e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30, 2007
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-31711
HOME SOLUTIONS OF AMERICA,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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99-0273889
(I.R.S. Employer
Identification No.)
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1500 Dragon Street, Suite B Dallas, TX 75207
(Address of principal executive
offices)
(214) 623-8446
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares outstanding of the registrants common
stock, $0.001 par value per share, as of August 7,
2007 was 47,525,850.
Home
Solutions of America, Inc.
INDEX TO
FORM 10-Q
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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Home
Solutions of America, Inc.
Condensed Consolidated Balance Sheets
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June 30,
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December 31,
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2007
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2006
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(Unaudited)
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(Audited)
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(Dollars and shares in thousands)
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ASSETS
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Current assets:
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Cash
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$
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4,646
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$
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8,713
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Accounts receivable, net
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82,304
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58,106
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Current portion of notes receivable
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1,857
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703
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Inventories
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3,511
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4,000
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Prepaid expenses and other current
assets
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5,908
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4,654
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Costs in excess of billings
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3,717
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6,292
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Deferred tax asset
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1,269
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1,337
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Total current assets
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103,212
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83,805
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Property and equipment, net
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6,451
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6,129
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Intangibles, net
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15,630
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8,732
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Goodwill
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106,723
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122,500
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Notes receivable, net of current
portion
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750
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Other assets
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905
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809
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Total assets
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$
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232,921
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$
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222,725
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued
expenses
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$
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31,177
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$
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15,608
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Billings in excess of costs
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383
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688
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Current portion of debt
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5,166
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26,816
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Current portion of capital lease
obligations
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512
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254
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Total current liabilities
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37,238
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43,366
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Long-term liabilities:
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Debt, net of current portion
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7,906
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10,448
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Line of credit
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27,111
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13,111
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Amounts due to seller
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9,855
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Deferred tax liabilities
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890
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890
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Capital lease obligations, net of
current portion
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958
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929
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Total liabilities
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74,103
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78,599
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Minority interest
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207
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237
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Commitments and contingencies
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Stockholders equity:
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Common stock, $0.001 par
value, 100,000 shares authorized; 47,423 and
47,297 shares issued and outstanding, respectively
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47
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47
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Additional paid-in capital
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142,139
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140,497
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Retained earnings
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16,425
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3,345
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Total stockholders equity
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158,611
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143,889
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Total liabilities and
stockholders equity
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$
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232,921
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$
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222,725
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See Notes to Condensed Consolidated Financial Statements.
1
Home
Solutions of America, Inc.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2007
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2006
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2007
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2006
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(Unaudited)
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(Dollars and shares in thousands,
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except per share data)
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Net sales
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$
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50,960
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$
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24,154
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$
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90,045
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$
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43,433
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Costs and expenses:
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Cost of sales
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27,213
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12,781
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46,573
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22,112
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Selling, general and
administrative expenses
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10,482
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5,471
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19,712
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11,420
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37,695
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18,252
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66,285
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|
|
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33,532
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|
|
|
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|
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|
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|
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Operating income
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13,265
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|
|
5,902
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|
23,760
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9,901
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|
|
|
|
|
|
|
|
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Other income (expense), net:
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|
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|
|
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|
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|
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Gain (loss) on sale of assets
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2
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|
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(5
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)
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22
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Interest income
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56
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|
74
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119
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124
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Interest expense
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(1,209
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)
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(58
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)
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(2,273
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)
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(118
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)
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Other income, net
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|
24
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|
29
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|
|
|
52
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55
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|
|
|
|
|
|
|
|
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Total other (expense) income, net
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(1,127
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)
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45
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(2,107
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)
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83
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|
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Income from continuing operations
before income taxes and minority interest
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12,138
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5,947
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21,653
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9,984
|
|
Income taxes
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|
|
(4,602
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)
|
|
|
(2,246
|
)
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|
|
(8,254
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)
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(3,668
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)
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Minority interest
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(164
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)
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(208
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)
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(319
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)
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(466
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)
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|
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|
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Income before discontinued
operations
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|
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7,372
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3,493
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|
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13,080
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5,850
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|
Gain on disposal, net of loss from
discontinued operations, net of tax of $0, $527, $0 and $971,
respectively
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|
|
|
|
975
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|
|
|
|
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income
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|
$
|
7,372
|
|
|
$
|
4,468
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$
|
13,080
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|
$
|
7,591
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|
|
|
|
|
|
|
|
|
|
|
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Earnings per common
share basic:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from continuing operations
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|
$
|
0.16
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|
|
$
|
0.09
|
|
|
$
|
0.28
|
|
|
$
|
0.16
|
|
Discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share available
to common stockholders
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|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per common
share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations
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|
$
|
0.15
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|
|
$
|
0.09
|
|
|
$
|
0.27
|
|
|
$
|
0.15
|
|
Gain from discontinued operations,
net of taxes
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share available
to common stockholders
|
|
$
|
0.15
|
|
|
$
|
0.11
|
|
|
$
|
0.27
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
47,361
|
|
|
|
38,295
|
|
|
|
47,337
|
|
|
|
37,103
|
|
Diluted
|
|
|
48,129
|
|
|
|
40,594
|
|
|
|
48,102
|
|
|
|
39,642
|
|
See Notes to Condensed Consolidated Financial Statements.
2
Home
Solutions of America, Inc.
|
|
|
|
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For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,080
|
|
|
$
|
7,591
|
|
Adjustments-
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,564
|
|
|
|
818
|
|
Minority interest in income of
consolidated subsidiary
|
|
|
319
|
|
|
|
466
|
|
Provision for doubtful accounts
|
|
|
515
|
|
|
|
1,224
|
|
Loss (gain) on sale of assets
|
|
|
5
|
|
|
|
(22
|
)
|
Stock-based compensation
|
|
|
1,251
|
|
|
|
298
|
|
Estimated fair value of common
stock issued for services
|
|
|
|
|
|
|
171
|
|
Gain on sale of discontinued
operations
|
|
|
|
|
|
|
(3,177
|
)
|
Changes in assets and liabilities,
net of acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(46,261
|
)
|
|
|
(2,481
|
)
|
Prepaid expenses and other current
assets
|
|
|
(1,426
|
)
|
|
|
(571
|
)
|
Costs in excess of billings, net
|
|
|
2,270
|
|
|
|
|
|
Inventories
|
|
|
489
|
|
|
|
(859
|
)
|
Other assets
|
|
|
(919
|
)
|
|
|
714
|
|
Deferred tax asset
|
|
|
68
|
|
|
|
(9,171
|
)
|
Accounts payable and accrued
expenses
|
|
|
15,569
|
|
|
|
(3,065
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(13,476
|
)
|
|
|
(8,064
|
)
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
Cash advanced under note receivable
|
|
|
(764
|
)
|
|
|
(375
|
)
|
Cash received under note receivable
|
|
|
360
|
|
|
|
650
|
|
Cash acquired in acquisition, net
of cash paid
|
|
|
|
|
|
|
87
|
|
Purchases of property and equipment
|
|
|
(454
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(858
|
)
|
|
|
139
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
Principal payments on debt and
capital leases
|
|
|
(2,828
|
)
|
|
|
(3,182
|
)
|
Proceeds on line of credit, net of
repayments
|
|
|
14,000
|
|
|
|
|
|
Payments on amounts due to seller
|
|
|
(1,119
|
)
|
|
|
|
|
Excess tax benefit from options
exercises
|
|
|
|
|
|
|
9,171
|
|
Proceeds from exercise of warrants
and options
|
|
|
563
|
|
|
|
7,880
|
|
Proceeds received from
disgorgement of profits
|
|
|
|
|
|
|
245
|
|
Distributions to minority
stockholder
|
|
|
(349
|
)
|
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
10,267
|
|
|
|
13,531
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(4,067
|
)
|
|
|
5,606
|
|
Cash at beginning of period
|
|
|
8,713
|
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
4,646
|
|
|
$
|
13,831
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
Home
Solutions of America, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,322
|
|
|
$
|
102
|
|
Income taxes
|
|
$
|
846
|
|
|
$
|
3,276
|
|
Supplemental schedule of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Satisfaction of seller note
against accounts receivable
|
|
$
|
21,548
|
|
|
$
|
|
|
Offset of amounts due to seller
against goodwill
|
|
$
|
8,736
|
|
|
$
|
|
|
Issuance of stock for conversion
of debt and accrued interest
|
|
$
|
|
|
|
$
|
902
|
|
Fixed assets acquired through debt
and capital lease obligations
|
|
$
|
471
|
|
|
$
|
128
|
|
Inventory received for reduction
of note receivable from Cornerstone
|
|
$
|
|
|
|
$
|
1,559
|
|
Issuance of notes payable for
acquisition
|
|
$
|
|
|
|
$
|
745
|
|
Reclassification of goodwill to
intangibles
|
|
$
|
7,748
|
|
|
$
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
Interim
Unaudited Condensed Consolidated Financial
Statements
The unaudited interim condensed consolidated financial
statements as of June 30, 2007 and for the three and six
month periods ended June 30, 2007 and 2006 contained in
this Quarterly Report (collectively, the Unaudited Interim
Condensed Consolidated Financial Statements) were prepared in
accordance with accounting principles generally accepted in the
United States (U.S. GAAP) for all periods presented. The
results of operations for the three and six month periods ended
June 30, 2007 are not necessarily indicative of the results
that may be expected for the entire fiscal year. The Unaudited
Interim Condensed Consolidated Financial Statements and other
financial information included in this Quarterly Report, unless
otherwise specified, have been presented to separately show the
effects of discontinued operations.
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with the
regulations for interim financial information of the Securities
and Exchange Commission (the SEC). Accordingly, they
do not include all of the disclosures required by U.S. GAAP
for complete financial statements. In the opinion of management,
the unaudited accompanying statements of financial condition and
related interim statements of income and cash flows include all
adjustments (which consist only of normal and recurring
adjustments) considered necessary for a fair presentation in
conformity with U.S. GAAP. These Unaudited Interim
Condensed Consolidated Financial Statements should be read in
conjunction with the Home Solutions of America, Inc.
consolidated financial statements as of and for the year ended
December 31, 2006, as filed with the SEC on
Form 10-K.
Company
Description and Nature of Operations
Home Solutions of America, Inc. (Home Solutions, or
the Company), a Delaware corporation, is a provider
of restoration, construction and interior services to
commercial, governmental and residential customers primarily in
the southern United States. The Company seeks to expand our core
service offerings through the future acquisition of strategic,
specialized, profitable and well-managed companies operating in
our target markets and business segments with a proven history
of internal growth and by expanding our geographic markets.
The Companys business consists of two integrated service
offerings: (i) restoration and construction services and
(ii) interior services. See Note 10
Segment Reporting for additional segment information.
Restoration
and Construction Services
Home Solutions is an emerging restoration and construction
services company, offering diversified general contracting,
restoration, construction management and design-build services
to private clients and public agencies primarily throughout the
southern United States and California, although we recently
expanded our construction services to markets in Washington and
New York. The Company offers general contracting,
preconstruction planning and comprehensive project management
services, including planning, scheduling and providing the
manpower, equipment, materials and subcontractors required for a
project. A portion of our work requires surety bonding and the
Company has surety bonding agreements with various institutions
to meet its bonding needs. The Company also serves as the
subcontractor on several projects in the same markets.
The Companys recovery services include catastrophic storm
response, clean up and removal of debris, initial set up
services in an impacted area (including power, lodging,
sustenance and training), water mitigation, drying,
dehumidification and preparing affected areas for the next stage
of restoration and rebuilding. The Companys trained
employees provide onsite first response to respond to fire,
water and weather-related emergencies in our target markets to
both commercial, residential and governmental clients. The
Companys restoration services
5
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
include servicing the next stage of the project after the
initial clean up and catastrophic storm response. Restoration
services include water, fire and wind restoration, mold
remediation, contents restoration, air decontamination, asbestos
and lead paint removal, cleaning, drying, and deodorization of
carpet and furniture and moving and storage services. The
Companys restoration and recovery services are currently
provided in the areas of Florida, Louisiana, Mississippi,
Alabama, Georgia, South Carolina, Texas, Washington and
California.
These services are provided through the Companys
wholly-owned subsidiaries, Fireline Restoration, Inc.
(Fireline), which we acquired effective July 1,
2006 pursuant to an acquisition closed on July 31, 2006,
and Home Solutions Restoration of Louisiana, Inc. (HSR of
Louisiana), which commenced operations in September 2005
in connection with the acquisition of substantially all the
assets of Florida Environmental Remediation Services, Inc.
(FERS). In October 2006, HSR of Louisiana purchased
Associated Contractors, LLC (Associated) to expand
its business development and general contracting capabilities.
Fireline, which specializes in disaster recovery services and
insurance estimates and repairs for commercial, industrial and
residential properties, is certified in multiple aspects of the
restoration industry, including smoke, fire, water and mold.
Fireline and HSR of Louisiana are licensed as general
contractors in Louisiana, and offer full interior and exterior
restoration and reconstruction services in those states.
Restoration business segment services are also provided through
PW Stephens, Inc. (PWS) and Fiber Seal Systems, L.P.
(FSS), two of the Companys wholly-owned
subsidiaries. PWS provides water and fire restoration services,
air decontamination and removal of mold, asbestos and lead paint
in California and, to a lesser extent, in Florida, and FSS
provides cleaning, drying and deodorization of carpet and
furniture as well as moving and storage services in
24 states and the District of Columbia.
We provide the following recovery, restoration and construction
services:
|
|
|
|
|
Recovery: The Companys recovery services
include providing initial set up services in an impacted area
(including power, lodging, and training) and then providing the
drying, dehumidification, cleanup and removal of debris from
commercial and residential areas to prepare the areas for the
next stage of restoration. The Company provides these services
on an hourly rate to our commercial and residential clients,
both as a contractor and as a subcontractor to customers
providing additional services in these markets.
|
|
|
|
Fire and Water Damage Restoration: The Company
provides trained employees to respond to fire, water and
weather-related emergencies, to inspect structural members and
contents damaged by water, to determine the likelihood or extent
of mold growth and to provide immediate cleaning, drying,
moving, storage and deodorization, among other services.
|
|
|
|
Construction: The Companys construction
services include general contracting work and subcontracting
work. The Companys services are provided to a number of
high growth$ companies and specialized building markets,
including hospitality and gaming, insurance, education and
healthcare markets, as well as to state and local government
agencies and districts.
|
|
|
|
Indoor Air Contamination: Through PWS, the
Company provides indoor air contamination services, including
contamination from mold, asbestos and lead paint. With increased
media attention regarding the health threat of mold, fewer
insurance options and property transfers at risk, current market
conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist
of property and system inspections, surface and air testing,
project design, microbial removal, light interior demolition,
repair and specialized cleaning work. Customer opportunities are
developed through a regional sales force as well as through
referrals by real estate firms, insurance adjusters, mortgage
companies, attorneys and nationally-branded retailers.
|
|
|
|
Cleaning and Fabric Protection: Through FSS,
the Company provides fabric protection services to protect
furniture, carpet and draperies from stains and daily wear
through both Company-owned locations and over forty licensed
locations. This niche market is primarily targeted at
above-average income homeowners. We also provide air duct
cleaning services to remove particulate (organic and inorganic)
material, which can cause
|
6
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
allergic reactions and is often the breeding ground for many
types of mold, from heating and air conditioning systems.
|
Interior
Services
Through the Companys wholly-owned subsidiaries, Southern
Exposure Unlimited of Florida, Inc. (Southern
Exposure) and Cornerstone Marble and Granite, Inc.
(Cornerstone), the Company offers cabinet and
countertop installation services. Southern Exposure manufactures
and installs a high-end product line of cabinets and
countertops. Cornerstone installs custom marble and granite
countertops for residential customers. Currently, the Company
manufactures cabinets and install cabinets and kitchen
countertops for Centex Corporation (Centex). The
Company also installs granite countertops for Home Depot, Inc.
(Home Depot) in Florida, Georgia, Alabama and South
Carolina. The Home Depot contract may be terminated at any time
upon notice to us. Furthermore, Home Depot is not obligated to
use our services under these contracts. We have no contract with
Centex and Centex is not obligated to buy our products or use
our services. We also have granite fabrication and installation
operations in Southern California which services the residential
and multi-family markets.
Principles
of Consolidation
The accompanying condensed consolidated financial statements
include the accounts of Home Solutions and its wholly and 50%
owned subsidiaries and joint ventures. All significant
intercompany transactions and balances have been eliminated in
consolidation. The minority owners interest in a
subsidiary has been reflected as minority interest in the
accompanying consolidated balance sheets.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Fair
Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with US GAAP. For certain of the Companys
financial instruments, including cash, accounts receivable,
notes receivable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short
maturities. The fair values of long-term debt and capital lease
obligations approximate their carrying values due to their
short-term maturities or their generally variable interest rate
terms.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates
made by management include, among others, the realizability of
accounts and notes receivable, inventories, recoverability of
property and equipment, intangibles and goodwill, estimating
costs for long-term contracts and valuation of stock-based
compensation and deferred tax assets. Actual results could
differ from these estimates.
Concentration
of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and receivables.
The Company places its cash with financial institutions and may
exceed the Federal Deposit Insurance Corporation
(FDIC) $100 insurance limit. At June 30, 2007,
the Company had approximately $3,360 in these accounts in excess
of the FDIC insurance limits.
The Company offers its services predominately in the states of
California, Texas, Louisiana, Georgia and Florida, although its
construction services have recently been expanded to include
certain markets in New York and Washington. The Company extends
credit based on an evaluation of a customers financial
condition, generally
7
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
without collateral or guaranties. Exposure to losses on accounts
receivable is principally dependent on each customers
financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
Although the Company expects to collect amounts due, subject to
such allowances, actual collections may differ from the
estimated amounts.
During 2006, two customers accounted for approximately 25% and
22% of total sales, and one customer accounted for approximately
56% of accounts receivable. There is no similar customer
concentration as of for the three and six month periods ended
June 30, 2007.
In June 2006, Southern Family Insurance (Southern)
was placed in liquidation. Southern was the insurance carrier on
two of Firelines significant customers. At June 30,
2007, the Company had net accounts receivable from these
customers aggregating approximately $29,000. Southern was an
admitted insurance carrier in Florida and state statutes insure
the payment of valid claims by the Florida Insurance Guarantee
Association (FIGA). Fireline initiated legal actions
against the homeowners associations to protect its claims and to
assist in collecting the balances due under the accounts
receivable in the circuit court of the Nineteenth Judicial
Circuit in and for Indian River County, Florida. In settlement
of these claims, the defendants assigned their claims against
FIGA to Fireline, and as a result the litigation against the
homeowners associations has been or is being dismissed and
Fireline is pursuing the FIGA claims directly. The Company
believes that the assignment of the homeowners association
claims against FIGA to Fireline will assist the Company in
recovering the balances due under the accounts receivable. As of
June 30, 2007, the Company assigned a portion of the right
to receive the proceeds of the uncollected FIGA receivables to
satisfy the $21,650 seller note due to the previous owner of
Fireline. See note 11, Related Party Transactions, for more
details regarding the satisfaction of the seller note. The
Company anticipates collection of a portion of the FIGA
receivables in 2007 and the Company expects that the amounts
collected will approximate the carrying amount of the
receivables that remain on the balance sheet. However, there is
no guaranty that the Company or Fireline will collect any
amounts from FIGA.
Costs
in Excess of Billings
Uncompleted contracts at June 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted
contracts
|
|
$
|
38,174
|
|
|
|
|
|
Estimated earnings
|
|
|
19,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,452
|
|
|
|
|
|
Billings to date
|
|
|
(54,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs in excess of billings
|
|
$
|
3,717
|
|
|
|
|
|
Billings in excess of costs
|
|
|
(383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
During the periods presented, the Company had no items of
comprehensive income and, therefore, has not presented a
statement of comprehensive income.
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by
8
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. The
Company will adopt SFAS No. 159 in the first quarter
of 2008, is still evaluating the effect, if any, on its
consolidated financial position and consolidated results of
operations and has not yet determined its impact.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes valuation techniques for measuring fair
value, and expands disclosures about fair value measurements.
SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based
on the assumptions that market participants would use in pricing
the asset or liability. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company has not yet determined what
impact, if any, SFAS No. 157 will have on its
financial statements.
Additionally, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), on January 1, 2007, the first
day of fiscal 2007. FIN 48 is an interpretation of
SFAS No. 109 and seeks to reduce the diversity in
practice associated with certain aspects of measurement and
recognition in accounting for income taxes. FIN 48
prescribes a recognition threshold and measurement requirement
for the financial statement recognition of a tax position that
has been taken or is expected to be taken on a tax return.
FIN 48 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. Under FIN 48 the Company may
only recognize or continue to recognize tax positions that meet
a more likely than not threshold. The Company
adopted FIN 48 effective January 1, 2007. There was no
impact on the Companys consolidated financial statements
as a result of the implementation of FIN 48.
|
|
3.
|
Computation
of Earnings Per Share
|
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computation as required by SFAS No. 128, Net income
Per Share. Common stock equivalents related to stock options
are excluded from diluted earnings per share calculation if
their effect would be anti-dilutive to net income per share
before discontinued operations.
9
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
7,372
|
|
|
$
|
3,493
|
|
|
$
|
13,080
|
|
|
$
|
5,850
|
|
Discontinued operations
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,372
|
|
|
$
|
4,468
|
|
|
$
|
13,080
|
|
|
$
|
7,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding Basic
|
|
|
47,361
|
|
|
|
38,295
|
|
|
|
47,337
|
|
|
|
37,103
|
|
Incremental shares from
outstanding stock options
|
|
|
469
|
|
|
|
2,061
|
|
|
|
497
|
|
|
|
2,301
|
|
Incremental shares from
outstanding warrants
|
|
|
238
|
|
|
|
238
|
|
|
|
238
|
|
|
|
238
|
|
Incremental shares from
outstanding restricted stock
|
|
|
61
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
common share equivalents Diluted
|
|
|
48,129
|
|
|
|
40,594
|
|
|
|
48,102
|
|
|
|
39,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.16
|
|
|
$
|
0.09
|
|
|
$
|
0.28
|
|
|
$
|
0.16
|
|
Discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
$
|
0.27
|
|
|
$
|
0.15
|
|
Discontinued operations
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.15
|
|
|
$
|
0.11
|
|
|
$
|
0.27
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, the Company has a note receivable with
a balance of $490. The note receivable, as amended, requires
final payment on December 31, 2007 and is personally
guaranteed by a third party. The Company recorded this note
receivable with an implicit rate of 4.55%. The Companys
management does not believe a reserve is necessary at this time.
On May 24, 2006, the Company entered into an exclusive
agreement with a modular housing sales agent to provide
installation services for modular housing in New Orleans and
surrounding areas. In connection with the agreement, the Company
agreed to advance the sales agent up to $800 under a promissory
note. The note required one balloon installment of all accrued
but unpaid interest and all outstanding principal on
August 17, 2006. In August 2006, the note was restructured
to change the maturity date to February 2007, for the debtor to
provide security for the indebtedness evidenced by the note, to
require a portion of proceeds from sales of modular houses to be
used to pay down the note, and to provide for certain other
additional terms and conditions. The note is secured by liens
against real estate and modular home units and bears interest at
the prime rate of interest plus 2% on a per annum basis. At
June 30, 2007, the note receivable balance was $1,032.
During April 2007, the Companys Fireline subsidiary
entered into a joint venture and has agreed to fund the
operations of the joint venture with its venture partner.
Fireline will receive 49% of the ventures profits for its
participation in the venture. The joint venture partner entered
into an agreement with Fireline whereby Fireline has agreed to
provide funding for the joint venture in the form of a $2,000
revolving promissory note. The note accrues interest at 6% per
annum. At June 30, 2007, Fireline had funded $187 under the
revolving facility to its joint venture partner and has
accounted for the balance as a note receivable.
10
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
|
|
5.
|
Intangible
Assets and Goodwill
|
Intangible
Assets
Identifiable intangibles acquired in connection with business
acquisitions accounted for under the purchase method are
recorded at their respective fair values. The Company is
amortizing the identifiable intangibles over their estimated
useful lives, ranging from six to twenty years. Intangibles
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
As of June 30,
|
|
|
December 31,
|
|
|
Estimated Useful
|
|
|
|
2007
|
|
|
2006
|
|
|
Life (Years)
|
|
|
Trade name
|
|
$
|
6,540
|
|
|
$
|
4,540
|
|
|
|
15
|
|
Customer list
|
|
|
8,850
|
|
|
|
4,100
|
|
|
|
15
|
|
Supply agreement
|
|
|
1,350
|
|
|
|
1,350
|
|
|
|
20
|
|
Non compete
|
|
|
1,439
|
|
|
|
441
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,179
|
|
|
|
10,431
|
|
|
|
|
|
Accumulated amortization
|
|
|
(2,549
|
)
|
|
|
(1,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,630
|
|
|
$
|
8,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $460 and $239 for the three months
ended June 30, 2007 and 2006, respectively, while
amortization expense totaled $850 and $495 for the six months
ended June 30, 2007 and 2006, respectively.
Goodwill
Goodwill represents the excess of acquisition cost over the net
assets acquired in a business combination and is not amortized
in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The provisions of SFAS No. 142
require that the Company allocate its goodwill to its various
reporting units, determine the carrying value of those
businesses, and estimate the fair value of the reporting units
so that a two-step goodwill impairment test can be performed. In
the first step of the goodwill impairment test, the fair value
of each reporting unit is compared to its carrying value.
Management reviews, on an annual basis, the carrying value of
goodwill in order to determine whether impairment has occurred.
Impairment is based on several factors including the
Companys projection of future discounted operating cash
flows. If an impairment of the carrying value were to be
indicated by this review, the Company would perform the second
step of the goodwill impairment test in order to determine the
amount of goodwill impairment, if any.
The changes in the carrying amount of goodwill for the six
months ended June 30, 2007 are as follows:
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
122,500
|
|
Goodwill related to purchase price
adjustments
|
|
|
707
|
|
Goodwill reversed against amounts
due to seller
|
|
|
(8,736
|
)
|
Estimate of identifiable
intangibles related to the Fireline and Associated acquisitions
|
|
|
(7,748
|
)
|
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
106,723
|
|
|
|
|
|
|
11
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Line of Credit
|
|
|
|
|
|
|
|
|
Revolving credit note payable to
bank, interest of prime less 0.25% The note matures in November
2009. At June 30, 2007 the interest rate was 8.00%.
|
|
$
|
27,111
|
|
|
$
|
13,111
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
|
|
|
|
|
|
Note payable to bank, interest of
prime less 0.25%. Interest and principal payable quarterly
beginning January 1, 2007. The note matures in November
2009. At June 30, 2007 the interest rate was 8.00%.
|
|
$
|
12,500
|
|
|
$
|
15,000
|
|
Note payable, non-interest
bearing, payable in $5 monthly installments until paid in
full to the seller of FSS Systems of Los Angeles
(FSSLA).
|
|
|
130
|
|
|
|
160
|
|
Note payable to Brian Marshall,
the Fireline seller, due June 30, 2007. Accrued interest on
the outstanding principal balance was due monthly. The seller
agreed to pay interest to the Company at 8% on certain accounts
receivable beginning January 31, 2007. The note was
subordinated to the Companys credit facility. As of
June 30, 2007 the note payable was satisfied by assignment
to the Fireline seller of the right to receive a portion of the
proceeds from certain accounts receivable.
|
|
|
|
|
|
|
21,650
|
|
Notes and leases payable to
various financial institutions, collateralized by various
equipment and automobiles, bearing interest at various annual
interest rates ranging from prime plus 0.75% to 13.21% with
principal and interest payable in monthly installments ranging
from $0.4 to $1 through March 2011.
|
|
|
320
|
|
|
|
307
|
|
Term loans with various financial
institutions with interest at various annual interest rates
ranging from 7.5% to 9.25%, payable in monthly installments
ranging from $0.5 to $2, due through September 2009, secured by
accounts receivable and equipment
|
|
|
122
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
13,072
|
|
|
|
37,264
|
|
Less current portion of notes
payable
|
|
|
(5,166
|
)
|
|
|
(26,816
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion of notes
payable
|
|
$
|
7,906
|
|
|
$
|
10,448
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
During the six months ended June 30, 2007, the Company
issued 126 shares of common stock for $563 in connection
with the exercise of stock options.
Pursuant to the Board Compensation Plan for the
2007-2008
board term, each board member is entitled to receive a grant of
immediately exercisable stock purchase rights exercisable for
25 shares of restricted stock. The stock purchase rights
have not yet been granted to our directors, but are expected to
be granted in the second half of 2007.
12
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
Pursuant to the Board Compensation Plan for the
2006-2007
board term, each board member and one former board member was
granted immediately exercisable stock purchase rights
exercisable for 20 shares of restricted stock on
July 26, 2006. Each stock purchase right represents the
right to receive one share of restricted common stock at a price
of $-0- per share. The stock purchase rights were exercised
immediately upon grant. The restricted shares of common stock
have the same voting and dividend rights as the Companys
other outstanding shares of common stock. A total of
240 shares of restricted common stock were granted to
current and former directors and will vest over a period of
23 months commensurate with service as a board member over
the same period. The restricted shares of common stock are
subject to a
lock-up
agreement pursuant to which 50% are released from
lock-up on
December 31, 2006, and the remaining 25% are released from
lock-up on
December 31, 2007 and the remaining 25% on
December 31, 2008. However, for the current directors the
vesting of such shares is subject to continuing service as a
board member. Unearned stock-based compensation related to the
restricted shares is determined based on the fair value of the
Companys stock on the date of grant, which was
approximately $1,524 and will be amortized to expense on a
straight-line basis over the vesting period, of which
approximately $398 was recognized during the six months ended
June 30, 2007.
Two newly appointed board of directors were granted
28 shares of restricted common stock for their services
from their appointment to the board of directors in August and
October 2006, respectively, until May 31, 2007. The
restricted shares of common stock are subject to a
lock-up
agreement pursuant to which 50% are released six months from the
date of grant and the remaining 50% are released from
lock-up on
December 31, 2007. Unearned stock-based compensation
related to the restricted shares is determined based on the fair
value of the Companys stock on the date of grant, which
was approximately $172 and will be amortized to expense on a
straight-line basis over the vesting period, of which
approximately $144 was recognized during the six months ended
June 30, 2007.
On May 11, 2007, the board of directors approved grants of
restricted stock to the companys Chief Executive Officer
and Chief Financial Officer. The two officers, collectively,
were granted 112 shares of restricted common stock which
vest over a period of 36 months. The restricted shares of
common stock become released from
lock-up as
they vest. Unearned stock-based compensation related to the
restricted shares is determined based on the fair value of the
Companys stock on the date of grant, which was
approximately $620 and will be amortized to expense on a
straight-line basis over the vesting period, of which
approximately $28 was recognized during the six months ended
June 30, 2007.
|
|
8.
|
Commitments
and Contingencies
|
Litigation
The nature and scope of the Companys business operations
bring it into regular contact with the general public, a variety
of businesses and government agencies. These activities
inherently subject the Company to potential litigation, which
are defended in the normal course of business.
On June 20, 2006, a class action lawsuit was filed in the
United States District Court for the Northern District of Texas.
Home Solutions and the Chief Executive Officer, President and
Chief Financial Officer of Home Solutions were named as
defendants in that action. The complaint alleges claims against
Home Solutions and such officers for violations of the
Securities Act of 1934. The complaint alleges that the
defendants disseminated false and misleading information to the
public that misrepresented the accuracy of the Companys
financial condition and future revenue prospects. The complaint
further alleges that the effect of the purported fraud was to
manipulate Home Solutions stock price so that the
defendants could profit from the manipulation. The action seeks
damages in an unspecified amount. On June 27, 2006 and on
July 6, 2006, two additional class action lawsuits were
filed in the United States District Court for the Northern
District of Texas. Home Solutions and its directors are named as
defendants in those actions. The allegations in these two
additional class action lawsuits are substantially similar to
those in the first lawsuit. The actions seek damages in an
unspecified amount.
13
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
On January 10, 2007, the Court consolidated two of the
class action cases and appointed lead plaintiffs and lead
counsel for the consolidated case. On March 12, 2007, the
lead plaintiffs filed a consolidated amended complaint asserting
claims under Sections 10(b) and 20(a) of the Exchange Act
and
Rule 10b-5
against the same defendants as in the original complaints as
well as against several additional defendants, including a
member of the Companys board of directors and Sanders
Morris Harris Group, Inc. The consolidated amended complaint
asserts that the defendants made false and misleading statements
regarding certain of the Companys contracts and
acquisitions and made false statements regarding the
Companys 2006 earnings guidance. On June 13, 2007,
the Court consolidated the third class action case into the
existing consolidated case. The Company and the individual
defendants have moved to dismiss the consolidated amended
complaint and intend to vigorously defend the class actions.
On June 27, 2006, a shareholder derivative case was filed
against certain of the Companys officers and directors. An
amended complaint was filed on July 23, 2007. The
derivative case is based on similar factual allegations as the
securities class action cases and asserts state law fiduciary
duty claims on behalf of the Company against the individual
defendants for allegedly exposing the Company to liability in
the securities class actions. The plaintiff is not seeking to
recover damages from the Company in the derivative case but is
seeking to have the Company pay his attorneys fees. The
Company and the individual defendants have moved to dismiss the
derivative action. It is possible that additional similar
actions could be filed.
Home Solutions is occasionally involved in other litigation
matters relating to claims arising out of the ordinary course of
business. Other than the class action lawsuits described above,
the Companys management believes that there are no claims
or actions pending or threatened against the Company, the
ultimate disposition of which would have a material adverse
effect on our business, results of operations and financial
condition. However, if a court or jury rules against us and the
ruling is ultimately sustained on appeal and damages are awarded
against us, such ruling could have a material and adverse effect
on our business, results of operations and financial condition.
In June 2006, Southern Family Insurance (Southern)
was placed in liquidation. Southern was the insurance carrier on
two of Firelines significant customers. At June 30,
2007, the Company had net accounts receivable from these
customers aggregating approximately $29,000. Southern was an
admitted insurance carrier in Florida and state statutes insure
the payment of valid claims by the Florida Insurance Guarantee
Association (FIGA). Fireline initiated legal actions
against the homeowners associations to protect its claims and to
assist in collecting the balances due under the accounts
receivable in the circuit court of the Nineteenth Judicial
Circuit in and for Indian River County, Florida. In settlement
of these claims, the defendants assigned their claims against
FIGA to Fireline, and as a result the litigation against the
homeowners associations has been or is being dismissed and
Fireline is pursuing the FIGA claims directly. The Company
believes that the assignment of the homeowners association
claims against FIGA to Fireline will assist the Company in
recovering the balances due under the accounts receivable. As of
June 30, 2007, the Company assigned a portion of the right
to receive the proceeds of the uncollected FIGA receivables to
satisfy the $21,650 seller note due to the previous owner of
Fireline. See note 11, Related Party Transactions, for more
details regarding the satisfaction of the seller note. The
Company anticipates collection of a portion of the FIGA
receivables in 2007 and the Company expects that the amounts
collected will approximate the carrying amount of the
receivables that remain on the balance sheet. However, there is
no guaranty that the Company or Fireline will collect any
amounts from FIGA.
Regulatory
Inquiries
In the normal course of business, the Company may receive
informal inquiries from regulatory authorities with respect to
disclosure issues, our policies and procedures and to clarify
previously published information. In July 2007, the Company
received informal inquiries from the SEC and Nasdaq with respect
to prior disclosure and related issues. The Company is
cooperating with the SEC and Nasdaq in responding to such
inquiries.
14
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
Promissory
Note
As detailed in Note 4, the Company has entered into a joint
venture whereby it has extended a revolving line of credit, in
the form of a promissory note, for $2.0 million to a
partner in a joint venture. Interest accrues at 6% per annum on
the note and is calculated on the basis of a 360 day year.
At June 30, 2007, the Company had issued cash of $187 under
the note and had open commitments of $1,813.
Indemnities
and Guarantees
The Company has made certain indemnities and guarantees, under
which it may be required to make payments to a guaranteed or
indemnified party, in relation to certain transactions. The
Company indemnifies its directors, officers, employees and
agents to the maximum extent permitted under the laws of the
State of Delaware. In connection with its facility leases, the
Company has indemnified its lessors for certain claims arising
from the use of the facilities. In connection with certain of
its debt, stock purchase and other agreements, the Company has
indemnified lenders, sellers, and various other parties for
certain claims arising from the Companys breach of
representations, warranties, covenants and other provisions
contained in the agreements. Historically, the Company has not
been obligated to make any payments for these obligations and no
liabilities have been recorded for these indemnities and
guarantees in the accompanying consolidated balance sheets.
Pursuant to the purchase agreement for the acquisition by HSR of
Louisiana of substantially all of the assets of FERS, FERS is
entitled to receive an amount (in cash or restricted common
stock, at the Companys option) equal to ten percent (10%)
of the excess of HSR of Louisianas earnings before
interest, taxes, depreciation and amortization with respect to
the acquired assets related to the business, if any, that exceed
$15,000 in each of fiscal years 2006 and 2007, subject to the
terms and provisions of the purchase agreement. As of
June 30, 2007, no amounts had been earned or paid out under
this provision. In addition, based on managements
forecast, the Company is not expected to pay any related amounts
in 2007.
HSR of Louisiana acquired Associated pursuant to a plan and
agreement of merger entered into and closed on October 26,
2006. The owners of Associated may earn cash of up to $9,000, up
to 2,000 in common stock (upon the exercise of a warrant at an
exercise price of $.01 per share) and additional cash equal to
5% of net profits on a specified contract, pursuant to the terms
of the merger agreement among HSR of Louisiana, Associated, the
owners of Associated and the Company. The Company also agreed to
indemnify the prior owners of Associated from personal
guarantees entered into in connection with the business of
Associated prior to the merger and to use commercially
reasonable efforts to remove such persons from the personal
guarantees after the closing. As of June 30, 2007, no
amounts had been earned, accrued or paid out under these
provisions.
The Company agreed to indemnity the seller of Fireline for
certain claims arising from the Companys breach of
representations, warranties, covenants and other provisions
contained in the stock purchase agreement.
|
|
9.
|
Stock-Based
Compensation
|
At June 30, 2007, the Company maintained two shareholder
approved stock-based incentive compensation plans that permit
the issuance of equity-based compensation awards to employees,
qualified consultants and directors, including stock options and
stock purchase rights.
The Company accounts for employee and director stock-based
compensation under the fair value recognition provisions of
SFAS No. 123(R), Share Based Payment.
Compensation cost recognized during the three and six month
periods ended June 30, 2007 includes: (a) compensation
cost for all share-based payments granted and not yet vested
prior to January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS No. 123 Accounting for Stock-Based
Compensation, and (b) compensation cost for all
share-based payments granted subsequent to December 31,
2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Since
stock-based compensation expense recognized in the statements of
income for the three and six month periods ended June 30,
2007 and 2006 is based on awards
15
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
ultimately expected to vest, the compensation expense has been
reduced for estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average
forfeiture rate for the quarters ended June 30, 2007 and
2006 of approximately 2% was based on historical forfeiture
experience and estimated future employee forfeitures.
The Company calculates stock-based compensation by estimating
the fair value of each option using the Black-Scholes option
pricing model. The Companys determination of fair value of
share-based payment awards are made as of their respective dates
of grant using that option pricing model and is affected by the
Companys stock price as well as a number of subjective
assumptions. These variables include, but are not limited to,
the Companys expected stock price volatility over the term
of the awards and actual and projected employee stock option
exercise behavior. The expected term of options granted is
derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate
selected to value any particular grant is based on the
U.S. Treasury rate that corresponds to the pricing term of
the grant effective as of the date of the grant. The expected
volatility is based on the historical volatility of the
Companys stock price. These factors could change in the
future, affecting the determination of stock-based compensation
expense in future periods. The Black-Scholes option pricing
model was developed for use in estimating the value of traded
options that have no vesting or hedging restrictions and are
fully transferable. Because the Companys options have
certain characteristics that are significantly different from
traded options, the existing valuation models may not provide an
accurate measure of the fair value of the Companys
options. Although the fair value of the Companys options
is determined in accordance with SFAS No. 123(R) using
an option-pricing model, that value may not be indicative of the
fair value observed in a willing buyer/willing seller market
transaction. The calculated compensation cost is recognized on a
straight-line basis over the vesting period of the options.
Stock
Plans
The Company maintains the 1998 Stock Option Plan (the 1998
Plan) and the 2001 Stock Plan (the 2001 Plan
and collectively, the Stock Plans). The Stock Plans
are shareholder approved stock-based incentive compensation
plans that permit the issuance of equity-based compensation
awards, including incentive stock options, nonqualified stock
options and stock purchase rights. Under the Stock Plans,
incentive stock options have been granted to employees, and
non-qualified stock options have been granted to employees,
qualified consultants and board members. Stock purchase rights,
which are available under the 2001 Plan, have been granted to
directors, consultants and employees. The compensation committee
serves as the administrator of the 1998 Plan, and the entire
board of directors serves as the administrator of the 2001 Plan.
The administrator of each Stock Plan determines eligibility,
vesting schedules and exercise prices for awards granted under
the Stock Plan which it administers. The Company issues new
shares or shares held in treasury to satisfy award exercises
under its Stock Plans.
A summary of the shares reserved for grant and awards available
for grant under each Stock Plan as of June 30, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Shares Reserved
|
|
|
Awards Available
|
|
|
|
for Grant
|
|
|
for Grant
|
|
|
1998 Stock Plan
|
|
|
3,500
|
|
|
|
393
|
|
2001 Stock Plan
|
|
|
6,500
|
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
3,289
|
|
The Company issues awards to employees, qualified consultants
and directors that generally vest over time based solely on
continued employment or service during the related vesting
period and are exercisable over a five to ten year service
period. Typically, employee awards vest monthly over a three
year period, although awards are sometimes granted with
immediate vesting and in certain cases, vesting of awards has
been accelerated. Options are generally granted with an exercise
price equal to the market price of the Companys stock at
the date of grant, although in certain
16
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
instances, the exercise price has been higher than the market
price on the date of grant. Directors have typically received
immediately vested stock purchase rights at an exercise price of
$ -0- per share, which are subject to forfeiture on a
proportionate basis in the event that a directors service
terminates prior to the end of the current board term.
The fair value of each stock-based award is estimated on the
grant date using the Black-Scholes option-pricing model.
Expected volatilities are based on the historical volatility of
the Companys stock price. The expected term of options
granted subsequent to the adoption of SFAS No. 123(R)
is derived using the simplified method as defined in the
SECs Staff Accounting Bulletin 107, Implementation
of FASB 123R. The risk-free rate for periods within the
contractual life of the option is based on the
U.S. Treasury interest rates in effect at the time of
grant. The fair value of options granted was estimated using the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Expected term (in years)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Expected volatility
|
|
|
|
|
|
|
80.0
|
%
|
|
|
|
|
|
|
80.0
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
4.5
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys stock option activity is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at December 31,
2006
|
|
|
1,897
|
|
|
$
|
4.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(69
|
)
|
|
|
6.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(126
|
)
|
|
|
4.52
|
|
|
|
|
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007
|
|
|
1,702
|
|
|
$
|
4.18
|
|
|
|
6.5
|
|
|
$
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of
period
|
|
|
1,227
|
|
|
$
|
3.51
|
|
|
|
5.1
|
|
|
$
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, there was $2,736 of total unrecognized
compensation cost, net of forfeitures, related to employee and
director stock option compensation arrangements. That cost is
expected to be recognized on a straight-line basis over the next
1.3 weighted average years.
The Company recorded compensation expense related to options of
$282 and $ -0- during the three months ended June 30,
2007 and 2006, respectively, while the Company recorded $681 and
$ -0- of compensation expense related to options during the
six months ended June 30, 2007 and 2006, respectively. The
total fair value of shares vested during the six months ended
June 30, 2007 was recorded net of an estimated forfeiture
rate of 2%.
Summary
of Restricted Stock Awards
Restricted stock purchase rights are independent of option
grants and are generally subject to forfeiture of unvested
shares if employment terminates or a member of the
Companys board of directors resigns prior to the release
of the restrictions. Restricted stock purchase rights have
historically been exercised immediately for shares of restricted
stock; provided, that the restricted stock granted upon exercise
of the stock purchase rights remain subject to the related
forfeiture limitations. The Company expenses the cost of the
restricted stock awards, which is determined to be the fair
market value of the shares at the date of grant, ratably over
the period during which the restrictions lapse.
17
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
Nonvested restricted stock awards as of June 30, 2007 and
changes during the six months ended June 30, 2007 were as
follows (in thousands, except weighted average grant date fair
value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2006
|
|
|
203
|
|
|
$
|
6.40
|
|
Granted
|
|
|
112
|
|
|
|
5.54
|
|
Vested
|
|
|
(89
|
)
|
|
|
6.37
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007
|
|
|
226
|
|
|
$
|
5.97
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, there was $592 of unrecognized
stock-based compensation expense related to nonvested restricted
stock awards. That cost is expected to be recognized over a
weighted-average period of 2.8 years. The Company recorded
$570 and $-0- of compensation expense during the six months
ended June 30, 2007 and 2006, respectively, related to the
vesting of restricted stock awards and the Companys
obligation to issue restricted stock awards.
Issuance
of Stock for Non-Cash Consideration
All issuances of the Companys stock for non-cash
consideration have been assigned a dollar amount equaling either
the market value of the shares issued or the value of
consideration received, whichever is more readily determinable.
The majority of the non-cash consideration received pertains to
services rendered by consultants and others and have been valued
at the market value of the shares issued. In certain issuances,
the Company may discount the value assigned to the issued shares
for illiquidity and restrictions on resale.
The Company operates in two segments: Restoration &
Construction Services and Interior Services. For segment
reporting, the Company combines its Restoration &
Construction Services into one segment, primarily because
Restoration & Construction services are closely
related and are performed by the same operating subsidiaries and
primarily for the same customers. The Companys
Restoration & Construction services segment includes
catastrophic storm response services, water, fire and wind
restoration, general contracting services, mold remediation and
air decontamination provided to commercial, residential and
industrial properties, as well as carpet cleaning, air duct
cleaning and fabric protection services provided primarily to
residential properties. The Interior Services segment includes
interior services provided to commercial, residential and
industrial properties and cabinet production, as well as cabinet
and countertop installation services provided primarily to
residential properties. The following table summarizes selected
financial information for each operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Interior
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007
|
|
Services
|
|
|
Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
45,328
|
|
|
$
|
5,973
|
|
|
$
|
(341
|
)
|
|
$
|
50,960
|
|
Income (loss) from continuing
operations before tax
|
|
|
15,961
|
|
|
|
(390
|
)
|
|
|
(3,433
|
)
|
|
|
12,138
|
|
Net (loss) income
|
|
|
15,374
|
|
|
|
(457
|
)
|
|
|
(7,545
|
)
|
|
|
7,372
|
|
Total assets
|
|
|
87,620
|
|
|
|
14,745
|
|
|
|
130,556
|
|
|
|
232,921
|
|
Intangibles, net
|
|
|
10,813
|
|
|
|
4,817
|
|
|
|
|
|
|
|
15,630
|
|
Goodwill
|
|
|
86,592
|
|
|
|
20,131
|
|
|
|
|
|
|
|
106,723
|
|
Depreciation and amortization
|
|
|
559
|
|
|
|
193
|
|
|
|
20
|
|
|
|
772
|
|
18
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Interior
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006
|
|
Services
|
|
|
Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
14,996
|
|
|
$
|
9,158
|
|
|
$
|
|
|
|
$
|
24,154
|
|
Income (loss) from continuing
operations before tax
|
|
|
6,421
|
|
|
|
1,101
|
|
|
|
(1,575
|
)
|
|
|
5,947
|
|
Income from discontinued operations
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
975
|
|
Net (loss) income
|
|
|
6,421
|
|
|
|
2,076
|
|
|
|
(1,575
|
)
|
|
|
4,468
|
|
Total assets
|
|
|
49,537
|
|
|
|
38,090
|
|
|
|
21,238
|
|
|
|
108,865
|
|
Intangibles, net
|
|
|
3,900
|
|
|
|
5,194
|
|
|
|
|
|
|
|
9,094
|
|
Depreciation and amortization
|
|
|
155
|
|
|
|
168
|
|
|
|
64
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Interior
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007
|
|
Services
|
|
|
Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
76,713
|
|
|
$
|
15,234
|
|
|
$
|
(1,902
|
)
|
|
$
|
90,045
|
|
Income from continuing operations
before tax
|
|
|
27,415
|
|
|
|
473
|
|
|
|
(6,235
|
)
|
|
|
21,653
|
|
Net (loss) income
|
|
|
26,356
|
|
|
|
157
|
|
|
|
(13,433
|
)
|
|
|
13,080
|
|
Total assets
|
|
|
87,620
|
|
|
|
14,745
|
|
|
|
130,556
|
|
|
|
232,921
|
|
Intangibles, net
|
|
|
10,813
|
|
|
|
4,817
|
|
|
|
|
|
|
|
15,630
|
|
Goodwill
|
|
|
86,592
|
|
|
|
20,131
|
|
|
|
|
|
|
|
106,723
|
|
Depreciation and amortization
|
|
|
1,012
|
|
|
|
396
|
|
|
|
156
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Interior
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006
|
|
Services
|
|
|
Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
23,616
|
|
|
$
|
19,817
|
|
|
$
|
|
|
|
$
|
43,433
|
|
Income (loss) from continuing
operations before tax
|
|
|
8,984
|
|
|
|
3,556
|
|
|
|
(2,556
|
)
|
|
|
9,984
|
|
Income from discontinued operations
|
|
|
|
|
|
|
1,741
|
|
|
|
|
|
|
|
1,741
|
|
Net (loss) income
|
|
|
8,984
|
|
|
|
5,297
|
|
|
|
(6,690
|
)
|
|
|
7,591
|
|
Total assets
|
|
|
49,537
|
|
|
|
38,090
|
|
|
|
21,238
|
|
|
|
108,865
|
|
Intangibles, net
|
|
|
3,900
|
|
|
|
5,194
|
|
|
|
|
|
|
|
9,094
|
|
Depreciation and amortization
|
|
|
355
|
|
|
|
358
|
|
|
|
105
|
|
|
|
818
|
|
There were no intersegment sales. Operating income is defined as
third party sales less operating expenses. All of the
Companys business activities are conducted within the
United States geographic boundaries.
|
|
11.
|
Related
Party Transactions
|
Effective June 30, 2007, pursuant to the terms of an
agreement dated August 14, 2007 between the Company and
Brian Marshall, the seller of our Fireline subsidiary and a
director and the Executive Vice President of the Company, the
$21,650 seller note issued by the Company to Mr. Marshall
in partial consideration for the stock of Fireline was deemed
satisfied and paid in full (the Satisfaction
Agreement). Pursuant to the terms of the Satisfaction
Agreement, (i) the seller note is deemed satisfied, paid in
full, and cancelled, (ii) the Company is entitled to
receive the first $9,000 in net proceeds collected from certain
uncollected accounts receivable due and owing to Fireline from
the Florida Insurance Guarantee Association (FIGA),
(ii) Mr. Marshall is entitled to receive the next
$21,650 in net proceeds collected from the FIGA accounts
receivable, and (iii) the Company is entitled to receive
any additional net proceeds from the FIGA
19
Home
Solutions of America, Inc.
Notes to Condensed Consolidated Financial
Statements (Continued)
receivables over and above the amounts paid out to the Company
and Mr. Marshall pursuant to clauses (i) and
(ii) above. The Company estimates that approximately
$30 million to $49 million of the FIGA receivables
ultimately will be collected; however, there is no guaranty that
any of the FIGA receivables will be collected. The first $9,000
of net proceeds from the FIGA accounts receivable which the
Company is entitled to receive approximates the remaining
carrying value of FIGA receivables on the Companys ledger.
In addition, all accrued interest amounts were eliminated in the
transaction which had no income statement impact.
Under the terms of the Companys credit agreement with its
lender, the Company is required to obtain the consent of its
letter to the transactions contemplated by the Satisfaction
Agreement. As of the date this quarterly reported is filed with
the SEC, the Company had not obtained its lenders written
consent to the transactions contemplated by the Satisfaction
Agreement. The Company has presented the transaction to its
lender for consent and is using its best efforts to obtain such
consent. Based on these efforts, management believes that it
will obtain the written consent of its lender to the
transaction. However, management expects that its lender will
require the Company and Mr. Marshall to comply with
conditions imposed by the lender, including payment of a fee and
such other terms and conditions as are determined by the lender.
Furthermore, the Companys lender has no obligation to
consent to the transaction and it is possible that the Company
will not obtain its lenders consent to the transaction.
Because the Company has not obtained its lenders consent,
it is likely in violation of certain covenants and agreements
under its credit agreement and related loan documents with its
lender. If the Company is in breach of certain covenants and
agreements under the credit agreement, or is otherwise in
default under the credit agreement, then its lender may call the
loan into default and proceed to exercise its remedies against
the Company and its subsidiaries, including foreclosing upon all
of the assets of the Company and its subsidiaries. In that
event, the Companys operations would be materially and
substantially impaired and the Company may be unable to continue
operations.
The agreement also modifies the Companys indemnity rights
under the Fireline purchase agreement with respect to potential
indemnity claims against Mr. Marshall in that (i) the
Companys indemnity rights against Mr. Marshall under
the Fireline purchase agreement with respect to accounts
receivable are eliminated (ii) the maximum amount for
indemnity claims for which Mr. Marshall may be responsible
is reduced from an amount approximately equal to purchase price
($44,000) to 200 shares of the Companys common stock
being held in escrow, and (ii) the cap on the maximum
amount that the Company may recover from Mr. Marshall
pursuant to its indemnity rights with respect to representations
for taxes, environmental claims, the ownership of the Fireline
stock prior to the acquisition, and liens against the Fireline
assets is eliminated.
The Companys Fireline subsidiary leases a warehouse
facility from Brian Marshall, a director and the Executive Vice
President of the Company under a non-cancelable lease. The lease
term was one year through July 2007 for $15 monthly. The
Company intends to continue the lease on its current terms for
the second half of 2007. The Company also leases warehouse and
administrative spaces from a related party under cancellable
leases. The Company can vacate the spaces with 60 days
notice to the related party.
The Company leases an aircraft from an entity owned by Brian
Marshall, pursuant to a one year operating lease entered into on
June 30, 2006. The Company intends to continue to lease the
aircraft under the lease terms. The lease requires monthly
payments of $75 and is cancellable with 30 days notice. The
Company currently leases land and a building from a related
entity for a monthly rental amount of $6 pursuant to a five year
cancellable lease ending June 2011.
In the second quarter 2007, Fireline entered into an agreement
to provide construction management and contracting services to a
Tampa Bay real estate development firm that intends to develop a
retail center and corporate office site. The parent of the real
estate development firm is owned 50% by unrelated third party
investors, and 50% by an entity of which by Brian Marshall, a
director and the Executive Vice President of the Company, is a
50% owner. Our management believes the terms of the transaction
are fair and reasonable to the Company, and has requested our
Audit Committee to conduct an independent investigation to
analyze the fairness of the transaction to the Company.
Amounts due to related parties at June 30, 2007 totaled
$363. Amounts paid to related parties for various services
totaled $304 and $714 for the three and six month periods ended
June 30, 2007.
20
RISKS
ASSOCIATED WITH FORWARD-LOOKING STATEMENT INCLUDED IN THIS
FORM 10-Q
This
Form 10-Q
contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and
objectives of management for future operations, including plans
and objectives relating to the Companys acquisition
strategies and availability of capital to fund such strategies.
The forward-looking statements included herein are based on
current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions, regulatory framework, and
future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond
the control of the Company. We refer you to the section entitled
Risk Factors in Item 1A of our annual report on
Form 10-K
for the year ended December 31, 2006, for a list of
specific factors that could cause actual results to differ
materially from those indicated by our forward-looking
statements made herein and presented elsewhere by management.
Although the Company believes that the assumptions underlying
the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this
Form 10-Q
will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Furthermore, except as required by law, we do not undertake any
obligation to update forward-looking statements made herein.
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations (Dollars and shares in thousands except per share
data or where noted).
|
Overview
Home Solutions is a provider of restoration, construction and
interior services to commercial, governmental and residential
customers primarily in the southern United States.
With operations primarily in the South, Gulf Coast regions and
California, we believe that the Company is well positioned to
capitalize on the growing demand for our suite of restoration,
construction and interior services. We seek to expand our core
service offerings through the future acquisition of strategic,
specialized, profitable and well-managed companies operating in
our target markets and business segments with a proven history
of internal growth and by expanding our geographic markets.
Fiscal
2007 Highlights:
|
|
|
|
|
We continued to integrate recent acquisitions which serve to
diversify our revenue base.
|
|
|
|
The $21,650 seller note payable to Brian Marshall, the seller of
our Fireline subsidiary, was satisfied, paid in full and
cancelled pursuant to an agreement providing for
Mr. Marshall to receive certain of the proceeds from
certain designated outstanding accounts receivable. The consent
of the Companys lender, which has not been obtained, is
required. See Note 11, Related Party Transactions, for
further information.
|
|
|
|
We announced that our Fireline subsidiary has entered into a
joint venture with a New York-based construction management
firm, to develop and construct three projects including 339
residential condominiums and 160,000 square feet of mixed
use retail space located in the boroughs of Brooklyn, Manhattan
and Queens, New York. The aggregate revenue from the contracts
to Fireline is expected to exceed $100 million.
Construction under one of the three projects began during the
second quarter of 2007, slightly ahead of schedule, and is
expected to be completed by 2009. Construction of the other two
projects is expected to commence in the fourth quarter of 2007
or the first quarter of 2008. Fireline is expected to complete
approximately $12 million in work under the first of the
three projects currently under construction in 2007.
|
|
|
|
We announced that our Fireline subsidiary has been awarded a
contract valued at approximately $100 million to provide
construction management, general contracting and development
services for a 600,000 plus square foot retail center and
corporate office site located in Hillsborough County, Florida.
The project is
|
21
|
|
|
|
|
being developed by a Tampa Bay-based real estate development
firm. The parent of the real estate development firm is owned
50% by unrelated third party investors, and 50% by an entity of
which by Brian Marshall, a director and the Executive Vice
President of the Company, is a 50% owner. Our management
believes the terms of the transaction are fair and reasonable to
the Company, and has requested our Audit Committee to conduct an
independent investigation to analyze the fairness of the
transaction to the Company.
|
|
|
|
|
|
We continued in our efforts to implement a companywide general
ledger program which will centralize our accounting function
while simultaneously eliminating several of our reported
internal control weaknesses.
|
|
|
|
We amended our credit agreement with our lenders which included
the following revisions: (1) The percentage of eligible
accounts receivable (as defined in the credit agreement) used to
calculate the borrowing base is increased from 80% to 85% from
the period from April 1, 2007 through December 31,
2007, and thereafter, is reduced to 80%; and (2) The
interest rate on advances under the line of credit will remain
at its current rate of prime less 0.25% until December 31,
2007, and thereafter, it will be reduced to prime less 0.50%.
Prior to the modification, the credit agreement provided for the
reduction in the interest rate to begin on July 1, 2007.
|
Growth
Strategy
Our growth strategy is to target markets that are (i) prone
to flooding, hurricanes, tornados, fires or other naturally
occurring and repetitive weather emergencies,
and/or
(ii) experiencing robust commercial or residential
development, and penetrate these markets through internal growth
of our existing operating subsidiaries and a well-executed
acquisition program to expand the Companys service
offerings. During 2006, we significantly grew our restoration
and construction business segment by acquiring Fireline, a
general contractor operating in Florida and Louisiana, effective
July 2006 and through the acquisition by our wholly-owned
subsidiary, HSR of Louisiana, of Associated in October 2006.
These acquisitions significantly expanded our business
development and general contracting capabilities. In addition to
restoration services, our operations now include full
construction services. We continue to service the construction
and rebuilding effort associated with the 2005 hurricanes, which
is currently underway, and we have positioned the Company to
take advantage of other opportunities in the construction
segment that are not disaster-related. The Company plans to take
advantage of the opportunity to service these areas through each
stage with each of its restoration, construction and interior
services offerings.
We also see the opportunity to further capitalize on the
residential housing market in our target geographic markets
through the expansion of our relationships with retailers,
including Home Depot.
Service
Offerings
The Companys business consists of two integrated service
offerings: (i) restoration and construction services and
(ii) interior services. See Note 10
Segment Reporting for additional segment information.
Restoration
and Construction Services
Home Solutions is an emerging restoration and construction
services company, offering diversified general contracting,
restoration, construction management and design-build services
to private clients and public agencies primarily throughout the
southern United States and California, and we have recently
expanded our construction services into Washington and New York.
We have established a strong reputation within our markets by
executing significant projects on time and within budget while
adhering to strict quality control measures. We offer general
contracting, preconstruction planning and comprehensive project
management services, including planning, scheduling and
providing the manpower, equipment, materials and subcontractors
required for a project. A portion of our work requires surety
bonding and the Company has surety bonding agreements with
various institutions to meet its bonding needs. We also serve as
the subcontractor on projects in the same markets.
The Companys recovery services include catastrophic storm
response, clean up and removal of debris, initial set up
services in an impacted area (including power, lodging,
sustenance and training), water mitigation, drying,
dehumidification and preparing affected areas for the next stage
of restoration and rebuilding. Our trained
22
employees provide onsite first response to respond to fire,
water and weather-related emergencies in our target markets to
both commercial, residential and governmental clients. Our
restoration services include servicing the next stage of the
project after the initial clean up and catastrophic storm
response. Restoration services include water, fire and wind
restoration, mold remediation, contents restoration, air
decontamination, asbestos and lead paint removal, cleaning,
drying, and deodorization of carpet and furniture and moving and
storage services. Our restoration and recovery services are
currently provided in regional markets in the states of Florida,
Louisiana, Mississippi, Alabama, Georgia, South Carolina, Texas
and California.
Fireline, which specializes in disaster recovery services and
insurance estimates and repairs for commercial, industrial and
residential properties, is certified in multiple aspects of the
restoration industry, including smoke, fire, water and mold.
Fireline and HSR of Louisiana are licensed as general
contractors in Louisiana, respectively, and offer full interior
and exterior restoration and reconstruction services in those
states. Restoration business segment services are also provided
through PW Stephens, Inc. (PWS) and Fiber Seal
Systems, L.P. (FSS), two of our wholly-owned
subsidiaries. PWS provides water and fire restoration services,
air decontamination and removal of mold, asbestos and lead paint
in California and, to a lesser extent, in Florida, and FSS
provides cleaning, drying and deodorization of carpet and
furniture as well as moving and storage services in
24 states and the District of Columbia.
We provide the following recovery, restoration and construction
services:
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Recovery: Our recovery services include
providing initial set up services in an impacted area (including
power, lodging, and training) and then providing the drying,
dehumidification, cleanup and removal of debris from commercial
and residential areas to prepare the areas for the next stage of
restoration. We provide these services on an hourly rate to our
commercial and residential clients, both as a contractor and as
a subcontractor to customers providing additional services in
these markets.
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Fire and Water Damage Restoration: We provide
trained employees to respond to fire, water and weather-related
emergencies, to inspect structural members and contents damaged
by water, to determine the likelihood or extent of mold growth
and to provide immediate cleaning, drying, moving, storage and
deodorization, among other services.
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Construction: The Companys construction
services include general contracting work and subcontracting
work. Our services are provide to a number of high growth
companies and specialized building markets, including
hospitality and gaming, insurance, education and healthcare
markets, as well as to state and local government agencies and
districts.
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Indoor Air Contamination: Through PWS, we
provide indoor air contamination services, including
contamination from mold, asbestos and lead paint. With increased
media attention regarding the health threat of mold, fewer
insurance options and property transfers at risk, current market
conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist
of property and system inspections, surface and air testing,
project design, microbial removal, light interior demolition,
repair and specialized cleaning work. Customer opportunities are
developed through a regional sales force as well as through
referrals by real estate firms, insurance adjusters, mortgage
companies, attorneys and nationally-branded retailers.
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Cleaning and Fabric Protection: Through FSS,
we provide fabric protection services to protect furniture,
carpet and draperies from stains and daily wear through both
Company-owned locations and over forty licensed locations. This
niche market is primarily targeted at above-average income
homeowners. We also provide air duct cleaning services to remove
particulate (organic and inorganic) material, which can cause
allergic reactions and is often the breeding ground for many
types of mold, from heating and air conditioning systems.
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Interior
Services
Through our wholly-owned subsidiaries, Southern Exposure
Unlimited of Florida, Inc. (Southern Exposure) and
Cornerstone Marble and Granite, Inc. (formerly known as
Cornerstone Building and Remodeling, Inc.
(Cornerstone), we offer cabinet and countertop
installation services. Southern Exposure manufactures and
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installs a high-end product line of cabinets and countertops.
Cornerstone installs custom marble and granite countertops for
residential customers. Currently, we manufacture cabinets and
install cabinets and kitchen countertops for Centex Corporation
(Centex), in its southwest Florida market. We also
install granite countertops for Home Depot, Inc. (Home
Depot) in Florida, Georgia, Alabama and South Carolina.
The Home Depot contract may be terminated at any time upon
notice to us. Furthermore, Home Depot is not obligated to use
our services under these contracts. We have no contract with
Centex, and Centex is not obligated to buy our products or use
our services. We also have granite fabrication and installation
operations in Southern California which services the residential
and multi-family markets.
Critical
Accounting Policies
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
effect on our revenues, income from operations, and net income,
as well as on the value of certain assets on our consolidated
balance sheets. We believe that there are several accounting
policies that are critical to an understanding of our historical
and future performance as these policies affect the reported
amounts of revenues, expenses, and significant estimates and
judgments applied by management. While there are a number of
accounting policies, methods and estimates affecting our
financial statements, areas that are particularly significant
include allowance for doubtful accounts, recoverability of
long-lived assets (including goodwill), revenue recognition,
stock-based compensation, and deferred taxes. See
Note 1 Basis of Presentation and Summary of
Significant Accounting Policies to the financial
statements included in this report for further discussion of our
accounting policies.
Allowance
for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. The allowance for doubtful accounts is based
on specific identification of customer accounts and our best
estimate of the likelihood of potential loss, taking into
account such factors as the financial condition and payment
history of major customers. We evaluate the collectibility of
our receivables at least quarterly. If the financial condition
of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be
required. The differences could be material and could
significantly impact cash flows from operating activities.
Impairment
of Long-Lived Assets
The Companys management assesses the recoverability of its
long-lived assets upon the occurrence of a triggering event by
determining whether the depreciation and amortization of
long-lived assets over their remaining lives can be recovered
through projected undiscounted future cash flows. The amount of
long-lived asset impairment is measured based on fair value and
is charged to operations in the period in which long-lived asset
impairment is determined by management.
Goodwill
Goodwill represents the excess of acquisition cost over the net
assets acquired in a business combination and is not amortized
in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The provisions of SFAS No. 142
require that the Company allocate its goodwill to its various
reporting units, determine the carrying value of those
businesses, and estimate the fair value of the reporting units
so that a two-step goodwill impairment test can be performed. In
the first step of the goodwill impairment test, the fair value
of each reporting unit is compared to its carrying value.
Management reviews, on an annual basis, the carrying value of
goodwill in order to determine whether impairment has occurred.
Impairment is based on several factors including the
Companys projection of future discounted operating cash
flows. If an impairment of the carrying value were to be
indicated by this review, the Company would perform the second
step of the goodwill impairment test in order to determine the
amount of goodwill impairment, if any.
24
Revenue
Recognition
The Company recognizes revenue in accordance with
SAB No. 101, Revenue Recognition in Financial
Statements, as revised by SAB 104. As such, the Company
recognizes revenue when persuasive evidence of an arrangement
exists, title transfer has occurred, the price is fixed or
readily determinable and collectibility is probable. Sales are
recorded net of sales discounts.
PWS, FSS, HSR of Louisiana and Fireline recognize revenue at the
time the contract and related services are performed.
Southern Exposure and Cornerstone recognize revenue for product
sales at the time the related products are shipped to the
customer. These subsidiaries recognize revenue for installation
jobs upon complete installation of the cabinets or countertops
and inspection by the customer. Deferred revenue represents
amounts billed to customers and collected prior to completion of
the installation of the cabinets or countertops and inspection
by the customer.
Fireline and HSR of Louisiana also recognize revenue from
certain jobs using the percentage-of-completion method. Under
the percentage-of-completion method, revenues with respect to
individual contracts are recognized in the proportion that costs
incurred to date bear to total estimated costs and progress
towards completion. These estimates are dependent upon judgments
including material costs and quantities, labor productivity,
subcontractor performance and other costs. In addition, disputes
on our projects can and sometimes do occur with our customers,
subcontractors and equipment vendors that require significant
judgment as to the ultimate resolution and may take an extended
period of time to resolve. As projects are executed, estimates
of total revenues and total costs at completion are refined and
revised. These estimates change due to factors and events
affecting execution and often include estimates for resolution
of disputes that may be settled in negotiations or through
arbitration, mediation or other legal methods. The
percentage-of-completion method requires that adjustments to
estimated revenues and costs, including estimated claim
recoveries, be recognized on a cumulative basis, when the
adjustments are identified. When these adjustments are
identified near or at the end of a project, the full impact of
the change in estimate would be recognized as a change in the
gross profit on the contract in that period. This can result in
a material impact on our results for a single reporting period.
General and administrative costs are not allocated to contract
costs and are charged to expense as incurred.
Stock-Based
Compensation
The Company maintains two shareholder approved stock-based
incentive compensation plans that permit the issuance of
equity-based compensation awards to employees, qualified
consultants and directors, including stock options and stock
purchase rights.
The Company accounts for stock-based compensation under the fair
value recognition provisions of SFAS No. 123(R),
Share-Based Payment. Compensation cost recognized in the
six months ended June 30, 2007, includes:
(a) compensation cost for all share-based payments granted
and not yet vested prior to January 1, 2006, based on the
grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and (b) compensation cost for
all share-based payments granted subsequent to December 31,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Since
stock-based compensation expense recognized in the statement of
operations for the three and six month periods ended
June 30, 2007 and 2006 is based on awards ultimately
expected to vest, the compensation expense has been reduced for
estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. We estimated forfeitures to be 2% of the
awards issued.
Our assessment of the estimated fair value of the stock options
granted is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables and the
related tax impact. We utilize the Black-Scholes model to
estimate the fair value of stock options granted. The fair value
of stock purchase rights is based on the market price of our
common stock on the grant date.
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The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. This model also
requires the input of highly subjective assumptions including:
(a) The expected volatility of our common stock price,
which we determine based on historical volatility of our common
stock over the expected term of the award;
(b) Expected dividends (which do not apply, as we do not
anticipate issuing dividends);
(c) Expected term of the award, which is estimated based on
the historical award exercise behavior of our employees; and
(d) The risk-free interest rate which we determine based on
the yield of a U.S. Treasury bond whose maturity period
equals the options expected term.
In the future, we may elect to use different assumptions under
the Black-Scholes valuation model or a different valuation
model, which could result in a significantly different impact on
our net income or loss.
Deferred
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not
realize tax assets through future operations. Additionally, the
Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on
January 1, 2007. FIN 48 is an interpretation of
SFAS No. 109 and seeks to reduce the diversity in
practice associated with certain aspects of measurement and
recognition in accounting for income taxes. FIN 48
prescribes a recognition threshold and measurement requirement
for the financial statement recognition of a tax position that
has been taken or is expected to be taken on a tax return.
FIN 48 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. Under FIN 48 the Company may
only recognize or continue to recognize tax positions that meet
a more likely than not threshold. There was no
impact on the Companys financial statements as a result of
the implementation of FIN 48.
Results
of Operations (Dollars and Shares in Thousands)
Comparison
of the three months ended June 30, 2007 to the three months
ended June 30, 2006
Restoration
and Construction Services
Net Sales. Revenue for the three months
ended June 30, 2007 was $45,328 compared to $14,996 for the
three months ended June 30, 2006. The increase from the
same period in 2006 is due primarily to the inclusion of
Fireline and Associated sales as a result of the acquisitions
and continued work in Florida and Louisiana, and the increased
revenues generated from HSR of Louisiana in the New Orleans
region as a result of post-hurricane Katrina rebuilding efforts.
Costs of Sales. Costs of sales for the
three months ended June 30, 2007 were $23,049 compared to
$6,562 for the three months ended June 30, 2006. The
increase in the total costs of sales from the same period in
2006 is due to the inclusion of Fireline and Associated costs as
a result of the acquisitions and continued work in Florida and
Louisiana, as well as HSR of Louisianas costs relating to
the increased work in the New Orleans region. Costs of sales as
a percentage of sales for the three months ended June 30,
2007 and 2006 were 50.8% and 43.8%, respectively. As expected,
gross margins were higher in the second quarter of 2006 than in
the same period in 2007 due to emergency-related restoration
work following the 2005 hurricanes, which traditionally
generates higher
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margins than construction work. In addition, the increased
volume of restoration work completed in 2007 was at lower
margins than the prior year.
Selling, General and Administrative
Expenses. Selling, general and administrative
(SG&A) expenses were $5,984 for the three
months ended June 30, 2007, compared to $2,016 for the
three months ended June 30, 2006. This represents an
increase of $3,968 from the same period in 2006, primarily due
to the inclusion of Fireline and Associateds operations as
a result of the acquisitions, effective July 1, 2006, as
well as increased costs associated with HSR of Louisianas
expanded operations in the Louisiana market. SG&A expenses
as a percentage of sales for the three months ended
June 30, 2007 and 2006 were 13.2% and 13.4%, respectively.
Interior
Services
Net Sales. Revenue for the three months
ended June 30, 2007 from continuing operations was $5,632,
compared to $9,158 for the three months ended June 30,
2006. The decrease from the same period in 2006 is due primarily
to a reduction in Southern Exposure and Cornerstones
cabinet and countertop sales as the new construction market in
the Florida market has experienced a decline from 2006.
Costs of Sales. Costs of sales for the
three months ended June 30, 2007 from continuing operations
were $4,164, compared to $6,219 for the three months ended
June 30, 2006. The decrease in total costs of sales from
the prior period in 2006 is due to the decrease in Southern
Exposure and Cornerstones sales. Segment costs of sales as
a percentage of sales for the three months ended June 30,
2007 and 2006 was 73.9% and 67.9%, respectively.
Selling, General and Administrative
Expenses. SG&A expenses were $1,852 for
the three months ended June 30, 2007, compared to $1,859
for the three months ended June 30, 2006. Segment SG&A
as a percentage of segment sales for the three months ended
June 30, 2007 and 2006 were 32.9% and 20.3%, respectively.
Corporate
Selling, General and Administrative
Expenses. Corporate SG&A expenses were
$2,646 for the three months ended June 30, 2007, compared
to $1,596 for the three months ended June 30, 2006. The
increase from the same period in 2006 is due primarily to
increased legal, professional fees and consulting fees of $594
associated with corporate governance Sarbanes-Oxley compliance
as well as board of director compensation of $334.
Other Income (Expense). Interest
expense was $1,209 for the three months ended June 30,
2007, compared to $58 for the three months ended June 30,
2006. The increase in interest expense is related to increases
in amounts outstanding pursuant to the bank line of credit and
the Fireline seller note.
Income Taxes. Income tax expense was
$4,602 for the three months ended June 30, 2007 compared to
$2,246 for the three months ended June 30, 2006. In 2006,
the Company utilized its net operating loss tax carry forward
provision to offset 2006 federal taxable income, resulting in a
reduction in taxes.
Comparison
of the six months ended June 30, 2007 to the six months
ended June 30, 2006
Restoration
and Construction Services
Net Sales. Revenue for the six months
ended June 30, 2007 was $76,713 compared to $23,616 for the
six months ended June 30, 2006. The increase from the same
period in 2006 is due primarily to the inclusion of Fireline and
Associated sales as a result of the acquisitions and continued
work in Florida and Louisiana, and the increased revenues
generated from HSR of Louisiana in the New Orleans region as a
result of post-hurricane Katrina rebuilding efforts.
Costs of Sales. Costs of sales for the
six months ended June 30, 2007 were $37,462 compared to
$9,446 for the six months ended June 30, 2006. The increase
in the total costs of sales from the same period in 2006 is due
to the inclusion of Fireline and Associated costs as a result of
the acquisitions and continued work in Florida and Louisiana, as
well as HSR of Louisianas costs relating to the increased
work in the New Orleans region. Costs of sales as a percentage
of sales for the six months ended June 30, 2007 and 2006
were 48.8% and 40.0%, respectively.
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Selling, General and Administrative
Expenses. SG&A expenses were $10,830 for
the six months ended June 30, 2007, compared to $5,183 for
the six months ended June 30, 2006. This represents an
increase of $5,647 from the same period in 2006, primarily due
to the inclusion of Fireline and Associateds operations as
a result of the acquisitions, effective July 1, 2006, as
well as increased costs associated with HSR of Louisianas
expanded operations in the Louisiana market. SG&A expenses
as a percentage of sales for the six months ended June 30,
2007 and 2006 were 14.1% and 21.9%, respectively.
Interior
Services
Net Sales. Revenue for the six months
ended June 30, 2007 from continuing operations was $13,332,
compared to $19,817 for the six months ended June 30, 2006.
The decrease from the same period in 2006 is due primarily to a
reduction in Southern Exposure and Cornerstones cabinet
and countertop sales as the new construction market in the
Florida market has experienced a decline from 2006.
Costs of Sales. Costs of sales for the
six months ended June 30, 2007 from continuing operations
were $9,111, compared to $12,666 for the six months ended
June 30, 2006. The decrease in total costs of sales from
the prior period in 2006 is due to the decrease in Southern
Exposure and Cornerstones sales. Segment costs of sales as
a percentage of sales for the six months ended June 30,
2007 and 2006 was 68.3% and 63.9%, respectively.
Selling, General and Administrative
Expenses. SG&A expenses from continuing
operations were $3,786 for the six months ended June 30,
2007, compared to $3,642 for the six months ended June 30,
2006. This represents an increase of $144 from the same period
in 2006, primarily due to the expansion of operational support
and sales growth and the expansion of Cornerstone into new
markets to service additional Home Depot locations and increased
transportation costs associated with fuel expenses. Segment
SG&A as a percentage of segment sales for the six months
ended June 30, 2007 and 2006 were 28.4% and 18.4%,
respectively.
Corporate
Selling, General and Administrative
Expenses. Corporate SG&A expenses were
$5,096 for the six months ended June 30, 2007, compared to
$2,595 for the six months ended June 30, 2006. The increase
from the same period in 2006 is due primarily to increased
legal, professional fees and consulting fees of $1,263
associated with corporate governance, Sarbanes-Oxley compliance
and board of director compensation of $716. Corporate SG&A
expenses for the six months ended June 30, 2007 and 2006 as
a percentage of total sales were 5.7% and 6.0%, respectively.
Other Income (Expense). Interest
expense was $2,273 for the six months ended June 30, 2007,
compared to $118 for the six months ended June 30, 2006.
The increase in interest expense is related to the bank line of
credit and the Fireline seller note.
Income Taxes. Income tax expense was
$8,254 for the six months ended June 30, 2007 compared to
$3,668 for the six months ended June 30, 2006. In 2006, the
Company utilized its net operating loss tax carry forward
provision to offset 2006 federal taxable income, resulting in a
reduction in taxes.
Liquidity
and Capital Resources
The Companys existing capital resources as of
June 30, 2007, consist of cash and accounts receivable
totaling $86,950, compared to cash and accounts receivable of
$66,819 as of December 31, 2006. A portion of our accounts
receivable is derived from hurricane disaster recovery work,
which is due from government agencies or entities owned by the
U.S. Government and insurance companies. These receivables
traditionally have periods of collection that are longer than
collection periods for general contracting work, which could
negatively affect our working capital. If our estimated amounts
recoverable on these projects differ from the amounts ultimately
collected, those differences will be recognized as income or
loss and our earnings and cash flows could be materially
impacted. The Company believes that its current financing
arrangements are sufficient to finance its working capital needs
for the next twelve months. However, continued implementation of
the Companys strategic plan of expanding our core service
offerings through the future acquisition of strategic,
specialized, profitable and well-managed companies will require
additional capital.
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In June 2006, Southern Family Insurance (Southern)
was placed in liquidation. Southern was the insurance carrier on
two of Firelines significant customers. At June 30,
2007, the Company had net accounts receivable from these
customers aggregating approximately $29,000. Southern was an
admitted insurance carrier in Florida and state statutes insure
the payment of valid claims by the Florida Insurance Guarantee
Association (FIGA). Fireline initiated legal actions
against the homeowners associations to protect its claims and to
assist in collecting the balances due under the accounts
receivable in the circuit court of the Nineteenth Judicial
Circuit in and for Indian River County, Florida. In settlement
of these claims, the defendants assigned their claims against
FIGA to Fireline, and as a result the litigation against the
homeowners associations has been or is being dismissed and
Fireline is pursuing the FIGA claims directly. The Company
believes that the assignment of the homeowners association
claims against FIGA to Fireline will assist the Company in
recovering the balances due under the accounts receivable. As of
June 30, 2007, the Company assigned a portion of the right
to receive the proceeds of the uncollected FIGA receivables to
satisfy the $21,650 seller note due to the previous owner of
Fireline. See note 11, Related Party Transactions, for more
details regarding the satisfaction of the seller note. The
Company anticipates collection of a portion of the FIGA
receivables in 2007 and the Company expects that the amounts
collected will approximate the carrying amount of the
receivables that remain on the balance sheet. However, there is
no guaranty that the Company or Fireline will collect any
amounts from FIGA.
On March 30, 2007, the Company entered into an amendment to
its credit agreement, which modified its line of credit as
follows:
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the percentage of eligible accounts receivable (as defined in
the credit agreement) used to calculate the borrowing base is
increased from 80% to 85% from the period from April 1,
2007 through December 31, 2007, and thereafter, was reduced
to 80%; and
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the interest rate on advances under the line of credit will
remain at its current rate of prime less 0.25% until
December 31, 2007, and thereafter, it will be reduced to
prime less 0.50%. Prior to the modification, the credit
agreement provided for the reduction in the interest rate to
begin on July 1, 2007.
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The Company paid a fee of $100 to the lenders providing the
credit facility in connection with the amendment.
During the six months ended June 30, 2007, the Company used
net cash from operating activities of $13,476, which included
net income of $13,080. These funds were used mainly to fund
current projects related to the Companys backlog which, at
June 30, exceeded $300 million. The Companys
investing activities used net cash of $858 primarily from cash
advanced on notes receivable and purchases of equipment.
The Companys net cash provided by financing activities of
$10,267 was primarily due to cash flow proceeds from the
Companys line of credit which was partially offset by
outlays for principal payments on long-term debt and capital
leases, payments on amounts due to seller and distributions to a
minority stockholder. As of June 30, the Company had
approximately $14,945 available to borrow under its current
credit facility.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Our primary market risk exposure relates to changes in interest
rates. We are not subject to any foreign currency exchange rate
risk or commodity price risk, or any other material market rate
or price risks. We use short-term debt financing and working
capital primarily to fund short-term uses and acquisitions and
generally expect to refinance such borrowings with cash from
operating activities or long-term debt.
We had $39,611 of variable rate debt outstanding at
June 30, 2007. The annual interest rate on our bank term
loan and line of credit is equal to the higher of (a) the
prime rate of interest as quoted in the Wall Street Journal,
less 25 basis points (0.25%) for periods prior to
December 31, 2007, and less 50 basis points (0.50%)
for periods after December 31, 2007, or (b) the
federal funds rate, as published by the Federal Reserve Bank of
New York, plus 25 basis points (0.25%) for periods prior to
December 31, 2007. If the prime rate were higher by 1%, the
interest expense would have increased by $99. Conversely, if the
prime rate was lower by 1%, interest expense would have
decreased by $99.
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Item 4.
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Controls
and Procedures
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Evaluation
of disclosure controls and procedures
The term disclosure controls and procedures (defined
in SEC
Rule 13a-15(e))
refers to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within required time periods. Our management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this most recent fiscal quarter. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 30, 2007, such controls and
procedures were ineffective.
Our management is responsible for establishing and maintaining a
system of disclosure controls and procedures that provide
reasonable assurance that information required to be disclosed
our Company in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management is also responsible for establishing and
maintaining an adequate level of internal controls over
financial reporting. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accounting principles accepted in the United States of
America (GAAP). Internal control over financial
reporting includes policies and procedures that:
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the Companys assets that could have a material effect on
the consolidated financial statements.
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Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with existing policies or procedures may
deteriorate.
The following material weaknesses in our internal control over
financial reporting were reported in our 2006 Annual Report on
Form 10-K
filed with the United States Securities and Exchange Commission
on March 19, 2007:
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Management did not maintain effective controls over management
review of user accounts at any location within the Company
because of a lack of segregation of duties within each
application.
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The Company did not maintain effective control environment
because it lacked (1) the appropriate communication of the
code of conduct, employee handbook and fraud policy (2) the
appropriate documentation related to personnel responsibilities
and performance, (3) appropriate human resource policies
regarding personnel matters, and (4) an internal audit
function.
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Management did not maintain effective controls over
stock/options. A reconciliation of the Companys
outstanding shares against the stock transfer agents
records historically is not performed. Also, journal entries to
record compensation expense and option exercises were not
reviewed and approved by the CFO. Finally, the Companys
registered public auditing firm noted during the financial
statement audit for the year ended December 31, 2006 that
Board of Director compensation expense was erroneously recorded
as prepaid expenses ($254,000) in the second quarter of 2006.
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The Company did not maintain effective internal controls over
income taxes because documentation of the review and approval of
the income tax returns, quarterly tax estimates, and tax journal
entries were not present.
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The Company did not maintain effective controls over the
accounts payable and expenditures cycle because (1) vendor
maintenance request forms were incomplete and were completed
after all additions had already been entered into the system,
(2) vendor maintenance requests were not approved,
(3) no purchases journal was maintained by the accounts
payable clerk and not all purchase orders matched the invoices
(and there was support for variances), (4) managers were
not signing all invoices when the product/service is received to
ensure that the product/service is acceptable prior to payment,
(5) not all invoices contained documentation of the
approval and GL coding provided by the controller,
(6) expense reports were not reviewed and approved prior to
payment, (7) wire transfers were not approved and one
person has the ability to initiate and perform a wire transfer,
(8) goods and services received but not invoiced are not
tracked to ensure timely recording of all expenditures,
(9) the accounts payable system did not prevent entry of
duplicate invoices, (10) there was no indication that
review of check registers tested had occurred, (11) for
invoices that did not match the amount paid per the check stub,
there was no explanation provided on the invoice explaining or
reconciling the variance, (12) lack of segregation of
duties, (13) check registers were not reviewed and
approved, (14) the Companys registered public
accounting firm noted several adjustments related to the
accounts payable cycle and the fact that a vendor statement did
not agree to the general ledger.
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At three locations, management did not maintain effective
controls over accounts receivables and sales because:
(1) masterfile changes were not approved, and the
masterfile was not reviewed for validity, accuracy, completeness
and timely recording of changes, (2) individual contracts
were not approved, (3) copies of lien waivers and copies of
invoices were not provided as support for several sales,
(4) there was no evidence of a reviewed and approval of
invoices, (5) cash receipts were not reviewed and approved,
(6) posted cash receipt entries were not reviewed,
(7) the appropriate accounts receivable and sales were not
reviewed and approved, (8) a lack of access and segregation
of duties was noted, (9) management noted during the
financial statement audit that some sales were recorded twice,
(10) the appropriate approval of contracts were not
documented, (11) invoices to accounts receivable subledger
reconciliation was not independently reviewed, (12) account
receivable subledger to general ledger reconciliation was not
independently reviewed, (13) cash receipts record (log) was
not reviewed and no one verified that cash receipts are posted
to the correct account.
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At one location, management did not maintain effective controls
over the inventory function because (1) an inventory
tracking system (subledger) was not maintained; therefore, no
reconciliation to the general ledger could be performed,
(2) an inventory master list was not being maintained,
(3) matching of the receipts with the purchase order and
bill of lading was not performed and the quality inspection is
not performed, (4) the entries to record the receipt of
inventory in the general ledger were not reviewed/approved,
(5) a review of the inventory records to ensure that all
issuances were properly approved was not performed,
(6) lack of segregation of duties and access authorization
was noted, (7) quarter inventory adjustments were not
reviewed, (8) lack of appropriate documentation for the
inventory count was noted, (9) finally, during the
financial statement audit the auditor made an adjustment to
inventory.
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At three locations, the Company did not maintain effective
internal controls over Financial Closing and Reporting because
(1) not all journal entries have adequate support, nor are
all journal entries approved, (2) all required elements
were not included in the controllers monthly binder(s),
(e.g. bank reconciliations, bank statements, and the
reconciliation for intercompany accounts), (3) no
supporting inventory documentation was submitted as a part of
the financial package, (4) no sales and expenses cutoff
review were performed, (5) lack of access controls to the
chart of accounts and the rights within the accounting software,
(6) no approval for changes to the chart of accounts was
noted, (7) no review and approval of the financial
reporting packages to the supporting general ledgers was noted,
(8) management did not use a generally accepted accounting
principles (GAAP) disclosure checklist in preparing and
reviewing draft financial statements to ensure accuracy,
completeness and consistency of required disclosures, and
(9) each financial-statement disclosure was not
independently reviewed and validated for appropriate
assumptions,
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31
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methodology, and presentation of all relevant information in
accordance with generally accepted accounting principles.
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At one location, management did not maintain effective controls
over the fixed asset cycle because (1) a fixed asset policy
existed but there was no evidence of review and approval and the
fixed asset policy had not been distributed to the person who
codes and records all purchases, including fixed asset purchases
to the general ledger (accounts payable clerk), (2) capital
expenditure forms were not completed for all fixed asset
acquisitions. One asset was purchased using the expense
reimbursement process and not recorded, (3) reconciliation
of fixed assets and accumulated depreciation was not performed
and reviewed, (4) management did not review the fixed asset
ledger at least quarterly to ensure compliance, (5) fixed
asset inventory review, documentation and approval are not
performed, any required impairment adjustments are not recorded,
(6) the monthly depreciation expense journal entry prepared
is not reviewed as part of the monthly closing and journal entry
review processes, (7) no documentation of the approval of
the disposal of assets was noted, (8) management does not
review the purchase journal and invoices to ensure that fixed
assets are recorded in the proper period. The journal entry and
support was not put into a monthly binder and reviewed quarterly
by the corporate controller.
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At one location, management did not maintain effective controls
over the payroll function because (1) no authorization for
hiring employees was noted, (2) no review of the employee
master file occurred, (3) no review and approval of
timekeeping was noted, (4) no reconciliation was prepared
and there was no documented review of the comparison of
timesheets to paychecks, and (5) no control over the
distribution of paychecks was noted.
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Each of the control deficiencies described above could result in
a misstatement of the aforementioned accounts or disclosures
that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be
prevented or detected.
Remediation
of Material Weaknesses
During the quarter ended June 30, 2007, the Company
executed the steps necessary to remediate the material
weaknesses related to the accounts payable and expenditures
cycle at two of five locations, which were identified as of
December 31, 2006.
During the quarter ended June 30, 2007, the Company
executed the steps necessary to remediate the material
weaknesses related to the accounts receivable and sales cycle at
one of three locations, which were identified as of
December 31, 2006.
During the quarter ended June 30, 2007, the Company
executed the steps necessary to remediate the material
weaknesses related to the financial reporting and closing at one
of three locations, which were identified as of
December 31, 2006.
In July 2007, our audit committee commenced an investigation to
review certain public disclosures and related matters with
respect to which the Company had received informal inquiries
from the SEC and Nasdaq. The review was not complete as of
June 30, 2007. The Company is cooperating with the SEC and
Nasdaq in responding to such inquiries. Management believes that
the results of the audit committee investigation will provide
management with insight that will assist management in enhancing
the Companys disclosure controls and procedures.
Based on the fact numerous material weaknesses are present, we
have begun to institute control improvements that we believe
will reduce the likelihood of errors and omissions.
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We are devoting more resources to developing and communicating
an anti-fraud program, code of conduct policies and human
resource polices to our employees and management. The program
may include the hiring of outside or in-house counsel to be
dedicated to the development and enforcement of compliance
programs. Background checks are being performed on personnel
being placed into positions of material responsibility. The
compliance program also will include a communication project to
set the right tone from the top. Additionally, we are expending
significant resources to following up on addressing control
deficiencies identified in the previous audits;
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32
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The Company intends to develop additional policies and
procedures to further strengthen its reporting, including the
areas of, sales and expense cut-off and sales returns, financial
reporting and disclosure procedures. In addition, we anticipate
hiring additional resources to perform the internal audit
function;
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The Company is evaluating the implementation of an ERP Suite to
address certain of the material weaknesses listed in the
Management Report on Internal Controls Over Financial Reporting,
including the effective control over period-end financial close
and reporting and the effective control over certain accounting
functions. The ERP implementation should facilitate the
appropriate review and approval over the recording of journal
entries to ensure the accuracy and completeness of the journal
entries recorded. Additionally, the Company will make changes to
its corporate accounting staff, including the hiring or
contracting of additional personnel;
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Additional segregation of duties and appropriate review,
approval, and supporting documentation will be installed in 2007
to maintain effective controls over the disbursement function.
We are developing policies for proper documentation, review and
approval related to subsidiary operations, compensation, expense
reimbursements;
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Additional segregation of duties and appropriate review,
approval, and supporting documentation will be implemented in
2007 to maintain effective controls over the fixed asset and
payroll functions;
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With the implementation of an ERP the financial reporting
package, we should be able to further restrict access to the
inventory detail schedule used to support the general ledger
balances. With additional implementation of ERP applications, we
plan to eventually replace the current periodic inventory
system, relying on monthly inventory counts using physical
inventory count sheets, with a perpetual inventory system.
Meanwhile, more procedures will be installed for review of
inventory count documentation;
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Additional processes will be instituted to timely resolve
identified accounting and legal issues so that period-end
financial statements and reporting can be timely
completed; and
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Management intends to review our internal disclosure policies
and procedures to ensure that they provide reasonable assurance
that information required to be disclosed in our reports that
are filed or submitted under the Exchange Act is accumulated and
communicated to our management, as appropriate to allow timely
decisions regarding required disclosure.
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Furthermore, certain of these remediation efforts, primarily
associated with our information technology infrastructure and
related controls, have and will require significant ongoing
effort and investment. Our management, with the oversight of our
audit committee, will continue to identify and take steps to
remedy known material weaknesses as expeditiously as possible
and enhance the overall design and capability of our control
environment and our public disclosures. We intend to further
expand our staff, accounting policy and controls capabilities by
attracting additional talent and enhancing training in such
matters. We believe that the foregoing actions will continue to
improve our internal control over financial reporting, as well
as our disclosure controls and procedures.
If the remedial policies and procedures we plan to implement are
insufficient to address the material weakness or if additional
significant deficiencies or other conditions relating to our
internal controls are discovered in the future, we may fail to
meet our future reporting obligations, our financial statements
may contain material misstatements and our operating results may
be adversely affected. Any such failure could also adversely
affect the results of the periodic future management evaluations
and annual auditor attestation reports regarding the
effectiveness of our internal controls over financial reporting.
Internal control deficiencies could also cause investors to lose
confidence in our reported financial information. Although we
believe that we have addressed, or will address in the near
future, our material weakness in internal controls, we cannot
guarantee that the measures we have taken to date or any future
measures will remediate the material weaknesses identified or
that any additional material weaknesses or significant
deficiencies will not arise in the future due to a failure to
implement and maintain adequate internal controls over financial
reporting.
Each of the control deficiencies described above could result in
a misstatement of the aforementioned accounts or disclosures
that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be
prevented or detected.
33
Based on this evaluation, management has concluded that our
disclosure controls and procedures at June 30, 2007 were
not effective to provide reasonable assurance that information
required to be disclosed in the reports we file and submit under
the Exchange Act is recorded, processed, summarized and reported
as and when required.
In light of this conclusion and as part of the preparation of
this report, we have applied compensating procedures and
processes as necessary to ensure the reliability of our
financial reporting. Accordingly, management believes, based on
its knowledge, that (1) this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made not misleading with
respect to the period covered by this report, and (2) the
financial statements, and other financial information included
in this report, fairly present in all material respects our
financial condition as of June 30, 2007, and our results of
operations for the three and six month period ended
June 30, 2007 and our cash flows for the six month period
ended June 30, 2007.
Changes
in internal controls
The term internal control over financial reporting
(defined in SEC
Rule 13a-15(f))
refers to the process of a company that is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. Our management, with the participation of
the Chief Executive Officer and Chief Financial Officer, have
evaluated any changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter,
and they have concluded that during the six months ended
June 30, 2007, there were no additional changes, other than
those noted below, in our internal control over financial
reporting that occurred during the period that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Changes
in internal controls over financial reporting
The following changes in our internal control over financial
reporting occurred during the period covered by this Quarterly
Report on
Form 10-Q
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
As previously disclosed in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006, the Companys
management identified material weakness as of December 31,
2006. Beginning in the fourth quarter of the year ended
December 31, 2006 and continuing in the period covered by
this Quarterly Report on
Form 10-Q,
the Company executed the steps necessary to remediate the
material weakness and made the following changes to its internal
control over financial reporting:
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Hiring highly qualified accounting consultants to guide internal
accounting personnel in the application of generally accepted
accounting principles related to revenue recognition;
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Training internal personnel, with the assistance of the new
external advisors, to obtain additional expertise as to the
application of generally accepted accounting principles
specifically related to software revenue recognition; and
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Ensuring the review of the revenue recognition documentation by
qualified staff.
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The Company believes, as of end of the period covered by this
Quarterly Report on
Form 10-Q,
it has fully remediated the material weakness which caused the
Company to conclude in its Annual Report on
Form 10-K
for the year ended December 31, 2006 that its internal
controls over financial reporting were not effective.
34
PART II
(Dollars and shares in thousands, except for per share
data)
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Item 1.
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Legal
Proceedings
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The nature and scope of the Companys business operations
bring it into regular contact with the general public, a variety
of businesses and government agencies. These activities
inherently subject the Company to potential litigation, which
are defended in the normal course of business.
On June 20, 2006, a class action lawsuit was filed in the
United States District Court for the Northern District of Texas.
Home Solutions and the Chief Executive Officer, President and
Chief Financial Officer of Home Solutions were named as
defendants in that action. The complaint alleges claims against
Home Solutions and such officers for violations of the
Securities Act of 1934. The complaint alleges that the
defendants disseminated false and misleading information to the
public that misrepresented the accuracy of the Companys
financial condition and future revenue prospects. The complaint
further alleges that the effect of the purported fraud was to
manipulate Home Solutions stock price so that the
defendants could profit from the manipulation. The action seeks
damages in an unspecified amount. On June 27, 2006 and on
July 6, 2006, two additional class action lawsuits were
filed in the United States District Court for the Northern
District of Texas. Home Solutions and its directors are named as
defendants in those actions. The allegations in these two
additional class action lawsuits are substantially similar to
those in the first lawsuit. The actions seek damages in an
unspecified amount.
On January 10, 2007, the Court consolidated two of the
class action cases and appointed lead plaintiffs and lead
counsel for the consolidated case. On March 12, 2007, the
lead plaintiffs filed a consolidated amended complaint asserting
claims under Sections 10(b) and 20(a) of the Exchange Act
and
Rule 10b-5
against the same defendants as in the original complaints as
well as against several additional defendants, including a
member of the Companys board of directors and Sanders
Morris Harris Group, Inc. The consolidated amended complaint
asserts that the defendants made false and misleading statements
regarding certain of the Companys contracts and
acquisitions and made false statements regarding the
Companys 2006 earnings guidance. On June 13, 2007,
the Court consolidated the third class action case into the
existing consolidated case. The Company and the individual
defendants have moved to dismiss the consolidated amended
complaint and intend to vigorously defend the class actions.
On June 27, 2006, a shareholder derivative case was filed
against certain of the Companys officers and directors. An
amended complaint was filed on July 23, 2007. The
derivative case is based on similar factual allegations as the
securities class action cases and asserts state law fiduciary
duty claims on behalf of the Company against the individual
defendants for allegedly exposing the Company to liability in
the securities class actions. The plaintiff is not seeking to
recover damages from the Company in the derivative case but is
seeking to have the Company pay his attorneys fees. The
Company and the individual defendants have moved to dismiss the
derivative action. It is possible that additional similar
actions could be filed.
Home Solutions is occasionally involved in other litigation
matters relating to claims arising out of the ordinary course of
business. Other than the class action lawsuits described above,
the Companys management believes that there are no claims
or actions pending or threatened against the Company, the
ultimate disposition of which would have a material adverse
effect on our business, results of operations and financial
condition. However, if a court or jury rules against us and the
ruling is ultimately sustained on appeal and damages are awarded
against us, such ruling could have a material and adverse effect
on our business, results of operations and financial condition.
The Company has identified the following risk factor which is in
addition to the risk factors previously disclosed in the
Companys
10-K for the
year ended December 31, 2006, filed with the SEC on
March 19, 2007.
If the downturn in the U.S. housing industry continues
or increases, our results of operation could be materially and
detrimentally effected.
35
The Company participates heavily in the U.S. housing
industry which is affected by many factors, including interest
rates and liquidity. A predominant amount of the Companys
business, and the bulk of the work performed by our interior
services division, is conducted in the US housing industry. The
downturn in the U.S. housing industry had a significant
impact on the financial results of our Interior Services
division for the six months ended June 30, 2007. Further
downturns in the US housing industry and tightening in the
credit markets could have adverse material effects on the
Companys current contracts and future business
opportunities.
Due to the Companys increases in sales and a decrease in
orders from a significant customer, sales of our Interior
Services division to one large customer have declined
significantly, although we continue to sell significant amounts
to that customer. The customer is a significant participant in
the US housing market and has been adversely affected by the
down turn in the industry. Our sales to this one customer have
declined as a result of the downturn in the US housing industry
and may not return to previous levels. Even if the
U.S. housing industry recovers, we may not experience a
significant recovery if our customer is unable to recover from
the downturn in the U.S. housing industry and we are unable
to grow our business through new and existing customers.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed under the
heading Risk Factors in our annual report on
Form 10-K
filed on March 30, 2007, which could materially affect our
business operations, financial condition or future results.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially
adversely affect our business operations
and/or
financial condition. In addition to the items referenced above,
there have been no other material changes from the risk factors
previously disclosed in the Companys
10-K for the
year ended December 31, 2006, filed with the SEC on
March 19, 2007.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds.
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No unregistered securities were issued by the Company during the
six months ended June 30, 2007.
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Item 3.
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Defaults
Upon Senior Securities
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None
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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The 2007 Annual Meeting of Stockholders of Home Solutions of
America, Inc. (the Annual Meeting) was held on
June 18, 2007.
At the Annual Meeting, the following persons were elected to
serve as directors, serving until the 2008 Annual Meeting, by
the votes indicated:
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Abstain/
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Broker
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Name
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For
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Non-Votes
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Michael S. Chadwick
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37,285
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1,979
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Frank J. Fradella
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36,001
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3,262
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Willard W. Kimbrell
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37,379
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1,885
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Brian Marshall
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36,040
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3,224
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Charles P. McCusker
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36,997
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2,267
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Patrick A. McGreeney
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37,054
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2,209
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Stephen Scott Sewell
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35,685
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3,579
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During the Annual Meeting, the stockholders also ratified the
appointment of KMJ Corbin & Company, LLP as the
Companys auditors for 2007, by the votes indicated below:
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Abstain/
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Broker
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For
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Against
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Non-Votes
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Appointment of KMJ
Corbin & Company LLP
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35,145
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3,565
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89
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36
No other matters were voted on during the meeting. For further
information with respect to the matters presented to the
stockholders for approval at the 2007 Annual Meeting of
Stockholders, please refer to our Definitive Proxy Statement on
Schedule 14A, filed with the SEC on April 30, 2007.
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Item 5.
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Other
information
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None
The following exhibits are filed as part of this report:
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Exhibit
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Method of
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Numbers
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Description
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Filing
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2
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.1
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Satisfaction of Note and Amendment
to Stock Purchase Agreement among Home Solutions of America,
Inc., Fireline Restoration, Inc. and Brian marshall dated
August 14, 2007 and effective June 30, 2007
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(1)
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3
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.1
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Certificate of Incorporation of
the Company, as restated on July 31, 2001 (filed with the
SEC on July 9, 2001 as Exhibit A to the Companys
Information Statement on Schedule 14C and incorporated
herein by reference).
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3
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.2
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Certificate of Amendment to the
Certificate of Incorporation of Nextgen Communications
Corporation, changing the corporations name to Home
Solutions of America, Inc., as filed with the Secretary of
State of Delaware on December 23, 2002 (filed with the SEC
on December 22, 2002 as Exhibit A to the
Companys Information Statement on Schedule 14C and
incorporated herein by reference).
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3
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.3
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Certificate of Amendment to the
Restated Certificate of Incorporation of Home Solutions of
America, Inc. as filed with the Delaware Secretary of State on
June 16, 2006 (filed with the SEC on July 14, 2006 as
Exhibit 3.3 to the Companys Registration Statement on
Form 8-A
and incorporated herein by reference).
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3
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.4
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Amended and Restated Bylaws of the
Company, as amended on April 4, 2006 (filed with the SEC on
May 15, 2006 as Exhibit 3.3 to the Companys
Quarterly Report on
Form 10-Q
and incorporated herein by reference).
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10
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.1
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Restricted Stock Purchase
Agreement between Frank J. Fradella and Home Solutions of
America, Inc. dated May 11, 2007
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(1)
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10
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.2
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Restricted Stock Purchase
Agreement between Jeffrey M. Mattich and Home Solutions of
America, Inc. dated May 11, 2007
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(1)
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10
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.3
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Board Compensation Plan
(2007-2008
Board Term)
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(1)
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31
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.1
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Rule 13a-14(a)
Certification by our principal executive officer
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(1)
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31
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.2
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Rule 13a-14(a)
Certification by our principal financial officer
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(1)
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32
|
.1
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Section 1350 Certification by
our principal executive officer
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(1)
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32
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.2
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Section 1350 Certification by
our principal financial officer
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(1)
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37
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME SOLUTIONS OF AMERICA, INC.
Registrant
Frank J. Fradella
Chairman, Chief Executive Officer and President
August 15, 2007
Jeffrey M. Mattich
Chief Financial Officer
August 15, 2007
38