 1995, the Company has employed Mr.
Wiens as its Controller for a two-year period, with successive one-year
automatic extensions of 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. Wiens' salary has been increased to $60,000 per year from its
initial $50,000 level and is subject to annual pay increases at the Company's
discretion. Until its termination, Mr Wiens was entitled to participate in the
Bonus Plan.

ALAN EMBER has extensive experience in the floor covering industry and was
recently hired by the Company to develop retail facilities in Phoenix and other
markets in the southwestern United States. Mr. Ember's responsibilities includes
merchandising, marketing, advertising, sales training and program development.
From September, 1994 until he was hired by the Company, Mr. Ember was the
Divisional

40
<PAGE>
President of Carpetmax in Phoenix, Arizona and was responsible for the entire
operation of that division. Prior to that, from November 1993, Mr. Ember was the
General Manager for Carpeteria in Tuscon. From March 1993, Mr. Ember served as
General Manager for Broadway Carpet, also in Tuscon. From September 1992, he was
the carpet division and advertising manager for Tile City in Pittsburgh,
Pennsylvania. Prior to that, Mr. Ember was the General Manager for Apollo Carpet
in Tuscon, Arizona.

Pursuant to an employment agreement dated May 28, 1996 between Mr. Ember and
the Company, Mr. Ember is serving as Senior Vice President of Carpet Barn for a
three-year period with successive one-year automatic extensions unless either
party gives the other at least 90 days notice of termination prior to the end of
any term. His current salary is $125,000 per year plus a bonus of 25% of
Earnings Before Interest and Taxes, as defined in the employment agreement
("EBIT"), for the entity managed by Mr. Ember, payable in Common Stock of the
Company 15 days after the Company's financial statements are finalized. Mr.
Ember's employment is terminable for cause, which includes the failure (a
"Target Failure") to achieve EBIT equal to or greater than (a) 75% of the
projected EBIT in any fiscal quarter, or (b) 85% of the projected EBIT for any
two consecutive fiscal quarters, in each case for the entity managed by Mr.
Ember. Mr. Ember will receive two months severance pay, plus one additional
month severance pay for each full year of employment, if the agreement
terminates due to a Target Failure or Mr. Ember's total disability.

JUDY HIGHTOWER has been the design services manager at Carpet Barn, Inc.
since joining the Company in October 1995. Ms. Hightower established the
Company's first window and wallcovering division and was also responsible for
designing, implementing and opening the Company's new design center and retail
facility in Las Vegas. From 1991 until she joined the Company, Ms. Hightower
provided similar design services to several large home builders in the Las Vegas
area.

ROBERT SMITH has extensive experience in operating and managing floor
covering warehouses and distribution centers and was hired by the Company to
manage and operate its warehouses and the distribution of its products in the
Las Vegas market. From January 1995 until he joined the Company in June 1996, Mr
Smith was the Director of Broadloom Installation for Giant Carpet in Moonachie,
New Jersey, where he supervised and coordinated the installation of carpeting
for thirty-eight retail stores. Prior to that, from March 1991, Mr. Smith was
the Terminal Manager and Operations Consultant for Apex Express, Inc., located
in New York, New York. In that capacity, Mr. Smith managed the warehousing,
delivery and assembly of office furniture and exercise equipment and designed
and implemented delivery and in-house assembly programs for United Stationers in
Edison, New Jersey.

1997 STOCK OPTION PLAN

The Company expects to adopt the 1997 Stock Option Plan (the "Option Plan")
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. 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. 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 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 or upon stockholder
approval of the plan and each year thereafter non-qualified stock options
("NQSO's) to purchase 10,000 shares of Common Stock at an exercise price equal
to the fair market value on the date of

41
<PAGE>
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, 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.

No options have been granted to date under the Option Plan. Eligible persons
may receive grants under the Option Plan in the future at the discretion of the
Compensation Committee.

42
<PAGE>
CERTAIN TRANSACTIONS

Branin, a principal stockholder of the Company, acted as advisor in
connection with the Financing as well as the concurrent private offerings of
Notes and Preferred Stock of CBH. Branin acted as advisor to the Financing
between CBI and First Source and for its role became entitled to receive a fee
of 3% of the aggregate proceeds received by CBI from the Credit Agreement upon
the consummation of the Offering. On June 2, 1995, CBH completed the concurrent
offerings in the aggregate amount of $4,655,000 consisting of $1,940,000 in
Notes from the Note Offering at a per Note unit price of $200,000 and $2,715,000
from the Preferred Stock Offering consisting of 2,715 shares of Preferred Stock
at a per share price of $1,000 and a per Preferred Stock unit price of $250,000.
For each Preferred Stock unit sold, the Company issued 36,313 shares of Common
Stock, and for each Note unit sold, the Company issued 15,910 shares of Common
Stock, for an aggregate of 548,683 shares of Common Stock issued in such Note
Offering and Preferred Stock Offering. Branin became entitled to receive a fee
of 3% of the aggregate proceeds from the Note Offering, the Preferred Stock
Offering and the Credit Agreement upon the consummation of the Offering. Philip
A. Herman, the Chairman of the Board and President of the Company, was the
principal of Branin. Branin is currently controlled by Facundo Bacardi, a
director and stockholder of the Company. The total of such fees would be
approximately $650,000. Branin has agreed to waive such fees in exchange for
increasing its management consulting fees described in the next paragraph, to
$20,000 per month, effective upon completion of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

In connection with the Preferred Stock Offering and the Financing, a
finder's fee of $445,000 was paid to Michael H. Mindlin, a director of the
Company. In addition, CBI entered into consulting arrangements with (a) Branin,
pursuant to which CBI was obligated to pay $35,000 per month to Branin and (b)
PAH Marketing, Inc. ("PAH"), a company controlled by Philip A. Herman, pursuant
to which CBI was obligated to pay $5,000 per month to PAH. These arrangements
were modified as of September 1, 1996 to provide for payment obligations to
Branin of $10,000 per month and to discontinue obligations to PAH. As of
September 30, 1996, CBI owed Branin $170,000 in respect of these obligations. In
addition, CBI entered into a consulting agreement with Capital Vision Group,
Inc. ("Capital"), a company controlled by Lawrence Fleischman, a former director
and stockholder of the Company, pursuant to which it paid $5,000 per month to
Capital from June 1995 through January 1996. These agreements were entered into
for the purpose of receiving management advisory services in the areas of
operations management, financing and acquisitions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

C.B. Realty, Inc. ("CB Realty"), which is owned by four stockholders of the
Company, including David Herman, a son of Philip Herman, acquired the land and
building previously owned by Carpet Barn. In connection with such purchase, the
Company loaned $288,000 to CB Realty, payable over a three-year period in
monthly installments of $9,293, including interest at a rate of 10% per annum.
CB Realty simultaneously entered into a lease agreement with the Company
pursuant to which the Company leased the land and building in which it conducts
its operations for a three year term with annual lease payments of approximately
$100,000.

On July 28, 1995, the Company purchased Steve's Floor Covering, Inc.
("Steve's"), a floor covering repairer, installer, cleaner and retailer from
Steven Chesin, the Chief Operating Officer of CBI, pursuant to an asset purchase
agreement (the "Steve's Agreement"). Under the Steve's Agreement, the Company
purchased substantially all of the assets of Steve's in exchange for
approximately $266,000. Mr. Chesin entered into an employment agreement with CBI
in connection therewith. The revenues of Steve's are not expected to have a
significant impact on the Company's results of operations. In 1994, the last
full year prior to the Company's acquisition of Steve's, Steve's had total
revenues of $686,480 and employed 25 people. See "Management--Employment
Agreements."

43
<PAGE>
In May 1996, the Company incurred a liability to Branin of $46,600 as a
result of interest and dividend payments on CBH securities made by Branin on
behalf of CBH. Further dividend payments of $46,600 per month thereafter have
been made by Branin on these securities, resulting in an obligation to Branin as
of January 1, 1997 in the amount of $419,400 in respect of these dividend
payments. In May 1996, Branin paid the Company approximately $6,000 for
consulting services rendered to Branin by employees of the Company.

The Company's executive offices are located at 100 Maiden Lane, New York,
New York. These offices are rented by Branin, which also occupies these offices.
Branin does not charge the Company rent for this space.

PRINCIPAL STOCKHOLDERS AND
HOLDINGS OF MANAGEMENT

The following table sets forth certain information as of January 1, 1997,
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.

<TABLE>
<CAPTION>
NUMBER OF SHARES
AND NATURE OF
BENEFICIAL PERCENTAGE OF
NAME & ADDRESS OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING SHARES
- ---------------------------------------------------- ------------------- ---------------------
<S> <C> <C>

Philip A. Herman(1)................................. 2,533,013 69.5%
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038

Branin Investments, Inc.(2)......................... 313,353 8.6
100 Maiden Lane
New York, NY 10038

Facundo Bacardi(3).................................. 1,748,849 48.0
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038

Icarus Investments, Ltd.(4)......................... 878,854 24.1
c/o Branin Investments, Inc.
100 Maiden Lane
New York, NY 10038

Michael Mindlin(5).................................. 144,200 4.0

Gary Peiffer(6)..................................... 34,963 *

William Poccia...................................... 0 *

All Directors and Executive
Officers as group (5 persons):.................... 2,533,013 69.5
</TABLE>

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

* Less than one percent

(1) Includes an aggregate of 2,533,013 shares issued to Mr. Herman as voting
trustee pursuant to a Voting Trust Agreement, dated May 30, 1995, among Mr.
Herman and certain stockholders of the Company, which shares Mr. Herman is
deemed to beneficially own. 313,353 of such shares are held by Branin, of
which Mr. Herman was a principal. Excludes 726 shares held by each of
Richard and Ruth Herman

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and 15,615 shares held by David Herman, all members of the immediate family
of Mr. Herman. Mr. Herman disclaims beneficial ownership of the shares held
by such family members.

(2) Excludes 72,500 shares held through the voting trust referenced in note 1,
above, for the benefit of Mr. Herman.

(3) Includes an aggregate of 1,218,121 shares held by various affiliates of Mr.
Bacardi (including 878,854 shares held by Icarus Investments Ltd., 313,353
shares held by Branin, 76,256 shares held by each of Stylish Investments
Ltd. and Delphic Investments Ltd., and 186,755 shares held by Designed
Investments Ltd.). All of such shares are held in the voting trust referred
to in note 1, above.

(4) Excludes shares held by Mr. Bacardi and his other affiliates. Mr. Bacardi
has sole voting and dispositive power with respect to the shares of Common
Stock owned by this entity. All of such shares are held in the voting trust
referred to in note 1, above.

(5) Includes 144,200 shares held by Mr. Mindlin's spouse, as to which he
disclaims beneficial ownership. All of such shares are held in the voting
trust referred to in note 1, above.

(6) All of such shares are held in the voting trust referred to in note 1,
above.

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

The Company is authorized to issue 20,000,000 shares of Common Stock. As of
December 31, 1996, there were an aggregate of 3,642,397 shares of Common Stock
outstanding, held of record by approximately 368 holders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters to
be voted on by stockholders. There is no cumulative voting with respect to the
election of directors, with the result that the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors then
up for election. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining which are available for distribution to them after payment of
liabilities and after provision has been made for each class of stock having
preference over the Common Stock. Holders of shares of Common Stock, as such,
have no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.

PREFERRED STOCK

The Company is authorized to issue 1,000,000 shares of preferred stock, par
value $.001 per share. No shares of the preferred stock are currently
outstanding. The Board of Directors of the Company has the authority at any time
and from time to time to establish and designate one or more additional series
of preferred stock, to fix the number of shares of any series (which number may
vary between series) and to fix the dividend rights and preferences, the
redemption price and terms, liquidation rights, sinking fund provisions (if
any), conversion provisions (if any), and the voting powers (if any). The Board
of Directors, without stockholder approval, could issue preferred stock with
voting and conversion rights that could adversely affect the voting power of
holders of the Common Stock. Certain companies have used the issuance of
preferred stock as an anti-takeover device and the Board of Directors of the
Company could, without stockholder approval, issue preferred stock with certain
voting, conversion and/or redemption rights that could discourage any attempt to
obtain control of the Company in a transaction not approved by the Board of
Directors. Although the Company does not intend to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.

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The preferred stock reflected in the Company's balance sheet is CBH
Preferred Stock, which, for accounting purposes, is treated as preferred stock
of the Company. The CBH Preferred Stock pays dividends monthly at a rate of 12%
per annum. The Company must redeem the CBH Preferred Stock upon the consummation
of the Offering. Holders of the CBH Preferred Stock have voting rights equal to
ten percent of the votes of the outstanding stock of CBH and vote together with
the holders of CBH common stock as a single class in all matters submitted to
stockholder vote.

DELAWARE ANTI-TAKEOVER LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in certain business combinations with
a person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless: (i) the transaction resulting in the acquiring
person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction which
makes it an interested stockholder (excluding certain employee stock option
plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. An "interested stockholder" is defined as any
person that is (x) the owner of 15% or more of the outstanding voting stock of
the corporation or (y) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder. Under
Delaware law, the Company could have opted out of Section 203 but elected to be
subject to its provisions.

CERTAIN MARKET INFORMATION

The Company has applied for listing of the Common Stock for trading on the
NASDAQ National Market. Prior to this offering there has been a limited public
trading market for the Common Stock which has traded since September 1995 on
NASD'S Electronic Bulletin Board with negligible trading volume.

LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

DGCL Section 102(b)(7) enables a corporation to eliminate or limit personal
liability of members of its board of directors for violation of a director's
fiduciary duty of care. However, the elimination of limitation may not apply
where there has been a breach of the duty of loyalty, failure to act in good
faith, intentional misconduct or knowing violation of law, payment of a dividend
or approval of a stock repurchase which was deemed illegal, or where a director
obtains an improper personal benefit.

The Company's Certificate of Incorporation provides that a director of the
Company shall, to the maximum extent permitted by Section 102(b)(7) or any
successor provision or provisions, have no personal liability to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director.

DGCL Section 145 permits a corporation organized under Delaware law to
indemnify directors and officers with respect to any matter in which the
director or officer acted in good faith and in a manner he reasonably believed
to be not opposed to the best interests of the company, and, with respect to any
criminal action, he had reasonable cause to believe his conduct was lawful.

The Company's Certificate of Incorporation provides that any director or
officer of the Company involved in any action, suit or proceeding, whether
civil, criminal, administrative, or investigative, the basis of which is alleged
action or inaction by such director or officer while acting in the official
capacity as

46
<PAGE>
director or officer of the Company or as director, trustee, officer, employee,
or agent of another entity at the request of the Company, shall be indemnified
and held harmless by the Company to the fullest extent permitted by DGCL 145 or
any successor provision or provisions, against all expense, liability and loss
reasonably incurred or suffered by such person in connection therewith. Such
indemnification as to such action or inaction shall be made by the Company only
upon a determination as to whether the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.

REGISTRATION RIGHTS

The Company anticipates that certain registration rights will be granted to
non-management stockholders who have entered into lockup agreements with
management and the Underwriters.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, located in Denver, Colorado.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

The shares sold in the Offering (other than shares which may be purchased by
"affiliates" of the Company) will be freely tradeable without restriction or
further registration under the Securities Act. In addition, 13,750 shares,
including the 12,500 shares sold by the Company in its initial public offering
in 1990 (other than shares which may be purchased by affiliates of the Company),
are freely tradeable without restriction or further registration under the
Securities Act. Approximately 276,750 additional shares are available for
immediate sale under Rule 144. The holders of of these shares available
for immediate sale under Rule 144 have agreed not to sell such shares prior to
without the consent of the Underwriters and the Company. The Company has
granted certain registration rights to these stockholders. In addition,
1,360,668 shares will become eligible for sale pursuant to Rule 144 in June 1997
and 36,313 shares will become eligible in August 1997. Moreover, holders of an
additional 62,590 shares which would become eligible for sale in November 1997
and May 1998 pursuant to Rule 144 have agreed not to sell such shares until
, and the Company has granted these stockholders certain registration
rights. The 1,892,328 remaining shares of Common Stock are "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act, and may only be sold pursuant to a registration statement under
the Securities Act or an applicable exemption from the registration requirements
of the Securities Act, including Rule 144 and 144A thereunder. No predictions
can be made as to the effect, if any, that market sales of shares of existing
stockholders or the availability of such shares for future sale will have on the
market price of shares of Common Stock prevailing from time to time. The
prevailing market price of the Common Stock after the offering could be
adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years from the later of the date such
restricted shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (56,424 shares based on the number of shares
to be outstanding immediately after this offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain requirements as to the manner and notice of sale and the
availability of public information concerning the Company.

Affiliates may sell shares not constituting restricted shares in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the two-year holding period. Restricted shares held by affiliates of the
Company eligible for sale in the public market under Rule 144 are subject to the
foregoing volume limitations and other restrictions.

Further, under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted shares were acquired from the Company
and the date they were acquired from an affiliate of the Company, and the person
was not an affiliate for at least three months prior to the sale, such person
would be entitled to sell the shares immediately without regard to volume
limitations and the other conditions described above.

No predictions can be made as to the effect, if any, that market sales of
shares of existing stockholders or the availability of such shares for future
sale will have on the market price of shares of Common Stock prevailing from
time to time. The prevailing market price of Common Stock after the offering
could be adversely affected by future sales of substantial amounts of Common
Stock by existing stockholders.

48
<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the Representative of the
several underwriters (the "Underwriters"), the Company has agreed to sell to the
Underwriters 2,000,000 shares of Common Stock. Under certain circumstances, this
amount may be increased. The number of shares of Common Stock which each
Underwriter has agreed to purchase is set forth opposite the name below.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Chatfield Dean & Co........................................................

-----------------
Total...................................................................... 2,000,000
</TABLE>

The Representative has advised the Company that the Underwriters propose to
initially offer the shares of Common Stock to the public at the Offering Price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $. per share of common stock. The
Underwriters may allow, and such dealers may allow, a discount not in excess of
$. per share of common stock on sales to certain other dealers. After the
Offering, the Offering Price, concession and discount may be changed.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 300,000 additional shares of Common Stock at the Offering Price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise this option only to cover
over-allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the Underwriters exercise this option, the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares of Common Stock proportionate to the Underwriters' initial amount
reflected in the foregoing table.

The Company has agreed to pay to the Underwriters a nonaccountable expense
allowance of 3% of the gross proceeds of this Offering. The Company has also
agreed to pay all expenses in connection with qualifying the shares of Common
Stock offered hereby for sale under the laws of such states as the Underwriters
may designate, including expenses of counsel retained for such purpose by the
Underwriters.

In connection with the Offering, the Company has agreed to sell to the
Underwriter and its designees for an aggregate of $200.00, the Underwriters'
Warrants to purchase up to ten percent (10%) of the shares of Common Stock
offered herein. The Underwriters' Warrants are exercisable initially at
$ per share (120% of the Offering Price) for a period of four years
commencing one year from the date of this Prospectus. The Underwriters' Warrants
grant to the holders thereof certain "piggyback" registration rights for a
period of four years from the first anniversary of the date of this Prospectus
with respect to registration under the Securities Act of the Common Stock
issuable upon exercise of the Underwriters' Warrants.

All directors, officers and 5% stockholders of the Company have agreed with
the Underwriters not to, directly or indirectly, offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock prior to the expiration of
periods ranging from 12 to 24 months from the date of this Prospectus without
the prior written consent of the Representative and the Company.

Prior to this Offering, there has been a limited public market for the
Common Stock of the Company. The Offering Price will be determined through
negotiations among the Company and the Representative. Among the factors
considered in determining the Offering Price, in addition to prevailing market
conditions, are the financial condition of the Company, the history of, and the
prospects for, the Company

49
<PAGE>
and the industry in which it competes and an assessment of the Company's
management. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the Offering Price. The Representative is
subject to the supervision of various governmental and self-regulatory
organizations as well as certain capital requirements. Such regulatory
authorities periodically investigate and audit the activities of broker-dealers,
such as the Representative. In the event the Representative is required to
curtail or cease operations as a result of administrative actions instituted by
the regulatory authorities or because of lack of capital, the price and
liquidity of the Common Stock may be affected by the reduced participation or
complete absence of such Representative from the market.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

LEGAL MATTERS

The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Herzfeld & Rubin, P.C., New York, New York. Stroock &
Stroock & Lavan, New York, New York has acted as counsel for the Underwriters in
connection with the Offering.

EXPERTS

The Financial Statements of Carpet Barn ("Predecessor Business") and the
Consolidated Financial Statements of Nations Flooring, Inc. and subsidiaries
included in this Prospectus and in the Registration Statement have been audited
by McGladrey & Pullen, LLP, independent public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and in the
Registration Statement, and are included herein in reliance upon the authority
of said firm as experts in auditing and accounting.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Nations Flooring, Inc.
(a Delaware Corporation)
Las Vegas, Nevada

We hereby consent to the use in the Registration Statement on Form S-1 of
our report which indicates the form of report we will be willing to issue dated
February 9, 1996, except for the second paragraph in Note 6 as to which the date
is April 15, 1996, the last paragraph in Note 7 as to which the date is March
31, 1996, and the last two paragraphs under basis of presentation in Note 1 as
to which the date is January , 1997, relating to the consolidated balance
sheet of Nations Flooring, Inc. and subsidiaries (Successor Business) as of
December 31, 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for the period from commencement of
operations (June 2, 1995) to December 31, 1995. We also consent to the use in
the Registration Statement on Form S-1 of our report dated February 9, 1996
relating to the balance sheet of Carpet Barn, Inc., a Nevada corporation
(Predecessor Business), as of December 31, 1994 and the related statements of
income, stockholder's equity and cash flows for the period from January 1, 1995
to June 1, 1995, and for the years ended December 31, 1994 and 1993. We also
consent to the reference to our Firm under the captions "Experts" and "Selected
Financial Data" in such prospectus.

MCGLADREY & PULLEN, LLP

Las Vegas, Nevada
January 15, 1997