**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549**

**FORM 10-KSB**

                (Mark One)

                [x]  Annualreport under Section 13 or 15(d) of the Securities Exchange Act of 1934

                For the fiscal year ended December 31, 2002

                [  ]  Transition report under Section 13 or 15(d)of the Securities Exchange Act of 1934

                For the transition period from                         to                            

|                      Commission file number |              0-22388 |
|------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|

 

| **HOME SOLUTIONS OF AMERICA, INC.**                             |
|-----------------------------------------------------------------|
| (Name of Small Business Issuer in Its charter)                  |
|                                                            |   |   |
| Delaware                                                        |  |          99-0273889 |
| (State or Other Jurisdiction of  Incorporation or Organization) |  | (IRS Employer  Identification No.) |
|                                                            |  |   |
| 11850 Jones Road, Houston, Texas                                |  | 77070 |
| (Address of Principal Executive  Offices)                       |  | (Zip Code) |
|                                                            |   |   |
| (281) 970-9859                                                  |
| (Issuer's Telephone Number, Including Area Code)                |

            Securities registered under Section 12(b) of theExchange Act:                        None.

            Securities registered under Section 12(g) of theExchange Act:

| Common Stock, Par Value $.001 Per Share |
|-----------------------------------------|
| (Title of Class)                        |

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.Yes         X               No                           

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B is not containedin this form, and no disclosure will be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.[ ] 

State issuer's revenues for its most recent fiscalyear. $2,812,000

The aggregate market value ofthe common stock of the registrant held by non-affiliates of the registrant (9,654,656 shares) on March 24, 2003,was approximately $24,136,000, based upon the closing sale price of the commonstock ($2.50per share)as quoted on the OTC Bulletin Board on March 24, 2003.  For purposes of this response, officers,directors and holders of 10% or more of the registrant's common stock areconsidered affiliates of the registrant at that date. 

Thenumber of shares outstanding of the registrant's common stock, $.001 par valueper share, as of March 24, 2003: 11,078,852 shares.

**DOCUMENTS INCORPORATED BY REFERENCE**

The information required by Items 9 through 12 of Part IIIof this Form 10-KSB is incorporated by reference from the registrant'sdefinitive proxy statement, which will be filed with the Securities andExchange Commission within 120 days of the close of the registrant's fiscalyear ended December 31, 2002.

Transitional Small BusinessDisclosure Format: Yes                             No                X             

----

**HOMESOLUTIONS OF AMERICA, INC.FORM 10-KSBTable of Contents**

 
Item     Page  Number            PART I          
1.

Description of Business

1
     
2.

Description of Property

4
     
3.

Legal Proceedings

4
     
4.

Submission of Matters to a  Vote of Security Holders

5
       PART II          
5.

Market for Common Equity  and Related Stockholder Matters

6
     
6.

Management's Discussion  and Analysis or Plan of Operation

7
     
7.

Financial Statements

10
     
8.

Changes in and  Disagreements with Accountants on

Accounting and Financial  Disclosure

10
       PART III          
9.

Directors, Executive  Officers, Promoters and Control Persons;

Compliance With Section  16(a) of the Exchange Act 

11
     
10.

Executive Compensation

11
     
11. 

Security Ownership of  Certain Beneficial Owners and

Management and Related  Stockholder Matters

11
     
12.

Certain Relationships and  Related Transactions

11
     
13.

Exhibits and Reports on  Form 8-K

12
     
14.

Controls and Procedures

14
     
Signatures

 
  15     
Certifications

 
  16     
Audited Consolidated  Financial Statements
  F-i
***PRELIMINARY NOTE:*** ThisAnnual Report on Form 10-KSB contains forward-looking statements relating toour goals, beliefs, plans or current expectations and other statements that arenot historical facts. For example, when we use words such as "project,""believe," "anticipate," "plan," "expect," "estimate," "intend," "should,""would," "could" or "may," or other words that convey uncertainty of future eventsor outcome, we are making forward-looking statements. We refer you to thecaption entitled "Trends, Risks and Uncertainties" in Item 6 of Part II forimportant factors that could cause actual results to differ materially fromthose indicated by our forward-looking statements made herein and presentedelsewhere by management. Such forward-looking statements represent management'scurrent expectations and are inherently uncertain. We do not undertake anyobligation to update forward-looking statements made by us. 

i

**PART I**

**Item 1.      Description of Business.**

**Overview**

Home Solutions of America, Inc. ("we," "us," "HomeSolutions," or the "Company") is a Delaware corporation that was incorporatedin 1998.  Our growth strategy, developedin 2002, is to become a leading provider of specialty residential services thatprotect the homeowner's single largest investment - their home. We seek adominant market position through the acquisition of strategic, specialized,profitable and well-managed residential service companies and through the aboveaverage internal growth of these operations. Home Solutions will provide services such as cleaning and fabricprotection, fire and water damage restoration, and the remediation of indoorair contaminants.  (See "Trends, Risksand Uncertainties" in Part II, Item 6 below)

**Growth Strategy**

As part of its strategyannounced in 2002, Home Solutions will seek to acquire or internally generateprojects that will focus on providing the specialty residential services tohomeowners that are discussed below. Effective November 1, 2002, we closed our first acquisition as part ofthis strategy, acquiring PW Stephens, Inc. ("PWS"), a $15 million revenue provider of indoor air contaminate removalservices for homeowners in California.  We expect to continue our aggressive growth strategy withadditional acquisitions.  (See "Trends,Risks and Uncertainties" in Part II, Item 6 below).  The following is a list of the targeted services that we arepursuing:

***Cleaning and Fabric Protection:***Wewill provide fabric protection services to protect furniture, carpet anddraperies from stains and daily wear and tear. This niche market is primarily targeted at above-average incomehomeowners with an average ticket of approximately $400 or more.  We will provide our customers with an annualfabric protection service agreement that will allow them to have on-site spillclean up during the life of the agreement. In addition, using well-tested methods of cleaning carpet, we will offermaintenance and emergency response services to our customer base to repaircarpet damaged by common stains, pet dander, bacteria and dust.  This procedure will extend the life of thehomeowners' carpets and make the carpet look its finest.  Furthermore, air duct cleaning is anotherunder-developed market the Company will approach.  Particulate(organic and inorganic) material within a home's heating and air conditioningsystems and the transferair ducts can cause allergicreactions and generally indicate poor air quality.  Furthermore, the conditions of these systems, high moisturecontent and heat are often the breeding ground for many types of mold.  It is expected that a portion of our cleaningoperations will generate additional opportunities across our other business segments.

***Indoor Air Contamination:*** Indoor aircontamination, including contamination from mold, asbestos and lead paint, is agrowing concern for the homeowner. With increased media attention regarding thehealth 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 andair testing, project design, microbial removal, light interior demolition,repair and specialized cleaning work. Home inspections and testing can range from $500 to several thousanddollars. For the typical mold-contaminated house, a remediation project canlast approximately one week and cost $20,000 or more for the homeowner.  Customer opportunities are developed througha regional sales force as well as through referrals by real estate firms,insurance adjusters, mortgage companies, attorneys and nationally brandedretailers.  Althoughgovernment-promulgated regulation is currently under review, industry practiceand general awareness is building momentum. The Company believes it can use itsindustry experience to give efficacy to its processes and provide homeownerswith quality assurance.  Furthermore, weplan to provide annual and quarterly monitoring services, in which technicianswill regularly inspect, test and certify the air quality of our clients' homes. It is expected that a portion of our indoor aircontamination operations will generate additional opportunities across ourother business segments. 

***Fire and Water Damage Restoration:***Aspart of Home Solutions specialty residential services strategy, we will providehighly trained technicians to respond to fire, water and weather-relatedemergencies to inspect structural members and contents damaged by water, todetermine the likelihood or extent of mold growth, and to provide immediatecleaning, drying, moving, storage, and deodorization, among other services.  As most cases of mold are associated withexcess moisture, we

 

1

 

believe that response to this type of event-related damagewill provide significant additional revenue opportunities.  The cost and time requirements of theseprojects can vary dramatically from case-to-case.  It is expected that a portion of our fire/water damagerestoration operations will generate additional opportunities across our otherbusiness segments.

**Current Letters of Intent**

Fiber Seal Systems L.P. In March 2003, we entered into a letterof intent to acquire Fiber Seal Systems L.P., a company that provides fabricprotection services, for the following consideration: (i) approximately$520,000 financed through a seller note, (ii) 300,000 shares of the Company'scommon stock, and (iii) an option to purchase up to 250,000 shares of theCompany's common stock, subject to Fiber Seal Systems achieving certain revenuetargets. 

Horizon Cleaning, Inc. In March 2003, we entered into a letter of intent to acquire all of theoutstanding stock of Horizon Cleaning, Inc., a company that provides specialtyresidential cleaning and remediation services, for approximately $2,416,000,consisting of 953,043 shares of common stock of the Company and a $224,000seller note.

Central Texas Residential Services, Inc.  In March 2003, we entered into a letter of intent to acquire allof the outstanding stock of Central Texas Residential Services, Inc., a companythat provides specialty residential cleaning and remediation services, forapproximately $2,000,000 consisting of 850,000 shares of common stock of theCompany.

All three of these acquisitions areexpected to close in the second quarter of 2003, however, each transaction is subject to thesatisfactory completion of our due diligence review, and the successful negotiationand execution of definitive purchase and/or loan agreements, which will containnumerous conditions to closing. There can be no assurance that we will be ableto consummate these transactions.

We will continueto actively pursue the acquisition of companies that provide specialtyresidential services as we proceed with our growth strategy. Our ability toacquire such businesses will be dependent upon, among other factors, ourability to obtain outside financing and/or issue shares of the Company's commonstock as a portion of the purchase price.

**Competition**

We compete against numerous nationalproviders, including Steamatic and ServiceMaster.  Locally, we compete against numerous family controlled operationsas well as larger regional operations. We expect additional competitors as the market for specialty residentialservices continues to grow, due to the lack of significant barriers of entryinto the residential services field.

**Regulatory Matters**

*General*

The specialty residential services industryis subject to various federal, state and local laws.  

*Environmental Regulation*

The operations of the Company are subject to various federal, state, and local laws and regulations regarding environmental matters. We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position, or result in material capital expenditures; however, we cannot predict the effect on our operations of possible future environmental legislation or regulations.

2

  

**Employees**

As of December 31, 2002, we had anaggregate of 166 employees (all but 4of whom were employed by PWS). All of these employees were full-time and werenot represented by collective bargaining agreements.  

**Business Background-1998Through 2002**

The Company was incorporated in Delaware on January 8, 1998, for thepurpose of serving as the successor corporation of EIF Holdings, Inc., a Hawaiicorporation, pursuant to a reincorporation merger that was completed in June 1998.  During 1999 and most of 2000, the Company,then named U S Industrial Services, Inc., operated through its wholly-ownedsubsidiaries as a multi-state service company, specializing in industrialcleaning services, including soil and groundwater remediation, and hazardousmaterial management and clean-up.  Priorto July 2000, the Company was a majority-owned subsidiary of American EcoCorporation ("AEC"), a publicly traded company that filed for bankruptcy in August2000.  In July 2000, Deere Park Capital,LLC ("Deere Park") acquired AEC's stake in the Company, which consisted ofapproximately 81.9% of the Company's outstanding common stock.

On September 29, 2000 the Company sold its holdings in four of itsoperating subsidiaries--P.W. Stephens Environmental, Inc., P.W. StephensContractors, Inc., P.W. Stephens Services, Inc., and P.W. Stephens Northwest,Inc. to Spruce MacIntyre Holding Corp. ("Spruce").  From September 29, 2000 until June 29, 2001, the Company had nosignificant operations.

As a result of two Stock Purchase Agreements between Deere Park andFrank J. Fradella, the President and Chief Executive Officer of the Company,dated December 21, 2000, and March 23, 2001, respectively, Mr. Fradellapurchased, on behalf of himself and as a third-party nominee for otherindividuals and entities, approximately 6.9 million shares of the Company'scommon stock held by Deere Park, or approximately 79% of the Company'soutstanding common stock at the time. 

On June 29,2001, we entered the communications sector by acquiring Point-to-Point NetworkServices, Inc. ("PTP"), based in Methuen, Massachusetts.  PTP was a provider of fixed communicationsnetworking design and build-out services, such as voice, data, and video, tothe communications industry.  In July2001, we changed our corporate name to Nextgen Communications Corporation toreflect our new strategy.  Originally,PTP was going to operate as our service function in coordination with our toweracquisition strategy.  However, due tochanging market conditions, we decided to divest PTP and exit thecommunications sector.  In February2002, we settled a dispute with the former owner and president of PTP, and soldPTP to an investment group led by Richard W. Lancaster, a former director ofthe Company.  From February 2002 untilNovember 2002, the Company had no significant operations.

In August 2002,we announced a new corporate strategy of acquiring companies in the specialtyresidential services industry.  Withinthis segment, we are targeting companies that perform indoor air contaminateremoval, fire/water damage restoration and cleaning and fabric protectionservices as acquisition candidates.

EffectiveNovember 1, 2002, we acquired PWS, based in California, from an affiliate ofSpruce for an aggregate purchase price of approximately $12.5 million, which wepaid with cash, promissory notes issued by the Company, the assignment ofcertain promissory notes owed to the Company, and a warrant to purchase 293,412shares of the Company's common stock at $.01 per share.  PWS has a twenty-year operating history as aprovider of indoor air contaminate removal services for residential and lightcommercial clients.

During November 2002, we consummated a privateplacement of approximately 1.4 million shares of our common stock (and warrantsto purchase an aggregate of 1.0 million shares of common stock for $1.00 pershare) with certain accredited investors, for aggregate proceeds ofapproximately $1.4 million.  These investorsalso received demand and piggyback registration rights for the shares of commonstock that they purchased in the private placement and piggyback registrationrights for the shares of common stock that may be purchased upon the exerciseof the warrants.

 

3

 

In December 2002, we converted an aggregate of $662,500 of liabilities owed to two of theCompany's creditors into an aggregate of 255,455 shares of the Company's commonstock.

In December 2002, in connection with theimplementation of our residential services strategy, our stockholders approveda change of our corporate name to Home Solutions of America, Inc.   Our website is now located atwww.HSOACorp.com.

**Recent Developments - Early 2003**

Effective January 15, 2003, Mark W. White,a businessman and former governor of Texas (and the father of R. Andrew White,our president and chief executive officer), and Michael S. Chadwick, aninvestment banker with Sanders Morris Harris, joined our Board of Directors.

In February 2003, the Company borrowed$250,000 from an affiliate of a stockholder of the Company, pursuant to apromissory note that bears interest at 8% and requires monthly payments priorto its final maturity date of May 31, 2003. In addition, the Company borrowedan aggregate of $250,000 from two individuals pursuant to two promissory notesthat each bear interest at 18% and require periodic payments prior to the finalmaturity date of June 30, 2003.  

In March 2003, R. Andrew White, our chieffinancial officer, was promoted to chief executive officer and president of theCompany.  We have entered into athree-year executive employment agreement with Mr. White, which provides anannual salary of $165,000.  We alsogranted Mr. White 250,000 options to purchase Home Solutions common stock at$2.10 per share, subject to vesting over a three-year period, and amended Mr.White's options agreements for 150,000 and 20,000 options, respectively, tofully vest all options in the event that Mr. White is terminated prior theexpiration of his employment agreement. Frank J. Fradella, our former chief executive officer and president,will remain Chairman of the Board and oversee our acquisition program.  Our Board of Directors vested the remainingportions of Mr. Fradella's 250,000 stock options and 500,000 stock purchaserights, respectively, in consideration of Mr. Fradella's past contributions andexpected future contributions to the Company.

In March 2003,the Company and the former shareholder of PWS conducted negotiations wherebycertain of the Company's promissory notes issued to the former shareholder ofPWS would be restructured and certain collateral would be provided as securityfor the restructured notes.  Suchdiscussions have not been finalized, and there can be no assurance thatdefinitive agreements will result from such discussions.

In March 2003, we signed three letters ofintent to acquire companies that perform specialty residential services.  (See "Current Letters of Intent" above)

**Item 2.       Description of Property.**

In October 2002, we purchased the office buildingthat serves as our corporate offices, consisting of approximately 8,000 squarefeet of office space, at 11850 Jones Road Houston, Texas 77070.  The purchase price of the building was$1,000,000, $250,000 of which we paid by issuing the seller 151,515 shares ofour common stock, and $750,000 of which was financed through a first-lienmortgage provided by an affiliate of one of our stockholders.  We also granted warrants to purchase anaggregate of 125,000 shares of our common stock for $1.50 per share inconnection with our mortgage financing. The Company is currently exploring the lease of office space in thisbuilding.

As of December 31, 2002, PWS leased its headquartersin Huntington Beach, California and had two additional offices in Fremont,California and San Diego, California. All of these lease agreements expire in 2004, but the Company plans torenew these leases prior to their expiration.

**Item 3.        Legal Proceedings.**

The nature and scope of our business operations bring us into regularcontact with the general public, a variety of businesses and governmentagencies.  These activities inherentlysubject us to potential litigation, which we defend in the normal course ofbusiness. At December 31, 2002, there were various claims and disputesincidental to the business.  The Companybelieves

4

 

that the disposition of all such claims and disputes, individually orin the aggregate, should not have a material adverse affect upon our financialposition, results of operations or cash flows. As of December 31, 2002, the Company has not been named as a responsibleparty for any environmental issues under the Federal Superfund Law.

On or about February 9, 2001, AEC commenced an adversary proceedingagainst us that, at the time, was a debtor-in-possession under Chapter 11 ofthe United States Bankruptcy Code.  Theproceeding, which is styled *Complaint for Collection of Account Receivable,Turnover of Property of the Estate and Avoidance Fraudulent Conveyance*,seeks the recovery of certain alleged transfers and recovery of fees againstthe Company, based on theories of breach of contract, promissory estoppel,quantum meruit, and pursuant to Sections 542, 544, 548 and 550 of the BankruptcyCode.  The proceeding seeks a recovery in excess of $1,300,000, and otherequitable relief.  The Company has filed its answer that, in part, deniesall liability.  An Order Scheduling Pre-Trial Proceedings was signed onOctober 31, 2001.  A trial date has not yet been set.  The Company isvigorously defending this suit.  At this time, the Company cannot predictthe likelihood of an unfavorable outcome.  

** **On or about August 1, 2002, National Union FireInsurance commenced an adversary proceeding against us styled *National Union Fire Ins. Co. v. QHI StephensContractors, Inc., EIF Holdings, Inc., P.W. Stephens Contractors, Inc., P.W.Stephens Contractors, Inc. (CA), P.W. Stephens Services, Inc., P.W. Stephens Residential,Inc., American Temporary Sanitation, Inc.* in the United States DistrictCourt for the Northern District of California. The lawsuit does not list the specific amount of damages beingsought.   The lawsuit derivesfrom a guarantee that EIF Holdings, Inc., a predecessor of theCompany, allegedly made in 1997 for the benefit of awholly-owned subsidiary of American Eco, when at the time EIF Holdingswas a 72%-owned subsidiary of American Eco.  The Company is vigorouslydefending the validity and enforceability of the guarantee that forms the basisfor this lawsuit, which is currently in the discovery phase.  

On or about October 3, 2002, in the Superior CriminalCourt of Los Angeles County, California a misdemeanor claim was filed againstPWS and two employees alleging that certain events violated state and localregulations.  The Company is vigorously defending this suit.  At thistime, the Company cannot predict the likelihood of an unfavorable outcome norestimate the amount or range of potential loss, if any.

Pursuant to an indemnification agreement between theCompany and Spruce, the Company recently settled claims brought by CIT Group/EquipmentFinancing, Inc. and Ackstar Insurance Company, both filed in the United StatesDistrict Court for the Eastern District of Missouri, which will be paid bySpruce.  The CIT settlement agreement requires Spruce to make certainpayments to the plaintiffs which Spruce has made through the filing date ofthis Form 10-KSB.  In the event thatSpruce fails to make the remaining settlement payments, the plaintiffs couldseek satisfaction of their $713,185 consent judgment against the Company, inwhich case the Company would have to seek indemnification from Spruce.

**Item 4.        Submissionof Matters to a Vote of Security Holders.**

On November 1, 2002, the holders of 4,772,453 shares of the Company's common stock, constituting a majority of the Company's outstanding common stock on such date, executed a written consent in lieu of a special meeting of stockholders, approving a certificate of amendment to the Company's certificate of incorporation (the "Amendment") whereby the Company's name would be changed from "Nextgen Communications Corporation" to "Home Solutions of America, Inc."  The Company provided all stockholders of record as of November 15, 2002, with notice of the approval of the Amendment on Schedule 14C, which the Company filed with the SEC and mailed to its stockholders on December 2, 2002.  The name change became effective on December 23, 2002, when the Amendment was filed with the Delaware Secretary of State.

** **

** **

 5

** **

**PART II**

** Item 5.        Marketfor Common Equity and Related Stockholder Matters.**

**Market Prices**

The Common Stock of the Companyis traded in the over-the-counter market. Quotations are published in the National Quotation Bureau's "PinkSheets" and on the OTC Bulletin Board under the symbol "HSLA.OB."  The following table sets forth, for thefiscal quarters indicated, the range of the high and low sales prices for theCompany's Common Stock as reported by the National Quotation Bureau, Inc.  These quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission, and may not representactual transactions.

Fiscal Year ended  December 31, 2002:

High
   Low   
Quarter ended December 31,  2002 

3.10
   
1.50

Quarter ended September 30,  2002

2.25
   
1.30

Quarter ended June 30, 2002

2.83
   
1.35

Quarter ended March 31,  2002

1.55
   
1.15
   
Fiscal Year ended  December 31, 2001:

High
   Low   
Quarter ended December 31,  2001

1.95
   
1.25

Quarter ended September 30,  2001

2.25
   
0.95

Quarter ended June 30, 2001

2.20
   
1.13

Quarter ended March 31,  2001

2.25
   
0.91

**Stockholders**

As of March 11, 2003, theCompany had approximately 145 record holders of its Common Stock, as reflectedon the books of the Company's transfer agent. A significant number of shares were held in street name and, as such,the Company believes that the actual number of beneficial owners issignificantly higher.

**Dividends**

The Company has not establisheda policy concerning payment of regular dividends nor has it paid any dividendson its Common Stock to date.  Anypayment of dividends in the future will be determined by the Board of Directorsin light of conditions then existing, including the Company's earnings,financial condition, capital requirements and debt covenants, and the taxtreatment consequences of paying dividends.

**Saleof Unregistered Securities**

During the fourth quarter of 2002, the Company issued the following shares of its common stock without registration under the Securities Act of 1933, as amended (the "Securities Act"):

                1.                On October 29, 2002, in connection with the purchase of the Company's office building at 11850 Jones Road, the Company issued 151,515 shares of common stock valued at $250,000 to the seller of the building, and warrants to purchase 125,000 shares of common stockvalued at $195,000 to certain affiliates of the mortgagee of the building, which was an affiliate of one of the Company's stockholders;

                2.                On November 15, 2002, in connection with the acquisition of PWS, the Company issued the former shareholder of PWS a warrant to purchase 293,412 shares of the Company's common stock for $.01 per share valued at $425,447;

6

 

                3.                On November 19, 2002, the Company issued approximately 1.4 million shares of common stock, and warrants to purchase approximately 1.0 million shares of common stock for $1.00 per share, to four accredited investors, in a private placement in which the Company received aggregate net proceeds of approximately $1.4 million;

The above issuances were unregistered, as the Company was relying on the exemptions from registration contained in Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, on the basis that such transactions did not involve public offerings of securities.

**Item 6.      Management's Discussion andAnalysis or Plan of Operation.**

**General**

In June 2001,the Company acquired PTP, and prior to that, the Company had no operatingentities during 2001. PTP was divested in February 2002, and the Company had nooperations from that date until November 2002, when it acquired PWS.  Therefore, comparisons between the periodspresented would not be informative. (See "Business Background-1998 Through 2002" in Item 1 of Part I above.)

*Use of Estimatesand Critical Accounting Policies*

Inpreparing our consolidated financial statements, we make estimates, assumptionsand judgments that can have a significant effect on our revenues, income (loss)from operations, and net income (loss), as well as on the value of certainassets on our balance sheet.  We believethat there are several accounting policies that are critical to anunderstanding of our historical and future performance as these policies affectthe reported amounts of revenues, expenses, and significant estimates andjudgments applied by management.  Whilethere are a number of accounting policies, methods and estimates affecting ourfinancial statements, areas that are particularly significant include revenuerecognition, stock-based compensation, and goodwill.  In addition, please refer to Note 1 to the accompanying financialstatements for further discussion of our accounting policies.

*RevenueRecognition*

                Revenueis recognized at the time the contract and related services are performed.

*Stock-BasedCompensation*

The Company uses the intrinsicvalue method of accounting for stock-based compensation to employees inaccordance with Accounting Principles Board Opinion ("APB") No. 25,as amended, *"Accounting for Stock Issued to Employees."*   The Company accounts for non-employeestock-based compensation under Statement of Financial Accounting Standards("SFAS") No. 123, *"Accounting for Stock-Based Compensation."* At December 31, 2002, the Company had twostock-based employee compensation plans, which are described more fully in Note7 of the accompanying consolidated financial statements.  The Company accounts for those plans underthe recognition and measurement principles of APB 25, and related interpretations.  The Company has applied the disclosureprovisions in SFAS No. 148 in its consolidated financial statements and theaccompanying notes.  The Company doesnot anticipate adopting the fair value based method of accounting forstock-based compensation.

*Goodwill*

Goodwillrepresents the excess of acquisition cost over the net assets acquired in abusiness combination. Management reviews, on an annual basis, the carryingvalue of goodwill in order to determine whether an impairment has occurred.Impairment is based on several factors including the Company's projection offuture undiscounted operating cash flows. If an impairment of the carryingvalue were to be indicated by this review, the Company would adjust thecarrying value of goodwill to its estimated fair value.

7

 

*Revenue*

Therevenue of $2,559,000 for the year ended December 31, 2002 is comprisedentirely of revenue from PWS, which represents two months of revenue since theacquisition of PWS, which was effective November 1, 2002.  The revenue of $30,000 for the year endedDecember 31, 2001 represents management fees earned by the Company in2001.  There were no such fees earned in2002.  PTP generated $253,000 and$4,303,000 in revenues in 2002 and 2001, respectively, which are included inloss from discontinued operations for the year ended December 31, 2001.

*Costs of Sales*

Costsof sales were $1,280,000 for the year ended December 31, 2002.  There were no costs of sales for the yearended December 31, 2001 as the operations of PWS, which comprise all of therevenues in 2002, were not acquired until 2002.  PTP generated $157,000 and $2,943,000 of costs of sales in 2002and 2001, respectively, which are included in loss from discontinued operationsfor the year ended December 31, 2001.

*Selling, General and Administrative Expenses:*

Selling,general and administrative expenses were $2,666,000 for the year ended December31, 2002 compared to $1,229,000 for the year ended December 31, 2001.  This represents an increase of $1,437,000 or117% over 2001.  Of this increase,$875,000 is related to PWS.  Of theremaining increase, $155,000 relates to increased legal and professional fees,$80,000 relates to employee relocation and education costs, $108,000 forincreased travel for searches for potential acquisition candidates, $48,000 inincreased insurance costs and the remaining amount representing corporateoverhead that was previously incurred and paid for by the Company'ssubsidiaries.

*Other Income (Expenses):*

Interest income decreased from $276,000 in2001 to $139,000 in 2002.  This isprimarily a result of lower cash balances during 2002 as well as a significantdecrease in yields during 2002.  Theloss on sale of assets of $41,000 in 2002 was almost entirely attributed to thedisposal of assets at PWS.  Interestexpense was $130,000 in 2002 compared to $0 in 2001.  This is entirely due to the debt incurred with acquisition of PWSand interest on the line of credit and term debt at PWS.  Other income was $1,189,000 in 2002, whichis comprised of $1,540,000 of reversals of prior accruals due to settlementsand reduction of estimates for claims accrued in prior years offset by $350,000in costs related to the forfeit of a deposit on an acquisition ofcommunications towers that the Company decided not to pursue.  In 2001, the Company sold a note receivableto a third party and recorded a loss on the sale of $1,591,000.

**Liquidity and Capital Resources**

The Company's existing capitalresources as of December 31, 2002, consisted of cash and accounts receivabletotaling $3,935,000, compared to cash, accounts receivable and notes of$4,251,000 as of December 31, 2001. The Company believes that the financingarrangements the Company currently has in place are sufficient throughout thenext twelve months to finance its working capital needs. Implementation of theCompany's strategic plan of acquiring niche residential services companies willrequire additional capital, however. 

The Company has a creditagreement with a financial institution. The credit agreement includes an $898,000 term loan, a revolving line ofcredit and an equipment line of credit. The credit agreement is guaranteed by the former stockholder of P.W.Stephens, secured by substantially all P.W. Stephens assets and contains aprovision that requires P.W. Stephens to maintain certain financial covenants.

The revolving line ofcredit bears interest at the prime rate (4.25% at December 31, 2002) plus 0.75%per annum, payable monthly.  The termsof the agreement provide for borrowings up to the lesser of $500,000 or theaggregate of 80% of eligible accounts receivable, as defined.  The revolving line of credit expired onJanuary 28, 2003.  The Company iscurrently negotiating with other financial institutions to refinance this line,the equipment line and the $898,000 term loan. The balance at December 31, 2002 was $499,330.

 

8

 

Theequipment line of credit bears interest at the prime rate plus 1.00% per annum,payable monthly.  The terms of theagreement provide for borrowings up to $200,000.  The equipment line of credit expired on January 31, 2003, atwhich time all outstanding amounts will be repaid over 36 equal monthlyinstallments including principal and interest through February 28, 2006.  The balance at December 31, 2002 was$29,000.

Duringfiscal year 2002, the Company utilized net cash in operating activities of$2,155,000, including a net loss of $477,000. Noncash adjustments to net loss included $1,540,000 of reversals ofprior accruals.

TheCompany's investing activities used net cash of $610,000, primarily due to thepurchase of PWS, offset by principal payments received on notes receivable.

TheCompany's financing activities provided net cash of $820,000, primarily due toproceeds of $1,400,000 from the sale of common stock offset by $580,000 ofprincipal payments made on long-term debt and capital leases.

**Trends,Risks and Uncertainties**

We have sought to identifywhat we believe to be the most significant risks to our business, but we cannotpredict whether or to what extent any of such risks may be realized, nor canthere be any assurances that the Company has identified all possible risks thatmight arise.  Current and potentialinvestors should carefully consider all of the following risk factors beforemaking an investment decision with respect to our stock.

***We Have Limited Prior Experience Acquiring andOperating Residential Services Companies.***

Although the Company has a history ofoperations in the industrial services and voice/data and cabling servicessectors, we have no history of acquiring and operating residential services companies.  The current strategy is a new direction forthe Company, and we may encounter unanticipated, unusual, or unexpected risksand problems in developing this new area of business, which could adverselyaffect us, as well as our operations, revenue, and ability to obtain a profit.

***We Require Additional Capital to Acquire Residential Services Companies.***

We will require additional capital to purchase niche residential services companies. If we are unable to raise capital when our needs arise, we will be unable to pursue our current business strategy and may not be able to fund our operations.

***If We Obtain Additional Financing, or AcquireCompanies using Our Common Stock, It Could Dilute Present Stockholder Holdings.***  

We will likely need to raise money through the sale of additional equity within the next twelve months, in one or more private placements and/or public offerings. If we do so, all of the then current existing stockholders and their stock holdings will be proportionately diluted.  In addition, we will likely acquire companies using our common stock as consideration.  If we do so, all of our existing stockholders at such time and their stock holdings will be proportionately diluted. 

***Our Business Depends on the Demand for Residential Services.***

Upon acquiring residential services companies, we would be adversely affected by any slowdown in the growth of, or reduction in demand for, residential services.  Demand for our services depends on numerous factors including:

9

- the amount and growth of household income;   
- the financial condition of homeowners, and whether a homeowner's insurance policy is available to pay the cost of our services;   
- the need for the remediation of indoor air contaminates, cleaning services, fabric protection and fire/water damage restoration;     
- changes in mortgage rates; and   
- general economic conditions.

 

***Our Aggressive Business Plans Will Place a Significant Strain on Our Assets.***

Implementation of our aggressive acquisition strategy will impose significant strains on our management, operating systems and financial resources. The acquisitions that we are currently contemplating would involve substantial expenditures of our time and resources to close. If we fail to manage our growth or encounter unexpected difficulties during expansion, it could have a material adverse effect on our financial condition and results of operations. The pursuit and integration of acquisitions will require substantial attention from our senior management, which will limit the amount of time they are able to devote to our existing operations.

***We Are Heavily Dependent on Our Senior Management.***

If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected.  Our existing operations and continued future development depend to a significant extent upon the performance and active participation of certain key individuals, including our Chief Executive Officer and our Chairman of the Board. We cannot guarantee that we will be successful in retaining the services of these or other key personnel. If we were to lose any of these individuals, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.

***We have a history of losses.***

We incurred consolidated net losses of $477,000, $2,447,000, and $6,225,000 during the years ended December 31, 2002, December 31, 2001 and September 30, 2000 (we changed our fiscal year to a calendar year at the beginning of 2001), respectively.  Our management believes that our revised business plan will be successful and we will become profitable; however, there can be no assurance that we will be successful in implementing our business plan or that we will be profitable now or in the future.

***Because Our Competition Has Greater Experience andResources Than We Do, We May Be at a Competitive Disadvantage.***

Manyof our competitors have significantly greater experience and financialresources than us, which could place us at a competitive disadvantage.    

** Item 7.    FinancialStatements.**

                The audited financial statementsare annexed to this report, commencing on page F-i.

**Item 8.    Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.**

On January 2, 2003, the Company replaced itsformer auditor, Merdinger, Fruchter,Rosen & Company, P.C. (who had resigned because the firm no longer auditedpublic companies) with Corbin & Company LLP.  The information relating to this change in the Company'sindependent accountants that was disclosed in the Company's Current Report onForm 8-K, which was filed with the SEC on January 7, 2003, is incorporatedherein by reference.

 10

**PART III**

** **

**Item 9.      Directors,Executive Officers, Promoters and Control Persons; Compliance With Section                 16(a) of the Exchange Act.**

Theinformation relating to directors, executive officers, and compliance withSection 16(a) of the Exchange Act contained in the Company's definitive proxystatement to be delivered to stockholders in connection with the 2003 AnnualMeeting of Stockholders (the "Proxy Statement") is incorporated herein byreference.

** Item 10.   ExecutiveCompensation.**

** **The information relating toexecutive compensation contained in the Proxy Statement is incorporated hereinby reference.

** Item 11.    SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

The information relating tosecurity ownership of certain beneficial owners and management contained in theProxy Statement is incorporated herein by reference.

The following table provides information regarding securitiesauthorized for issuance under equity compensation plans, as of December 31,2002, concerning compensation plans (including individual compensationarrangements) under which equity securities of the Company are authorized forissuance.

                           

(a)
   
(b)
   
(c)
            
         Plan Category

 

Number of  securities to be issued upon exercise of   outstanding options, warrants and  rights
   
 

Weighed-average exercise price of   outstanding options, warrants  and rights
   
Number of  securities remaining available for future issuances under equity compensation  plans (excluding securities reflected in   column (a))
          
Equity compensation plans
      
approved by security holders

 1,437,000 
   
$1.31
   
1,220,000
           
Equity compensation plans   not approved by  security
      
holders

   1,789,000  
   
$0.98
   
 --
             
      Total

3,226,000
   
$1.12
   
1,220,000

For a complete description of the Company's equitycompensation plans, please refer to Note 8 of our audited consolidatedfinancial statements as of December 31, 2002.

** Item 12.     CertainRelationships and Related Transactions.**

The information relating torelated party transactions contained in the Company's Proxy Statement isincorporated herein by reference.

** **

** **

11

 

**Item 13.    Exhibits and Reports on Form8-K.**

**                **(a)             *Exhibits*

2.1           Stock Purchase and Note Assignment Agreement, dated as ofSeptember 29, 2000, between Spruce MacIntyre Holding Corp., P.W. StephensEnvironmental, Inc., P.W. Stephens Contractors, Inc., P.W. Stephens Services,Inc., P.W. Stephens Northwest, Inc. and U.S. Industrial Services, Inc. (filedas Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February20, 2001, and incorporated herein by reference).

2.2           Reorganization Agreement and Plan of Merger, effectiveas of June 29, 2001, by and among U S Industrial Services, Inc., a Delawarecorporation, Point To Point Network Services, Inc., a Massachusettscorporation, and W. Michael Sullivan (filed as Exhibit 2.1 to the Company'sCurrent Report on Form 8-K filed on July 19, 2001, and incorporated herein byreference).

2.3           Agreement for Sale of Shares, dated as of February 22, 2002, betweenNextgen Communications Corporation, a Delaware corporation, and Point to Pointof Louisiana, Inc., a Louisiana corporation (filed as Exhibit 2.1 to the Company's Current Reporton Form 8-K filed on March 19, 2002, and incorporated herein by reference).

2.4           First Amendment to Agreement for Sale of Shares, executedto be effective as of February 22, 2002, by and between Nextgen CommunicationsCorporation and Point to Point of Louisiana, Inc. (filed as Exhibit 2.2 to the Company'sCurrent Report on Form 8-K filed on March 19, 2002, and incorporated herein byreference).

2.5           Secured Promissory Note, dated February 22, 2002, issuedby Point to Point of Louisiana to Nextgen Communications Corporation. (filed as Exhibit 2.3 to theCompany's Current Report on Form 8-K filed on March 19, 2002, and incorporatedherein by reference).

2.6           First Amendment to Secured Promissory Note, executed to beeffective as of February 22, 2002, by and between Point to Point of Louisiana,Inc. and Nextgen Communications Corporation (filed as Exhibit 2.4 to the Company's Current Reporton Form 8-K filed on March 19, 2002, and incorporated herein by reference).

2.7           Stock Pledge Agreement, executed to be effective as ofFebruary 22, 2002, by and between Point to Point of Louisiana, Inc. and NextgenCommunications Corporation (filed as Exhibit 2.5 to the Company's Current Report on Form 8-K filedon March 19, 2002, and incorporated herein by reference).

2.8           Settlement Agreement and Mutual Release of Claims,executed to be effective as of February 20, 2002, by and among Point To PointNetwork Services, Inc., Nextgen Communications Corporation, and W. MichaelSullivan (filedas Exhibit 2.6 to the Company's Current Report on Form 8-K filed on March 19,2002, and incorporated herein by reference).

2.9           Repurchase Option Agreement, executed to be effective asof February 20, 2002, by and between Nextgen Communications Corporation and W.Michael Sullivan (filedas Exhibit 2.7 to the Company's Current Report on Form 8-K filed on March 19,2002, and incorporated herein by reference).

2.10         Stock Purchase Agreement dated November 1, 2002, by and between NextgenCommunications Corporation and Jane C. Barber (filed as Exhibit 2.1 to the Company's CurrentReport on Form 8-K filed on January 17, 2003, and incorporated herein byreference).

2.11         Promissory Note dated November 1, 2002, in the originalprincipal amount of $1,500,000, issued by Nextgen Communications Corporation toJane C. Barber (filedas Exhibit 2.2 to the Company's Current Report on Form 8-K filed on January 17,2003, and incorporated herein by reference).

12

 

 

2.12         Promissory Note dated November 1, 2002, in the originalprincipal amount of $1,000,000, issued by Nextgen Communications Corporation toJane C. Barber (filedas Exhibit 2.3 to the Company's Current Report on Form 8-K filed on January 17,2003, and incorporated herein by reference).

2.13         Promissory Note dated November 1, 2002, in the originalprincipal amount of $1,444,100, issued by Nextgen Communications Corporation toJane C. Barber (filedas Exhibit 2.4 to the Company's Current Report on Form 8-K filed on January 17,2003, and incorporated herein by reference).

2.14         Secured Promissory Note dated November 1, 2002, in theoriginal principal amount of $5,200,000, issued by Nextgen CommunicationsCorporation to Jane C. Barber (filed as Exhibit 2.5 to the Company's Current Report on Form 8-K filedon January 17, 2003, and incorporated herein by reference).

2.15         Assignment of Promissory Notes, dated November 1, 2002,by and between Nextgen Communications Corporation and Jane C. Barber (filed as Exhibit 2.6 to theCompany's Current Report on Form 8-K filed on January 17, 2003, andincorporated herein by reference).

2.16         Warrant Purchase Agreement, dated November 15, 2002 byand between Nextgen Communications Corporation and Jane C. Barber. +

3.1           Certificate of Incorporation of the Company, as restatedon July 31, 2001 (filed as Exhibit A to the Company's Information Statement onSchedule 14C filed on July 9, 2001, and incorporated herein by reference).

3.2           Certificate of Amendment to the Certificate ofIncorporation of Nextgen Communications Corporation, changing the corporation'sname to "Home Solutions of America, Inc.", as filed on December 23, 2002 (filedas Exhibit A to the Company's Information Statement on Schedule 14C filed onDecember 22, 2002, and incorporated herein by reference)

3.3           Bylaws of the Company, as amended on April 2, 2001(filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB for thequarter ended June 30, 2001, and incorporated herein by reference).

10.1 *      1998 Stock Option Plan (filed as Exhibit 4.1 to the Company'sAnnual Report on Form 10-KSB for the year ended September 30, 1998, andincorporated herein by reference).

10.2        Promissory Notes in principal amounts of $3,490,000 and$1,000,000, respectively, issued to ATNAM Enterprises, Inc. by Kenny IndustrialServices, L.L.C. (filed as Exhibit 10.3 to the Company's Quarterly Report onForm 10-QSB for the quarter ended March 31, 2001, and incorporated herein byreference).

10.3 *      2001 Stock Plan (filed as Exhibit B to the Company'sInformation Statement on Schedule 14C filed on July 9, 2001, and incorporatedherein by reference).

10.4         Note Modification Agreement dated April 30, 2001, by andbetween Spruce MacIntyre Holding Corp. and U S Industrial Services, Inc. (filedas Exhibit 10.6 to the Company's Quarterly Report on Form 10-QSB for thequarter ended June 30, 2001, and incorporated herein by reference).

10.5 *      Employment Agreement by and between Frank J. Fradellaand U S Industrial Services, Inc., dated April 2, 2001. (filed as Exhibit 10.7to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,2001, and incorporated herein by reference).

10.6 *      Registration Rights Agreement by and between Frank J.Fradella and U S Industrial Services, Inc., dated April 2, 2001. (filed asExhibit 10.8 to the Company's Quarterly Report on Form 10-QSB for the quarterended June 30, 2001, and incorporated herein by reference).

10.7 *     Stock Option Agreement executed December27, 2001, to be effective as of October 3, 2000, by and between Frank J.Fradella and Nextgen Communications Corporation (filed as Exhibit 2 toAmendment No. 3 to Schedule 13D of Frank J. Fradella filed on January 3, 2002,and incorporated herein by reference).

 

13

 

10.8*       Stock Option Agreement by and between R. Andrew White andNextgen Communications Corporation, dated February 1, 2002 (filed as Exhibit10.8 to the Company's Quarterly Report on Form 10-QSB for the quarter endedMarch 31, 2002, and incorporated herein by reference).

10.9*       Employment Agreement by and between R. Andrew White andNextgen Communications Corporation, dated March 1, 2002 (filed as Exhibit 10.9to the Company's Quarterly Report on Form 10-QSB for the quarter ended March31, 2002, and incorporated herein by reference).

10.10*     First Amendment to Stock Option Agreement by and between R.Andrew White and Nextgen Communications Corporation, dated September 2, 2002(filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-QSB forthe quarter ended September 30, 2002, and incorporated herein by reference).

10.11*     Restricted Stock Purchase Agreement by and between FrankJ. Fradella and US Industrial Services, Inc. dated April 2, 2001. + 

10.12*     Employment Agreement by and between P.W. Stephens, Inc.,a California corporation, and Scott Johnson, effective September 1, 2001. +

10.13       Form of Registration Rights Agreement between NextgenCommunications Corporation and each of four accredited investors, datedNovember 19, 2002. +

10.14       Form of Warrant Purchase Agreement between NextgenCommunications Corporation and each of four accredited investors, datedNovember 19, 2002. +

16.1         Letter dated January 3, 2003, from Merdinger, Fruchter,Rosen & Company, P.C. to the SEC regarding change in certifying accountants(filed as Exhibit 16.1 to the Company's Current Report on Form 8-K filed onJanuary 7, 2003, and incorporated herein by reference).

99.1         Certification pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +

                * Denotes a management contract or compensatory planor arrangement.                + Filed herewith.

               (b)                *Reports on Form 8-K*                                    None.

**Item 14. Controls and Procedures.**

Within the 90-day period prior to the filing of thisreport, an evaluation was carried out under the supervision and with theparticipation of the Company's management, including our Chief ExecutiveOfficer and our Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934).  Basedupon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that the design and operation of these disclosure controlsand procedures were effective.  No significant changes were made in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

14

 

**SIGNATURES**

                In accordance with Section 13 or15(d) of the Exchange Act, the registrant caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
**HOME SOLUTIONS OF AMERICA, INC**.     
Dated:  March 31, 2003

By:   /s/ R. ANDREW WHITE
   
R.  Andrew White
   
President,  Chief Executive Officer and 
   
Chief  Financial Officer

                In accordance with the ExchangeAct, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 

Dated:  March 31, 2003

By:   /s/ FRANK J. FRADELLA       Frank  J. Fradella, Director and Chairman of the Board

  
     
Dated:  March 31, 2003

By:   /s/ MICHAEL S. CHADWICK       Michael  S. Chadwick, Director

  
     
Dated:  March 31, 2003

By:   /s/ MARK W. WHITE       Mark  W. White, Director

 

 

 

 

15

 

**CERTIFICATIONS**

I, R. Andrew White, certify that:

1. I have reviewed this annual report on Form 10-KSBof Home Solutions of America, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statementof a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

a) Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant'sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the "Evaluation Date"); and

c) Presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant'sauditors and the audit committee of registrant's board of directors (or personsperforming the equivalent functions):

a) All significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant'sability to record, process, summarize and report financial data and haveidentified for the registrant's auditors any material weaknesses in internalcontrols; and

b) Any fraud, whether or not material, that involvesmanagement of other employees who have a significant role in the registrant'sinternal controls; and

6. The registrant's other certifying officers and Ihave indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

                                                        

/s/ R. ANDREW WHITE
   
R. Andrew  White
   
Chief  Executive Officer, President, and Chief Financial Officer
   
Date: March 31, 2003

 

16

 

 

HOME SOLUTIONS OF AMERICA,INC.

CONSOLIDATED FINANCIALSTATEMENTS

**INDEX**
  PAGE     
 

INDEPENDENT  AUDITORS' REPORTS

F-1
     
CONSOLIDATED  BALANCE SHEET

F-3
     
 

CONSOLIDATED  STATEMENTS OF OPERATIONS

F-4
     
 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

F-5
     
 

CONSOLIDATED  STATEMENTS OF CASH FLOWS

F-6
     
 

NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS

      F-7 - F-25

 

 

 

 

 

 

** **

 

**INDEPENDENTAUDITORS' REPORT**

 

To The Board Of Directors HOMESOLUTIONS OF AMERICA, INC.

We have audited theaccompanying consolidated balance sheet of HOME SOLUTIONS OF AMERICA, INC. (formerly Nextgen CommunicationsCorporation) (the "Company") as of December 31, 2002, and the relatedconsolidated statements of operations, stockholders' equity, and cash flows forthe year then ended.  These consolidated financial statements are theresponsibility of the Company's management.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.  

We conducted our auditin accordance with auditing standards generally accepted in the United Statesof America.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall consolidated financial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion. 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of HOME SOLUTIONS OF AMERICA, INC. (formerly Nextgen CommunicationsCorporation) as of December 31, 2002, and the results of their operations andtheir cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America. 

                                                                                                               /s/ Corbin & Company, LLP        

                                                                                                              **Corbin & Company, LLP**

Irvine, California March 14, 2003, except forNote 13, as to which the date is March 21, 2003 
 
 

F-1

 

**INDEPENDENTAUDITORS' REPORT**

** **

** **

**TO THE BOARD OFDIRECTORS HOME SOLUTIONS OFAMERICA, INC.:**

We have audited theaccompanying consolidated statements of operations, stockholders' equity andcash flows of HOME SOLUTIONS OFAMERICA, INC. (formerly Nextgen Communications Corporation) for the yearended  December 31, 2001. Theseconsolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit. 

We conducted our auditin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion. 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of HOME SOLUTIONS OF AMERICA, INC.(formerly Nextgen Communications Corporation) for the year ended December 31,2001, in conformity with accounting principles generally accepted in the UnitedStates of America. 

**MERDINGER,FRUCHTER, ROSEN & CORSO, P.C. CertifiedPublic Accountants**

New York, New York March 1, 2002 
****
 

F-2

 

**HOMESOLUTIONS OF AMERICA, INC.CONSOLIDATEDBALANCE SHEET**DECEMBER31, 2002 (InThousands, Except Per Share Data)  

 
**ASSETS**                  
Current assets:

Cash
  $
265 

Accounts receivable, net  of allowance for doubtful accounts of $94
   
3,670 

Prepaid expenses and  supplies
       514        Total current assets
4,449 
     
Property and equipment,  net of accumulated depreciation 

  and amortization of $75

3,053 
     
Goodwill

10,815 
     
Deferred income taxes

32 
     
Due from related party

60 
     
Other assets
    129      
$
    18,538 **LIABILITIES AND STOCKHOLDERS' EQUITY**             
Current liabilities:

Accounts payable and  accrued expenses
  $
2,363 

Due to related party
   
87 

Line of credit borrowings
   
528 

Current portion of  long-term debt
   
2,960 

Current portion of capital  lease obligations
   
171 

Notes payable to related  party
       750        Total current liabilities
6,859 
     
Long-term liabilities:

Long-term debt, net of  current portion
   
6,702 

Capital lease obligations,  net of current portion
       297             Total liabilities    13,858      
Commitments and  contingencies
     
Stockholders' equity:

Common stock, $0.001 par  value; 50,000 shares authorized;

  11,079 shares issued and outstanding
   
11 

Additional paid in capital
   
26,745 

Accumulated deficit 
       (22,076)       Total stockholders' equity      4,680      
$
    18,538 
Theaccompanying notes are an integral part of these consolidated financialstatements.

F-3

 

**HOMESOLUTIONS OF AMERICA, INC. CONSOLIDATEDSTATEMENTS OF OPERATIONS**(InThousands, Except Per Share Data) 

 
         
Year Ended     December 31, 2002   
Year Ended     December 31, 2001                  
Net  Sales

$
    2,559   $    30      
Costs  and expenses

Cost  of sales
   
1,280 
   
- 

Selling,  general and administrative expenses
   
2,666 
   
1,229 
  3,946 
1,229 
     
Operating  loss
    (1,387)    (1,199)     
Other  income (expense):

Loss  on sale of note receivable
   
- 
   
(1,591)

Loss  on sale of assets
   
(41)
   
- 

Interest  income 
   
139 
   
276 

Interest  expense
   
(130)
   
- 

Other  income (expense), net
       1,189        - 
     Total  other income (expense)
    1,157     (1,315)     
     Loss  from continuing operations before income taxes

(230)

(2,514)
     
Income  taxes

- 
  -      
Income  (loss) from discontinued operations (including loss on disposal

  of $104 for the year ended December 31,  2002)
    (247)    67      
Net  loss
  $    (477)
$
    (2,447)        
Basic and diluted  loss per common share:
   
Net loss from  continuing operations
  $
(0.02)
  $
(0.26)

Net income (loss)  from discontinued operations
       (0.03)       0.01            
Net loss
  $    (0.05)  $    (0.25)           
Weighted  average shares outstanding
      
-  Basic and diluted
       9,709        9,868 
Theaccompanying notes are an integral part of these consolidated financialstatements.

F-4

**HOMESOLUTIONS OF AMERICA, INC. CONSOLIDATEDSTATEMENT OF STOCKHOLDERS' EQUITY** (In Thousands) 

                                
   
**Common Shares**   Additional         Total   Shares  Outstanding   Dollar  Amount   Paid-inCapital   AccumulatedDeficit   Stockholders'Equity
Balance,  January 1, 2001

8,764 

$

88 

$

23,177 

$

(19,152)

$

4,113 
  
Exercise  of options

83 

1 

33 

- 

34 
  
Issuance  of shares for services

125 

1 

190 

- 

191 
  
Issuance  of shares for acquisition

2,000 

20 

2,894 

- 

2,914 
  
Net  loss

- 

- 

- 

(2,447)

(2,447)
  
Adjustment  for change in par value
- (99)99 - -   
Balance,  December 31, 2001

10,972 

11 

26,393 

(21,599)

4,805 
  
Issuance  of common stock to officer

for  note receivable

50 

- 

63 

- 

63 
  
Issuance  of common stock for exercise

of  options for note receivable

50 

- 

63 

- 

63 
  
Common  stock returned due to settlement

(1,800)

(2)

(2,626)

- 

(2,628)
  
Issuance  of common stock in relation

to  purchase of the building

152 

- 

250 

- 

250 
  
Issuance  of common stock to investors

for  cash

1,400 

2 

1,398 

- 

1,400 
  
Issuance  of shares for services

255 

- 

662 

- 

662 
  
Estimated  fair market value of options

and  warrants granted to employees and

non-employees  for services and interest

- 

- 

117 

-

117 
  
Warrants  issued as consideration for

purchase  of P.W. Stephens, Inc.

- 

- 

425 

-

425 
  
Net  loss
- - - (477)(477)  
Balance,  December 31, 2002
11,079 
$
11 
$
26,745 
$
(22,076)
$
4,680   
Theaccompanying notes are an integral part of these consolidated financialstatements.

F-5

**HOMESOLUTIONS OF AMERICA, INC. CONSOLIDATEDSTATEMENTS OF CASH FLOWS**(InThousands) 

 
                Year Ended     December 31,     2002       Year Ended     December 31,     2001
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(477)

$
  (2,447)
Adjustments to reconcile  net loss to net cash used in operating

  activities:

Depreciation and  amortization

105 

117 

Allowance for doubtful  accounts

10 

67 

Loss on sale of assets

41 

- 

Loss on sale of PTP

104 

- 

Reversal of previously  recorded liabilities

(1,540)

- 

Loss on sale of notes  receivable

- 

1,591 

Stock-based compensation

117 

60 

Changes in operating assets  and liabilities, net of acquisitions 

  and divestitures-

     Accounts receivable
   
618 
   
(706)

     Costs and estimated  earnings in excess of billings on jobs in        progress, net
   
6 
   
(191)

     Prepaid expenses and  supplies
   
(63)
   
168 

     Other assets
   
(1)
   
9 

     Accounts payable and  accrued liabilities
       (836)       (651)        
Net cash used in operating  activities

 
  (1,916)
 
  (1,983)     
CASH FLOWS FROM INVESTING  ACTIVITIES:

Principal payments received on notes  receivable
   
199 
   
3,397 

Cash transferred in sale of PTP
   
(198)
   
- 

Cash received in  acquisition of PTP, net
   
- 
   
1,812 

Purchase of P.W. Stephens,  Inc., net of cash acquired of $260
   
(740)
   
- 

Advances to related parties
   
(80)
   
- 

Collections on advances to related  parties
   
20 
   
- 

Purchases of property and  equipment
       (50)       -         
Net cash (used in) provided  by investing activities
       (849)       5,209        
CASH FLOWS FROM FINANCING  ACTIVITIES:
   
Principal payments on  long-term debt and capital leases
   
(580)
   
(882)

Proceeds from sale of stock
   
1,400 
   
- 

Restricted cash
       -        (167)           
Net cash provided by (used  in) financing activities
       820        (1,049)       NET INCREASE (DECREASE) IN  CASH     (1,945)   
2,177 

  

 
     CASH AT BEGINNING OF YEAR  2,210   33 
  
        
CASH AT END OF YEAR

$
    265   $    2,210      
Supplemental disclosures of  cash flow information:

Cash paid for:

Interest

$

53 

$

23 

Income taxes

$

- 

$

- 
     
Supplemental schedule of non-cash investing  and financing activities:

Machinery and equipment  acquired through capital lease obligations

$

14 

$
  - 
Stock and options/warrants  issued for services

$

117 

$

60 

Stock issued in  payment/settlement of accounts payable

$

662 

$

131 

Common stock returned as  settlement

$

2,628 

$

- 

Stock issued for notes  receivable

$

126 

$

- 

Stock and debt issued for  purchase of land and building

$

1,000 

$

- 

Shares issued for  acquisition

$

- 

$

2,914 
  See Note 2 for additional non-cash transactions related to the acquisition of  PWS
Theaccompanying notes are an integral part of these consolidated financialstatements.

F-6

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**  **

**NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**CompanyDescription and Nature of Operations**

Home Solutions of America,Inc. (formerly Nextgen Communications Corporation) and its wholly ownedsubsidiaries (together, the "Company"), provide abatement servicesof indoor air contaminates for residential and commercial properties tocustomers located throughout California. Prior to the sale of Point To Point Network Services, Inc. ("PTP"),the Company provided fixed communications networking design and build-outservices, such as voice, data, and video, to the communications industry (seeNote 2).  As of December 31, 2002, theCompany has three branches in California located in Huntington Beach, Fremontand San Diego. The Company's corporateoperations are based in Houston, Texas. 

On December 23, 2002, theCompany filed a Certificate of Amendment to its Certificate of Incorporation,thereby changing its name from Nextgen Communications Corporation to HomeSolutions of America, Inc.  Prior to the acquisition of PTP on June 29,2001 (see Note 2), the Company had no significant operations.

**Principlesof Consolidation**

The accompanyingconsolidated financial statements include the accounts of Home Solutions ofAmerica, Inc. and its wholly owned subsidiaries. All significant intercompanytransactions and balances have been eliminated in consolidation. 

**FairValue of Financial Instruments**

The Company measures itsfinancial assets and liabilities in accordance with generally acceptedaccounting principles. For certain of the Company's financial instruments,including cash, accounts receivable, and accounts payable, the carrying amountsapproximate fair value due to their short maturities.  The fair value of lines of credit and long term debt approximatetheir face values due to the short term maturities or their variable interestrate terms.  The fair value of dueto/due from related party is not determinable as these are with relatedparty.  

**Useof Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of the contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Significant estimates made by management include, amongothers, the realizability of accounts receivable, property and equipment andgoodwill, and valuation of deferred tax assets.  Actual results could differ from these estimates. 

**Concentrationof Credit Risk**

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistof cash and notes and other receivables. The Company places its cash with highquality financial institutions and at times may exceed the Federal DepositInsurance Corporation ("FDIC") $100 insurance limit. At December 31, 2002, theCompany had approximately $212 in these accounts in excess of the FDICinsurance limits. 

The Company offers itsservices predominately in the state of California, and it extends credit basedon an evaluation of a customer's financial condition, generally withoutcollateral. Exposure to losses on accounts receivable is principally dependenton each customer's financial condition. The Company monitors its exposure forcredit losses and maintains allowances for anticipated losses, if required. Although the Company expectsto collect amounts due, actual collections may differ from the estimatedamounts.

Nosingle customer accounted for more than 10% of either accounts receivable or oftotal sales, as of and for the year ended December 31, 2002.

****F-7

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

** **

** NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

**Propertyand Equipment**

Propertyand equipment are stated at cost, and are being depreciated using thestraight-line method over the estimated useful lives of the related assets,ranging from three to 20 years. Leasehold improvements are amortized using the straight-line method overthe lesser of the estimated useful lives of the assets or the related leaseterms.  Equipment under capital leaseobligations is depreciated over the shorter of the estimated useful life or theterm of the lease.  Maintenance androutine repairs are charged to expense as incurred.  Significant renewals and betterments are capitalized.  At the time of retirement or otherdisposition of property and equipment, the cost and accumulated depreciationare removed from the accounts and any resulting gain or loss is reflected inthe statement of operations.

**Goodwill**

Goodwill represents theexcess of acquisition cost over the net assets acquired in a businesscombination and is not amortized in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 142, "*Goodwilland Other Intangible Assets"*. Management reviews, on an annual basis, the carrying value of goodwillin order to determine whether impairment has occurred. Impairment is based onseveral factors including the Company's projection of future undiscountedoperating cash flows. If an impairment of the carrying value were to beindicated by this review, the Company would adjust the carrying value ofgoodwill to its estimated fair value. 

The changes in the carryingamount of goodwill for the years ended December 31, 2002 and 2001 are asfollows:

Balance as of January 1,  2001

$

- 

Goodwill acquired during year

3,509 

Amortization
    (44)     
Balance as of December 31, 2001

3,465 
     
Goodwill reversed due to settlement (see Note 2)

(2,628)

Goodwill written off due to sale of  PTP

(837)

Goodwill acquired during the year
    10,815      
Balance as of December 31, 2002

$
    10,815 
The following tablereflects pro forma results of operations of the Company giving effect to SFASNo. 142 as if it were adopted on January 1, 2001:
        Year Ended   December 31, 2002     Year Ended   December 31, 2001                        
Net loss as reported

$

(477)
   
$

(2,447)
              
Add: Goodwill amortization
    -       44               
Pro forma net loss

$
    (477)   
$
    (2,403)              
Basic and diluted loss per share - as  reported

$
    (0.05)   
$
    (0.25)              
Basic and diluted loss per share - pro forma

$
    (0.05)   
$
    (0.24)      
F-8

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

**NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

**Long-LivedAssets**

The Company's managementassesses the recoverability of its long-lived assets by determining whether thedepreciation and amortization of long-lived assets over their remaining livescan be recovered through projected undiscounted future cash flows.  The amount of long-lived asset impairment,if any, is measured based on fair value and is charged to operations in theperiod in which long-lived asset impairment is determined by management.  At December 31, 2002, the Company'smanagement believes there is no impairment of its long-lived assets.  There can be no assurance, however, thatmarket conditions will not change or demand for the Company's products andservices will continue, which could result in impairment of long-lived assetsin the future.

**RevenueRecognition**

Sincethe purchase of P.W. Stephens, Inc. ("PWS") (see Note 2), revenue is recognizedat the time the contract and related services are performed.

Priorto that time, the Company reported revenues from fixed priced contracts usingthe percentage of completion method for financial reporting purposes.  Under the percentage of completion method,revenues with respect to individual contracts were recognized in the proportionthat costs incurred to date bore to total estimated costs.  Revenue and cost estimates were subject torevision during the terms of the contracts, and any required adjustments weremade in the periods in which the revisions become known.  Provision was made, where applicable, forthe entire amount of future estimated losses on contracts in progress when suchlosses were determined.  General andadministrative costs were not allocated to contract costs and were charged toexpense as incurred.

TheCompany recognized revenues from time and materials contracts and consultingservices as those services were performed. Advance payments made under these contracts were recorded as deferredrevenue and recognized when the related services were performed.

**Advertising**

The Companyexpenses the cost of advertising when incurred as general and administrativeexpense.  Advertising expense wasimmaterial for the years ended December 31, 2002 and 2001.
****
F-9

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

**  **

**NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

** Stock-BasedCompensation**

The Company uses theintrinsic value method of accounting for stock-based compensation to employeesin accordance with Accounting Principles Board Opinion ("APB") No. 25,as amended, *"Accounting for Stock Issued to Employees."*   The Company accounts for non-employeestock-based compensation under SFAS No. 123, *"Accounting forStock-Based Compensation."* AtDecember 31, 2002, the Company has two stock-based employee compensation plans,which are described more fully in Note 7. During the year ended December 31, 2002 and 2001, $11 and $0,respectively, of compensation expense was recognized in the accompanyingstatements of operations for options issued to employees pursuant to APB25.  No other stock-based employeecompensation cost is reflected in the 2002 statements of operations, as alloptions granted in 2002 under those plans had either exercise prices equal toor greater than the market value of the underlying common stock on the date ofgrant or the vesting period starts in fiscal 2003.  The following table illustrates the effect on net loss and lossper share if the Company had applied the fair value recognition provisions ofSFAS No. 123, to stock-based employee compensation:
          Year Ended     December 31,     2002       Year Ended December 31, 2001               
Net loss as reported
  $
(477)
     $
(2,447)

Deduct:      Total stock-based employee compensation  expense under
                  
  APB  25
     11    
-

Add:
   
Total stock-based employee compensation  expense under fair
   
   value based method for all awards, net of related tax effects
    (236)       (274)           
Pro forma net loss

$
    (702)   
$
    (2,721)       
Basic and diluted loss per share - as  reported

$
    (0.05)
$
    (0.25)       
Basic and diluted loss per share - pro forma

$
    (0.07)   
$
    (0.28)
**IncomeTaxes**

The Company accounts for income taxes in accordance withSFAS No. 109, *"Accounting for IncomeTaxes."*  Under the asset andliability method of SFAS No. 109, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities ofa change in tax rates is recognized in income in the period that includes theenactment date.  A valuation allowanceis provided for certain deferred tax assets if it is more likely than not thatthe Company will not realize tax assets through future operations.

** ComprehensiveIncome**

During the periodspresented, the Company had no items of comprehensive income and, therefore, hasnot presented a statement of comprehensive income. 

** **F-10

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

**NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

**Per Share Data**

Basic earnings per share("BEPS") is computed by dividing income (loss) available to common stockholdersby the weighted average number of outstanding common shares during the periodof computation. Diluted earnings per share ("DEPS") gives effect toall dilutive potential common shares outstanding during the period ofcomputation.   The computation of DEPSdoes not assume conversion, exercise or contingent exercise of securities thatwould have an antidilutive effect on earnings. As of December 31, 2002 and2001, the Company had the following potentially dilutive securities that wouldaffect loss per share if they were to be dilutive: 
             2002       2001                  
Options

830
  410
Warrants
    1,351    -    2,181    410                  
**Business Segments**

The Company currently operates in one segment, indoor air contaminateabatement services for residential and commercial properties.

**New AccountingPronouncements**

In June 2001, SFAS No. 141,*"Business Combinations"*, and SFAS No. 142, *"Goodwilland Other Intangible Assets,"* were issued. SFAS No. 141 requires thatall business combinations initiated after June 30, 2001 be accounted for usingthe purchase method of accounting, and that identifiable intangible assetsacquired in a business combination be recognized as an asset apart fromgoodwill, if they meet certain criteria. The Company accounted for itsacquisition of PWS under SFAS No. 141 (see Note 2).

SFAS No. 142 applies to allgoodwill and identified intangible assets acquired in a business combination.Under the new standard, all goodwill and indefinite-lived intangible assets,including that acquired before initial application of the standard, will not beamortized but will be tested for impairment at least annually. The new standardis effective for fiscal years beginning after December 15, 2001. The Companyadopted SFAS No. 142 effective January 1, 2002 and as a result did notrecognize any amortization of goodwill during 2002 and did not recognize anyimpairment with respect to goodwill at December 31, 2002. 

In July 2001, SFAS No. 143,*"Accounting for Asset Retirement Obligations"* was issued,which requires the recognition of a liability for an asset retirementobligation in the period in which it is incurred. When the liability isinitially recorded, the carrying amount of the related long-lived asset iscorrespondingly increased. Over time, the liability is accreted to its presentvalue and the related capitalized charge is depreciated over the useful life ofthe asset. SFAS No. 143 is effective for fiscal years beginning after June 15,2002. The impact of the adoption of SFAS No. 143 on the Company's reportedoperating results, financial position and existing financial statementdisclosure is not expected to be material.

In August 2001, SFAS No.144, *"Accounting for the Impairment or Disposal of Long-LivedAssets,"* was issued. This statement addresses the financial accountingand reporting for the impairment or disposal of long-lived assets and broadensthe definition of what constitutes a discontinued operation and how results ofa discontinued operation are to be measured and presented. The provisions ofSFAS No. 144 are effective for financial statements issued for fiscal yearsbeginning after December 15, 2001. The Company adopted SFAS No. 144 effectiveJanuary 1, 2002 and there was no effect on financial position or the results ofoperations as of and for the year ended December 31, 2002. 

F-11

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

** **

**NOTE 1 - BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

In April 2002, SFAS No.145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections," was issued.  As a result of rescinding SFAS No. 4,"Reporting Gains and Losses from Extinguishment of Debt," the requirement thatgains and losses from the extinguishment of debt be aggregated and, ifmaterial, classified as an extraordinary item, net of the related income taxeffect is eliminated. The provisions of SFAS 145 that affect the Company areeffective for fiscal periods beginning after May 15, 2002, although earlyadoption of SFAS 145 is permitted. The Company has applied the disclosureprovisions in SFAS 145 in its consolidated financial statements and the accompanyingnotes.

In June 2002, SFAS No. 146, *"Accounting for CostsAssociated with Exit or Disposal Activities,"* was issued. This statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) IssueNo. 94-3, *"Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring)."* The provisions of this Statement are effective forexit or disposal activities that are initiated after December 31, 2002, withearly application encouraged. The Company will adopt SFAS No. 146 in thefirst quarter of 2003 and does not expect adoption to have a material effect onits results of operations, financial position or cash flows.

InNovember 2002, the FASB issued Interpretation No. 45 ("FIN 45"), *"Guarantor'sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others."* FIN 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued. Italso clarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. The initial recognition and initial measurementprovisions of FIN 45 are applicable on a prospective basis to guarantees issuedor modified after December 31, 2002. The disclosure requirements in FIN 45 areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002. The Company does not expect FIN 45 to have a material impacton its financial position or results of operations. 

InDecember 2002, the FASB issued Statement of Financial Accounting Standards No.148 ("SFAS 148"), *"Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of FASB Statement No. 123."* SFAS 148 amendsSFAS 123 to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. In addition, SFAS 148 amends the disclosure requirements ofSFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Thetransition guidance and annual disclosure provisions of SFAS 148 are effectivefor financial statements issued for fiscal years ending after December 15,2002. The interim disclosure provisions are effective for financial reportscontaining financial statements for interim periods beginning afterDecember 15, 2002. The Company has applied the disclosure provisions inSFAS 148 in its consolidated financial statements and the accompanying notes. 

InJanuary 2003, the FASB issued Interpretation No. 46 ("FIN 46"), *"Consolidationof Variable Interest Entities"*, an interpretation of Accounting ResearchBulletin 51, "Consolidated Financial Statements," to improve financialreporting of special purpose and other entities. In accordance with theinterpretation, business enterprises that represent the primary beneficiary ofanother entity by retaining a controlling financial interest in that entity'sassets, liabilities, and results of operations must consolidate the entity intheir financial statements. Prior to the issuance of FIN 46, consolidationgenerally occurred when an enterprise controlled another entity through votinginterests. FIN 46 is effective immediately for all new variable interestentities created or acquired after January 31, 2003. For variable interestentities created or acquired prior to February 1, 2003, the provisions ofFIN 46 must be applied for the first interim or annual period beginning afterJune 15, 2003. The Company does not expect FIN 46 to have a materialimpact on its financial statements as it has no variable interest entities.

**Reclassifications**

Certainreclassifications have been made to prior year amounts in financial statementsin order to conform to the current year presentation.  These reclassifications have no effect on previously reportedresults of operations.

****F-12

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)For The Year EndedDecember 31, 2002**

** **

**NOTE 2 - ACQUISITIONSAND DISPOSITIONS**

Commensurate with the announcement in August2002 of the Company's strategy of acquiring companies in the specialtyresidential services industry, onDecember 27, 2002, pursuant to a stock purchase agreement, the Companypurchased 100% of the outstanding stock of PWS.  The sale was effective November 1, 2002, and has been accountedfor as a purchase.  The purchase pricewas comprised of the following:
   
Cash

$

1,000
   
Notes  payable (see Note 5)

8,809
   
Assignment of notes receivable

1,175
   
Cancellation of note receivable (see Note 3)

1,154
   
Value  of warrants

425
   
Commissions,  legal, accounting and other costs
    839      
$
    13,402
The purchase price wasallocated as follows:
   
Current assets

$

4,386 
   
Property  and equipment

2,022 
   
Other long-term assets

160 
   
Current liabilities

(2,552)
   
Long-term  liabilities
    (1,429)           
Estimated  fair value of tangible net assets acquired

2,587 
   
Goodwill  and other intangible assets

10,815 
           
$
    13,402 
The Company has classifiedthe excess of the purchase price over the estimated fair value of the tangiblenet assets acquired as goodwill as of December 31, 2002 in the accompanyingconsolidated balance sheet.  The Companyis in the process of analyzing the components of the intangible assets and willhave an appraisal performed by a third party during 2003 to determine finalpurchase price allocation.

The Company acquired all ofthe issued and outstanding stock of PTP on June 29, 2001. The acquisition wasrecorded as a purchase. Consideration paid was as follows:
   
Cash

$

678
   
2,000 shares of the  Company's common stock

2,914
   
Legal,  accounting and other costs
    189      
$
    3,781
F-13

 

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 2 - ACQUISITIONSAND DISPOSITIONS (Continued)**

The purchase price wasallocated as follows:
   
Current assets

$

2,850 
   
Property  and equipment

543 
   
Other long-term assets

536 
   
Current liabilities

(2,442)
   
Long-term  liabilities
    (1,215)           
Estimated  fair value of tangible net assets acquired

272 
   
Goodwill

3,509 
      
$
    3,781 
On February 22, 2002, the Company sold all of its shares of PTP toPoint to Point of Louisiana, Inc., a Louisiana corporation (the "Buyer"). Thesale price  was $1,000, which the Buyer paid byissuing a Secured Promissory Note (the "Note") to the Company. TheNote had interest at 6.5% per annum, and required a payment of accrued intereston February 22, 2003, and a payment of accrued interest and $100 of principalon February 22, 2004, and all remaining principal and interest accrued thereonon February 22, 2005. The Note was secured by the stock sold, pursuant to a StockPledge Agreement dated February 22, 2002 (see Note 8). Richard W. Lancaster, aformer director of the Company, serves as the President of the Buyer.  The Note was assigned to the formerstockholder of PWS in connection with the acquisition of PWS on November 1,2002 (see discussion above).  PTP had revenuesof $253 and incurred a loss from operations of $143 during 2002. PTP hadrevenues of $4,403 and income from operations of $67 during 2001. The loss on sale of PTP is comprised of thefollowing:
   
Current assets

$

811 
   
Property  and equipment

476 
   
Goodwill

837 
   
Current liabilities

(1,066)
   
Long-term  liabilities
    (12)           
Net book  value of net assets sold

1,046 
   
Legal  and other transaction costs

58 
   
Sale  price
    (1,000)      
$
    104 
Prior to the sale of PTP,the Company entered into a settlement agreement with a former employee andstockholder of PTP (see Note 11).  Theagreement required the former stockholder to transfer 1,800 of the 2,000 sharesof the Company's common stock issued in the acquisition of PTP back to theCompany.  As a result, theCompany reduced previously recorded goodwill related to PTP by $2,628, thevalue of the shares on the date of acquisition.

Theaccompanying consolidated financial statements include the operations of PWSfrom November 1, 2002 forward. Thefollowing unaudited pro forma information presents the results of operationsfor the years ended December 31, 2002 and 2001 as though the acquisition hadoccurred on January 1, 2001: 
      
Year Ended
   
Year Ended
      
December 31,
   
December 31,
          2002       2001      
Revenue                   

$

14,991 

$

12,884 
   
Net loss

(18)

(463)
   
Loss per share

(.00)

(.04)

F-14

 

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

** **

**NOTE 3 - NOTESRECEIVABLE**

The Company held notesreceivable from Kenny Industrial Services, LLC in the amended and restatedprincipal amount of $4,091. These notes were sold for cash proceeds of $2,500to third parties during fiscal 2001. This sale resulted in a loss of $1,591,which is included as loss on sale of note receivable in the accompanyingstatement of operations for the year ended December 31, 2001. 

The Company held a notereceivable from Spruce McIntyre Holding Corp. ("Spruce") resulting from thesale of assets in September 2000. Spruce was related to PWS through commonownership, prior to the acquisition of PWS by the Company.  Principalpayments were due in three installments beginning June 15, 2001. The note wasmodified on April 30, 2001 in a new principal amount of $1,420, representing theoutstanding principal balance of the original note on that date. The modifiednote included an interest rate of 7.75% and was to mature on July 1, 2005. Termsprovided for payments of interest only through November 1, 2001 and 44 equalpayments of principal and interest of $37 commencing December 1, 2001. The noteand accrued interest totaling $1,154 was forgiven by the Company  in connection with the acquisition of PWS on November 1, 2002 andtherefore recorded as consideration by the Company in calculating the purchaseprice (see Note 2).

**NOTE 4 - PROPERTY ANDEQUIPMENT**

Property and equipment issummarized as follows at December 31, 2002: 
   
Machinery and equipment

$

1,128 
   
Building

850 
   
Automobile and trucks

844 
   
Land

150 
   
Computer equipment

62 
   
Office equipment, furniture and leasehold  improvements
    94    
3,128 
           
Less: accumulated depreciation and amortization
    (75)           
Property and equipment, net

$
    3,053 
 

Depreciation andamortization expense for property and equipment for the years ended December31, 2002 and 2001 was $105 and $73, respectively. 

**NOTE 5 - LINE OF CREDIT**

The Company has a creditagreement with a financial institution. The credit agreement includes a term loan (see Note 6), a revolving lineof credit and an equipment line of credit. The credit agreement is guaranteed by the former stockholder of PWS,secured by substantially all PWS assets and contains a provision that requiresPWS to maintain certain financial covenants.

The revolving line ofcredit bears interest at the prime rate (4.25% at December 31, 2002) plus 0.75%per annum, payable monthly.  The termsof the agreement provide for borrowings up to the lesser of $500 or the aggregateof 80% of eligible accounts receivable, as defined.  The revolving line of credit expired on January 28, 2003.  The Company is currently negotiating withother financial institutions to refinance this line, the equipment line and the$898 note payable (see Note 6).  Thebalance at December 31, 2002 on the line of credit was $499.

The equipment line ofcredit bears interest at the prime rate plus 1.00% per annum, payablemonthly.  The terms of the agreementprovide for borrowings up to $200.  Theequipment line of credit expired on January 31, 2003, at which time alloutstanding amounts will be repaid over 36 equal monthly installments includingprincipal and interest through February 28, 2006.  The balance at December 31, 2002 was $29.

F-15

 

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 6 - LONG-TERM DEBT**

Long-term debt consists ofthe following at December 31, 2002:

Note payable to seller,  interest at 6%, principal due in one payment including interest of $37 on  March 31, 2003, secured by substantially all the assets of the Company.   The Company is currently in the process of renegotiating the terms of this  note to extend the maturity date.

$

1,500 
   
Note payable to seller,  net of discount of $169, zero coupon, imputed interest at 5%, principal and  interest due in equal monthly installments of $24 through October 2007,  secured by substantially all the assets of the Company.

1,195 
   
Note payable to seller,  net of discount of $60, interest starting June 1, 2003 at one-month LIBOR  (1.38% at December 31, 2002) plus 1%, principal payments of $250 due  quarterly plus interest beginning November 1, 2003, with final payment of  $200 plus unpaid interest on November 1, 2008, secured by substantially all  of the assets of the Company.

5,141 
   
Note payable to a  financial institution (see Note 5), bearing interest at prime (4.25% at  December 31, 2002) plus 0.75%, monthly principal payments of $18 plus  interest, maturing on January 28, 2007.   The Company expects to replace the note payable through additional  financing from another institution.   The Company must maintain certain financial and non-financial  covenants.  This note is guaranteed by the  former stockholder of PWS.

898 
   
Note payable to seller, interest at 2.25%, principal  payments due as accounts receivable securing the note are collected,  remaining amount (if any) due April 1, 2003.

827 
   
Note payable to a related party, dated October 29,  2002, secured by a deed of trust, interest of 12% per annum payable monthly  and the balance due October 29, 2003.
  750    
Note payable to various financial institutions,  collateralized by various automobiles, bearing interest at various annual  interest rates ranging from prime plus 0.75% to 7.5%, principal and interest  payable in monthly installments ranging from $0.70 to $1 through September  30, 2005.
    101    
10,412 

          Less current portion

(3,710)
   
$
    6,702 
Future minimum principalpayments pursuant to the above long-term debt are as follows:

 

 
**Years Ending December 31,**                  
     2003

$

3,710 

     2004

1,494 

     2005

1,520 

     2006

1,490 

     2007 
    1,248        Thereafter     950 
$
    10,412                         
F-16

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 7 - LEASES**

On October 29, 2002, theCompany purchased the building in which the Company's headquarters are locatedin Houston, Texas, for $1,000. The Company paid $250 of the purchase price byissuing 152 shares of common stock of the Company (see Note 8), and $750 wasborrowed from an entity affiliated with a stockholder of the Company (see Note6). This mortgage loan had an origination fee of 3% plus 125 warrants to buycommon stock at $1.50 per share (valued at $195 under SFAS No. 123) (see Note8).  The value of these warrants isrecognized as interest expense over the term of the loan, and interest expenseof $22 was recorded during the year ended December 31, 2002.  The Company's Houston facilities werepreviously leased on a month-to-month basis, with a monthly rent of $5.

**Operating Leases**

The Company leases its facilities undernon-cancelable operating lease agreements. The leases expire on various dates through December 2004 and provide formonthly rents ranging from approximately $2 to $4.  Rental expense for the years ended December 31, 2002 and 2001 wasapproximately $72 and $143, respectively.

**Capital Leases**

The Company leases certainequipment under capital lease agreements, which expire at various dates throughMay 2006.  The leases are payable inmonthly installments ranging from approximately $0.4 to $2 at effectiveinterest rates ranging from 10.25% to 28.3%. The assets and liabilities under capital leases are recorded at leaseinception at the lower of the present value of the minimum lease payments orthe fair market value of the related assets. 

Future minimum leasepayments under non-cancelable leases are as follows:

**Years  Ending**
   
**Capital**

**Operating**
**December 31,**   **Leases**
** **
**Leases****Total**
2003

$

229 

$

72

$

301

2004

195 

54

249

2005

129 

-

129

2006
    19     -    19   
Total lease payments
   
572 

$
    126
$
    698         
Less amount representing  interest
       (104)         
Present value of future  minimum
      
  lease payments
   
468 
         
Less current portion
       (171)      
 
  $    297 
 

The following is ananalysis of the leased equipment under capital lease, which is included inproperty and equipment as of December 31, 2002:

Automobiles and trucks

$

399 

Machinery and equipment
    126 
525 

Less accumulated  depreciation
    (22)
$
    503 
                                

F-17

**HOMESOLUTIONS OF AMERICA, INC. NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 8 - EQUITY**

**CommonStock**

On July 31, 2001, the Companyfiled a restated certificate of incorporation. The restated certificate of incorporation increased the authorizedshares of the Company's common stock from 25,000 to 50,000, and decreased thepar value of the Company's common and preferred stock from $0.01 to $0.001.Stockholders holding a majority of the Company's common stock outstandingapproved the restated certificate of incorporation by their written consent inlieu of a special meeting dated June 14, 2001. This has been reflected as an adjustment to the par value in theaccompanying consolidated statement of stockholders' equity for the year endedDecember 31, 2001.

Duringthe year ended December 31, 2002, the Company issued 50 shares of restrictedcommon stock to one of its officers in connection with his employment.  The shares were issued for $1.25 per share(approximates the fair market value on the date of issuance), for which theofficer gave the Company a promissory note in the principal amount of $63,secured by these shares and an additional 50 shares of the Company's commonstock owned by him.  This promissorynote was assigned to the sole shareholder of PWS as part of the considerationpaid in the acquisition of PWS during fiscal 2002 (see Note 2).

Duringthe year ended December 31, 2002, the Company issued 50 shares of restrictedcommon stock to a former director of the Company pursuant to his exercise ofstock options, for which he gave the Company a promissory note in the principalamount of $63.  This promissory note wasassigned to the sole shareholder of PWS as part of the consideration paid inthe acquisition of PWS during fiscal 2002 (see Note 2).

Duringthe year ended December 31, 2002, the Company received back 1,800 shares of itscommon stock pursuant to a Settlement Agreement and Mutual Release of Claims(the "Release") by and among PTP, the Company, and W. Michael Sullivan("Sullivan") (see Note 11).

Duringthe year ended December 31, 2002, the Company issued 152 shares of restrictedcommon stock to a non-related party for $250 (the fair market value on the dateof issuance) as part of the consideration in the purchase of the building (seeNote 7).

During the year ended December 31, 2002, the Company issued 1,400 shares of restricted common stock and warrants to purchase 1,000 shares of common stock for $1.00 per share in connection a private placement in which the Company received aggregate net cash proceeds of $1,400.

Duringthe year ended December 31, 2002, the Company issued an aggregate of 255 sharesof restricted common stock to non-related parties for $662 (the fair marketvalue on the dates of issuance) as payment under various consulting agreements.

**StockOptions**

The Company's Board ofDirectors approved the 2001 Stock Plan (the "2001 Plan") on April 2,2001. The 2001 Plan provides for awards of incentive stock options,non-qualified stock options, and restricted stock purchase rights. The Companyhas reserved 2,000 shares of common stock under the 2001 Plan. The exerciseprice of the awards shall be determined by the Plan administrator at the dateof grant, but shall not be less than the fair market value of the stock on thedate of grant for employees, or 85 percent of the fair market value fornon-employees. The exercise period shall be no more than 10 years and theawards will vest over a period of time determinable by the Board ofDirectors.  The number of options underthe 2001 Plan available for grant at December 31, 2002 was 1,110.

The Company's Board ofDirectors approved the 1998 Stock Option Plan (the "1998 Plan"). The1998 Plan covers two types of options: incentive stock options andnon-qualified stock options. The aggregate number of shares that may be issuedpursuant to the 1998 Plan may not exceed 1,000 shares. The exercise price forthe options shall be determined by the Plan administrator at the date of grant,but shall not be less than the fair market value of the stock at the date of grant.The option period can be no more than 10 years and the options will vest over aperiod of time determinable by the Board of Directors.  The number of options under the 1998 Planavailable for grant at December 31, 2002 was 110.

During the year endedDecember 31, 2002 and 2001, the Company issued options to purchase 515 and 477shares of the Company's common stock to employees, respectively, under the 2001Plan.

F-18

 

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 8 - EQUITY(Continued)**

During the year endedDecember 31, 2002, the Company issued options under the 1998 Plan to purchase50 shares of the Company's common stock at $1.50 per share (which was above thefair market value on the date of grant) to non-employee, valued at $64 underSFAS No. 123.

During the year endedDecember 31, 2002, $11 of compensation expense was recognized in theaccompanying consolidated statements of operations for options issued toemployees in 2002 under APB 25.  

During the year endedDecember 31, 2001, the Company entered into Restricted Stock Purchase Agreementin which it granted to its officer the right to purchase 500 shares commonstock of the Company, $0.01 par value, at a price of $1.25 per share, subjectto the terms and conditions of the Company's 2001 Plan.  The purchase and sale of the stock wouldoccur as designated by the Company, but not later than April 2, 2011.  The stock is subject to the rights andoptions of the Company to repurchase the stock, as defined.

The fair value of eachoption granted during 2002 and 2001 to consultants and outside serviceproviders is estimated at the date of grant using the Black-Scholes optionpricing model with the following respective weighted average assumptions for2002 and 2001: interest rates of 2.97% and 5.50%, respectively; no dividendyields; volatility of 137% and 160%, respectively; and a weighted averageexpected life of the option of 5 years. 

The Black-Scholes optionvaluation method was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable.  In addition, the option valuation model requiresinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company's employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management's opinion, the existing model does not necessarily provide areliable single measure of the fair value of its employee stock options. 

The following summarizesthe Company's stock option transactions under the stock option plan for theyears ended December 31, 2002 and 2001:
      
Weighted
      
Average

Number of
   
Exercise Price

Options
   
Per Share
      
Outstanding, January 1,  2001

705 

$

1.73

Granted 

977 
   
1.28

Exercised

(83)
   
0.41

Canceled
    (190)       4.74   
Outstanding, December 31,  2001

1,409 
   
1.09
   
Granted 

565 
   
1.43

Exercised

(50)
   
1.25

Canceled
    (487)       0.83
Outstanding, December 31,  2002
    1,437 
$
    1.31
Exercisable at December  31, 2002
    972 
$
    1.24
Weighted average fair  value of

  options granted

2001 

$

1.14

2002 

$

1.66

F-19

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 8 - EQUITY(Continued)**

The following table summarizes the outstanding andexercisable stock options grouped by range of exercise prices as of December31, 2002: 

Options Outstanding
    Options Exercisable      
Weighted
               
Average
   
Weighted
   
Range of
      
Remaining
   
Average
   
Weighted

Exercise
      
Contractual
   
Exercise
   
Average
    Prices       Number       Life       Price       Number    Exercise Price            
$0.41 to $1.10
   
47
   
1.2 years
   
$0.85
   
47

$0.85

$1.82
   
20
   
9.3 years
   
$1.82
   
-

-

$1.25 to $1.50
     1,370        
5.6 years
   
$1.32
   
925   

$1.26
            
**Warrants**

From time to time, theCompany issues warrants pursuant to various consulting and third partyagreements.

During the year endedDecember 31, 2002, the Company issued 125 warrants to purchase shares of theCompany's common stock to lenders (see Note 7), 293 warrants to the formerstockholders of PWS in connection with the acquisition of PWS (see Note 2),1,000 warrants to investors (see "Common Stock" section above), and 75 warrantsto various consultants.  The warrants to consultants were valued at $141and are recorded to expense ratably over the term of the respective agreementsfor the year ended December 31, 2002, $20 has been expensed and $121 of the value remains to be recognized in fiscal2003.

The following summarizesthe Company's warrant transactions for the years ended December 31, 2002 and2001:
   
 
     Weighted      
Average
   
Number of
   
Exercise Price
       Warrants       Per Share                     
Outstanding, January 1,  2001

296

$

1.50
   
Granted

-
   
-
   
Exercised

-
   
-
   
Canceled
    -       -         
Outstanding, December 31,  2001

296
   
1.50
         
Granted

1,493
   
0.88
   
Exercised

-
   
-
   
Canceled
    -       -      
Outstanding, December 31,  2002
    1,789
$
    0.98      
Exercisable at December  31, 2002
    1,789
$
    0.98      
Weighted average fair  value of
   
  warrants granted

2001

$

-
   
2002

$

1.39

F-20

 

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 8 - EQUITY(Continued)**

The following tablesummarizes information about warrants outstanding as of December 31, 2002: 
    Warrants Outstanding   
Warrants Exercisable

Weighted

Weighted
   
Range of

Average

Average
   
Weighted

Exercise

Remaining

Exercise
   
Average
    Prices    Number    Contractual Life    Price       Number    Exercise Price   
$0.01

293

4.9 years

$0.01
   
293

$0.01

$1.00

1,000

4.9 years

$1.00
   
1,000   

$1.00

$1.50 - $2.00

496

3.4 years

$1.53
   
496

$1.53

The fair valueof each warrant granted during 2002 for services is estimated using theBlack-Scholes option pricing model on the date of grant using the followingassumptions:  (i) no dividend yield,(ii) average volatility of 137 percent, (iii) weighted average risk freeinterest rate of approximately 2.97 percent, and (iv) average expected life of5 years.

**NOTE 9 - RETIREMENTPLANS**

Asof December 31, 2001, a majority of the Company's current and former employeeswere covered by union sponsored, collectively bargained multi-employer pensionplans. The Company contributed and charged to expense approximately $109 forthe year ended December 31, 2001 for such plans. The plans' administrators didnot provide sufficient information to enable the Company to determine itsshare, if any, of unfunded vested benefits. During fiscal 2002, there was no expense as the Company had no pensionplans after the sale of PTP (see Notes 1 and 2).

**NOTE 10 - INCOME TAXES**

The provision for income taxes in theaccompanying consolidated financial statements consists of the following forthe years ended December 31:

 

 

**2002**
**2001**                     
Current:

Federal

$

-
  $
-

State

-
   
-

-
     -   
Deferred:
   
Federal
  -   
-

State
  -   
-

-
     -  $    -
$
    -
The reconciliation of theeffective income tax rate to the Federal statutory rate is as follows for theyears ended December 31: 
 **                   **
** 2002** 
**2001**      Federal income tax rate(34.0)% (34.0)% State and local income tax rate, net of Federal effect (5.0)      -     Increase invaluation allowance      39.0            34.0                     Effective income tax rate       - %        -%    
F-21

 

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 10 - INCOME TAXES(Continued)**

Deferred tax assets and liabilities reflect the net taxeffect of temporary differences between the carrying amount of asset andliabilities for financial reporting purposes and amounts used for income taxpurposes. Significant components of the Company's deferred tax assets are asfollows as of December 31, 2002: 

Deferred tax assets

  Loss carryforwards

$

5,062 

  Reserves and accruals

58 

  Depreciation

(26)

  Less: valuation allowance
    (5,062)
Net deferred tax assets

$
    32 
The valuation allowanceincreased by $191 and $878 during the years ended December 31, 2002 and 2001,respectively.

At December 31, 2002, theCompany had Federal net operating loss carryforwards of approximately $14,802.Net operating loss carryforwards expire starting in 2016 through 2022. Per yearavailability may be subject to change of ownership limitations under InternalRevenue Code Section 382. 

**NOTE 11 - LITIGATION,COMMITMENTS AND CONTINGENCIES**

The nature and scope of theCompany's business operations bring it into regular contact with the generalpublic, a variety of businesses and government agencies. These activitiesinherently subject the Company to potential litigation, which are defended inthe normal course of business. At December 31, 2002, there were various claimsand disputes incidental to the business. The Company believes that thedisposition of all such claims and disputes, individually or in the aggregate,should not have a material adverse affect upon the Company's financialposition, results of operations or cash flows. As of December 31, 2002, theCompany has not been named as a responsible party for any environmental issuesunder the Federal Superfund Law. 

An adversary proceeding wascommenced on or about February 9, 2001 by American Eco Corporation("Plaintiff" or "AEC"), which, at the time, was adebtor-in-possession under Chapter 11 of the United States Bankruptcy Code. Theproceeding seeks the recovery of certain alleged transfers and recovery of feesagainst the Company based on theories of breach of contract, promissoryestoppel, quantum meruit and pursuant to Sections 542, 544, 548 and 550 of theBankruptcy Code. The proceeding seeks a recovery in excess of $1,300 and otherequitable relief. The Company has filed its answer, which, in part, denies allliability. An Order Scheduling Pre-Trial Proceedings was signed on October 31,2001. A trial date has not yet been set.  The Company is vigorouslydefending this suit.  At this time, the Company cannot predict thelikelihood of an unfavorable outcome.  The Company had previously accruedmanagement fees that were billed prior to December 31, 2000.  

On or about August 1, 2002,National Union Fire Insurance commenced an adversary proceeding against usentitled *National Union Fire Ins. Co. v. QHI Stephens Contractors, Inc., EIFHoldings, Inc., P.W. Stephens Contracts, Inc., P.W. Stephens Contractors, Inc.(CA), P.W. Stephens Services, Inc., P.W. Stephens Residential, Inc., AmericanTemporary Sanitation, Inc.* in the United States District Court for theNorthern District of California.  Thelawsuit does not list the specific amount of damages being sought.  The lawsuit derives from a guaranteethat EIF Holdings, Inc., a predecessor of the Company, allegedlymade in 1997 for the benefit of a wholly-owned subsidiary of AmericanEco, when at the time EIF Holdings was a 72%-owned subsidiary of AmericanEco.  The Company is vigorously defending the validity and enforceabilityof the guarantee that forms the basis for the lawsuit, which is currently in thediscovery phase. 

F-22

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 11 - LITIGATION,COMMITMENTS AND CONTINGENCIES (Continued)**

Pursuant to an indemnification agreement between theCompany and Spruce, the Company recently settled a claim brought by CIT Group/EquipmentFinancing, Inc. filed in the United StatesDistrict Court for the Eastern District of Missouri.  The CIT settlement agreement requires Spruce to make certainpayments to the plaintiffs which Spruce has made through the filing date ofthis Form 10-KSB.  In the event thatSpruce fails to make the remaining settlement payments, the plaintiffs couldseek satisfaction of their $713 consent judgment against the Company, inwhich case the Company would have to seek indemnification from Spruce.

The Company has accrued$225 in the accompanying consolidated financial statements related to theabove proceedings.  Based onmanagement's analysis, the Company believes these amounts will be sufficient tocover any potential losses that may occur.

**EmploymentAgreements**

The Company has enteredinto employment contracts with two executive officers. The contracts providefor annual salary totaling $320; one contract expires in March 2003 and theother expires in April 2004. 

**ConsultingAgreements**

The Company has enteredinto a variety of consulting agreements for services to be provided to theCompany in the ordinary course of business. These agreements call for option grants and/or common share issuances andvarious payments upon performance of services and/or termination of theagreements (except for cause).

**SettlementAgreement**

The Company entered into arelease effective as of February 20, 2002, by and among PTP, the Company, andSullivan, a stockholder of the Company and former employee and stockholder ofPTP.  The Release settled certaindisputes among the parties related to the Company's acquisition of PTP fromSullivan on June 29, 2001, and the termination of Sullivan's employment withPTP on November 1, 2001. Pursuant to the Release, Sullivan receivedapproximately $464 cash, comprised of approximately $107 as severance for thetermination of his employment with PTP, and approximately $357 as payment infull of a promissory note issued by PTP to Sullivan on June 29, 2001 (see Note12). Also, approximately $42 of liabilities of PTP that Sullivan had personallyguaranteed were paid off in full. The Release required Sullivan to transfer1,800 of his 2,000 shares of the Company's common stock back to the Company (seeNote 8).

**Lettersof Intent**

In March 2002, the Companyentered into three letters of intent to acquire 229 communications towers foran aggregate purchase price of $51.2 million. These acquisitions werecontingent upon the occurrence of various events and conditions. The Company announced onOctober 3, 2002, that it would no longer seek the acquisition of communicationstowers. All of the Company's letters of intent to acquire communications towershave expired and the Company wrote-off $350 of non-refundable deposit, which isincluded in other income (expense) in the accompanying statements of operationsfor the year ended December 31, 2002.

F-23

**HOMESOLUTIONS OF AMERICA, INC.NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Dollarsand Shares in Thousands, Except Per Share Data)ForThe Year Ended December 31, 2002**

**NOTE 12 - RELATED PARTYTRANSACTIONS**

The Company is involved invarious related party transactions. These transactions are summarized asfollows: 

Pursuant to a ManagementServices Agreement effective May 1, 1999, between AEC and the Company, AEC hadagreed to provide certain services to the Company in exchange for a managementfee to be paid on a monthly basis. The services included providing the Companywith management guidance in addition to guaranteeing certain of the Company'sobligations with its creditors, in order to allow the Company to receive favorableterms with its creditors. The agreement provided for a monthly payment of $40.The Company believes that AEC did not perform its responsibilities under themanagement agreement and it is contesting the validity of the agreement. AtDecember 31, 2001, the Company had recorded $1,370 of accrued expenses payableto AEC.  During the year ended December 31, 2002, theCompany recorded no monthly expense and wrote-off $1,295 of the amounts due toother income (expense) in the accompanying consolidated statements ofoperations as management believes the Company has no liability for these feesas no services were rendered (see Note 11). At December 31, 2002, the Company has $75 of accrued liabilities recordedin due to related party in the consolidated balance sheet related to thismatter.

The Company was obligatedto PTP's former shareholder pursuant to a note in the amount of $340, bearinginterest at 8.25%, which represented advances made to PTP prior to itsacquisition by the Company. The note was settled in full by cash payment ofapproximately $357 as part of a settlement agreement (see Note 11). 

During the year endedDecember 31, 2002, an advance of $80 was made to an officer of the Company, ofwhich $20 was repaid during the year. The advances are non-interest bearing and are due on demand.  The outstanding balance at December 31, 2002was $60.

The Company has a note payable to a related partyfor the purchase of the land and building for the Company's corporateheadquarters.  The note is secured by adeed of trust, accrues interest at 12% per annum, payable monthly and thebalance is due October 29, 2003.  Interestpaid on the note was $16 for the year ended December 31, 2002.

**NOTE 13 - SUBSEQUENT EVENTS**

In February 2003, the Company borrowed $250 from anaffiliate of a stockholder of the Company, pursuant to an unsecured promissorynote that bears interest at 8% and requires monthly payments as the Companycollects proceeds on certain accounts receivable, prior to its final maturitydate of May 31, 2003.  In addition, theCompany borrowed $250 from two unrelated individuals pursuant to two promissorynotes.  These notes are guaranteed bytwo officers of the Company, each bear interest at 18% and require periodicpayments as the Company collects proceeds on certain accounts receivable, priorto the final maturity date of June 30, 2003.

In March 2003, the Company entered into aletter of intent to acquire all of the outstanding stock of Horizon Cleaning,Inc., a company that provides specialty residential cleaning and remediationservices, for approximately $2,416, consisting of 953 shares of common stock ofthe Company and a $224 seller note.

In March 2003, the Company entered into aletter of intent to acquire Fiber Seal Systems L.P., a company that providesfabric protection services, for the following consideration: (i) approximately$520 financed through a seller note, (ii) 300 shares of the Company's commonstock, and (iii) an option to purchase up to 250 shares of the Company's commonstock, subject to Fiber Seal Systems L.P. achieving certain revenue targets. 

In March 2003, the Company entered into aletter of intent to acquire all of the outstanding stock of Central TexasResidential Services, Inc., a company that provides specialty residentialcleaning and remediation services, for approximately $2,000 consisting of 850shares of common stock of the Company.

 

F-24

 

All three of these acquisitions areexpected to close in the second quarter of 2003, however, each transaction is subject to the satisfactory completion of the Company's due diligence review, and thesuccessful negotiation and execution of definitive purchase and/or loanagreements, which will contain numerous conditions to closing. There can be noassurance that the Company will be able to consummate these transactions.

In March 2003, the Company granted to its officer 250 optionsto purchase the Company's common stock at $2.10 (approximate fair value on date ofgrant) per share, vesting over a three-year period.  The Company alsoamended the officer's 170 options to fully vest all options in the event thatthe officer is terminated prior to the expiration of his employment agreement.

 

 

 

F-25