##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
 for the quarterly period ended September 30, 2006
 Or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
 for the transition period from  to
 Commission File Number: 001-31711
 HOME SOLUTIONS OF AMERICA, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    99-0273889(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 1500 Dragon Street, Suite B Dallas, TX 75207
(Address of principal executive offices)
(214) 623-8446
(Registrants telephone number, including area code)
 þ o
  o o þ
 o þ
  o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operation (Dollars and shares in thousands except per share data)Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other informationItem 6. ExhibitsSignaturesForm of Restricted Stock Purchase AgreementBoard Compensation PlanRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  
 PART
I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Home Solutions of America, Inc.
Consolidated Balance Sheets
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash
    
    $
    5,734
    
    
    $
    8,225Accounts receivable, net
    
    
    61,417
    
    
    
    20,585Current portion of notes receivable
    
    
    1,134
    
    
    
    361Inventories
    
    
    4,566
    
    
    
    1,026Current assets of discontinued operations held for sale
    
    
    
    
    
    
    767Prepaid expenses and other current assets
    
    
    2,542
    
    
    
    1,041Costs in excess of billings
    
    
    13,020
    
    
    
    Deferred tax asset
    
    
    6,044
    
    
    
    Assets held for sale
    
    
    
    
    
    
    840Total current assets
    
    
    94,457
    
    
    
    32,845Property and equipment, net
    
    
    5,894
    
    
    
    2,466Intangibles, net
    
    
    8,913
    
    
    
    9,501Goodwill
    
    
    92,046
    
    
    
    41,882Notes receivable, net of current portion
    
    
    188
    
    
    
    525Non-current assets of discontinued operations held for sale
    
    
    
    
    
    
    391Deferred tax asset
    
    
    
    
    
    
    793Other assets
    
    
    993
    
    
    
    264$
    202,491
    
    
    $
    88,667Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    20,242
    
    
    $
    6,267Lines of credit
    
    
    18,719
    
    
    
    Deferred revenue
    
    
    260
    
    
    
    Billings in excess of costs
    
    
    926
    
    
    
    Current portion of debt
    
    
    27,227
    
    
    
    3,382Current portion of capital lease obligations
    
    
    174
    
    
    
    76Current liabilities of discontinued operations held for sale
    
    
    
    
    
    
    1,216Total current liabilities
    
    
    67,548
    
    
    
    10,941Long-term Liabilities:Debt, net of current portion
    
    
    825
    
    
    
    1,363Non-current liabilities of discontinued operations held for sale
    
    
    
    
    
    
    158Minority interest
    
    
    358
    
    
    
    483Capital lease obligations, net of current portion
    
    
    715
    
    
    
    117Total liabilities
    
    
    69,446
    
    
    
    13,062Commitments and ContingenciesStockholders Equity:Common stock, $.001 par value, 100,000 shares authorized; 44,569 and
35,510 shares issued and outstanding, respectively
    
    
    45
    
    
    
    36Additional paid-in capital
    
    
    131,878
    
    
    
    90,122Retained earnings (accumulated deficit)
    
    
    1,122
    
    
    
    (14,553
    )Total stockholders equity
    
    
    133,045
    
    
    
    75,605$
    202,491
    
    
    $
    88,667
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



Home Solutions of America, Inc.
Consolidated Statements of Income
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    49,077
    
    
    $
    18,977
    
    
    $
    92,510
    
    
    $
    41,071Costs and expensesCost of sales
    
    
    28,058
    
    
    
    10,397
    
    
    
    50,170
    
    
    
    22,458Selling, general and administrative expenses
    
    
    7,739
    
    
    
    4,831
    
    
    
    19,159
    
    
    
    11,38635,797
    
    
    
    15,228
    
    
    
    69,329
    
    
    
    33,844Operating income
    
    
    13,280
    
    
    
    3,749
    
    
    
    23,181
    
    
    
    7,227Other income, net:Gain on sale of assets
    
    
    
    
    
    
    25
    
    
    
    22
    
    
    
    27Interest income
    
    
    87
    
    
    
    15
    
    
    
    211
    
    
    
    46Interest expense
    
    
    (718
    )
    
    
    (620
    )
    
    
    (836
    )
    
    
    (1,399
    )Other income, net
    
    
    16
    
    
    
    28
    
    
    
    71
    
    
    
    75Total other income (expense)
    
    
    (615
    )
    
    
    (552
    )
    
    
    (532
    )
    
    
    (1,251
    )Income from continuing operations before income taxes
and minority interest
    
    
    12,665
    
    
    
    3,197
    
    
    
    22,649
    
    
    
    5,976Income taxes
    
    
    4,389
    
    
    
    286
    
    
    
    8,057
    
    
    
    480Minority interest
    
    
    192
    
    
    
    252
    
    
    
    658
    
    
    
    731Income before discontinued operations
    
    
    8,084
    
    
    
    2,659
    
    
    
    13,934
    
    
    
    4,765Gain (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    (303
    )
    
    
    1,741
    
    
    
    (322
    )Net income
    
    $
    8,084
    
    
    $
    2,356
    
    
    $
    15,675
    
    
    $
    4,443Net income available to common shareholders:Basic
    
    $
    8,084
    
    
    $
    1,994
    
    
    $
    15,675
    
    
    $
    3,721Diluted
    
    $
    8,084
    
    
    $
    2,135
    
    
    $
    15,675
    
    
    $
    4,117Basic earnings per share:Income from continuing operations
    
    $
    0.19
    
    
    $
    0.09
    
    
    $
    0.35
    
    
    $
    0.20Gain (loss) from discontinued operations, net of
taxes
    
    
    
    
    
    
    (0.01
    )
    
    
    0.05
    
    
    
    (0.02
    )$
    0.19
    
    
    $
    0.08
    
    
    $
    0.40
    
    
    $
    0.18Diluted earnings per share:Income from continuing operations
    
    $
    0.18
    
    
    $
    0.09
    
    
    $
    0.34
    
    
    $
    0.19Gain (loss) from discontinued operations, net of
taxes
    
    
    
    
    
    
    (0.01
    )
    
    
    0.04
    
    
    
    (0.01
    )$
    0.18
    
    
    $
    0.08
    
    
    $
    0.38
    
    
    $
    0.18Weighted average number of common shares outstanding:Basic
    
    
    43,229
    
    
    
    23,717
    
    
    
    39,167
    
    
    
    20,569Diluted
    
    
    45,181
    
    
    
    27,833
    
    
    
    41,439
    
    
    
    23,171
 See Notes to Consolidated Financial Statements.
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Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
 For the Nine Months EndedSeptember 30,2006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    15,675
    
    
    $
    4,443Adjustments-Depreciation and amortization
    
    
    1,240
    
    
    
    1,366Minority interest in income of consolidated subsidiary
    
    
    658
    
    
    
    731Provision for doubtful accounts
    
    
    979
    
    
    
    434Accrued interest on note receivable
    
    
    (15
    )
    
    
    Gain on sale of assets
    
    
    (22
    )
    
    
    (26
    )Stock-based compensation
    
    
    824
    
    
    
    1,108Gain on sale of discontinued operations
    
    
    (3,177
    )
    
    
    Changes in assets and liabilities, net of acquisitions and divestitures:Accounts receivable
    
    
    (21,629
    )
    
    
    (8,160
    )Prepaid expenses and other current assets
    
    
    (617
    )
    
    
    65Costs in excess of billings, net
    
    
    (6,406
    )
    
    
    (1,140
    )Inventories
    
    
    (1,295
    )
    
    
    (631
    )Other assets
    
    
    (654
    )
    
    
    98Deferred tax asset
    
    
    (5,251
    )
    
    
    Accounts payable and accrued expenses
    
    
    5,919
    
    
    
    400Net cash used in operating activities
    
    
    (13,771
    )
    
    
    (1,312
    )Cash Flows from Investing ActivitiesCash advanced under note receivable
    
    
    (571
    )
    
    
    Payments received on notes receivable
    
    
    1,525
    
    
    
    431Costs incurred in acquisitions, net of cash acquired
    
    
    (684
    )
    
    
    761Purchase of Cornerstone Building & Remodeling (Cornerstone), including
acquisition costs
    
    
    
    
    
    
    (2,122
    )Purchases of property and equipment
    
    
    (586
    )
    
    
    (199
    )Purchase of Fireline Restoration, Inc. (Fireline)
    
    
    (11,500
    )Net cash used in investing activities
    
    
    (11,816
    )
    
    
    (1,129
    )Cash Flows from Financing ActivitiesProceeds from note payable, net of cash issuance costs
    
    
    
    
    
    
    8,536Principal payments on debt and capital leases
    
    
    (4,242
    )
    
    
    (5,484
    )Proceeds on line of credit, net of repayments
    
    
    10,808
    
    
    
    Excess tax benefit from options exercises
    
    
    9,171
    
    
    
    Proceeds from exercise of warrants and options
    
    
    7,897
    
    
    
    3,861Distributions to minority stockholder
    
    
    (783
    )
    
    
    (541
    )Proceeds received from disgorgement of profits
    
    
    245
    
    
    
    Net cash provided by financing activities
    
    
    23,096
    
    
    
    6,372Net (decrease) increase in cash
    
    
    (2,491
    )
    
    
    3,931Cash at beginning of period
    
    
    8,225
    
    
    
    1,128Cash at end of period
    
    $
    5,734
    
    
    $
    5,059
 See Notes to Consolidated Financial Statements.
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Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
 For the Nine Months EndedSeptember 30,2006
    
    2005Cash paid for:Interest
    
    $
    840
    
    
    $
    878Income taxes
    
    $
    3,878
    
    
    $
    157Supplemental schedule of non-cash investing and financing activities:Issuance of stock for conversion of debt and accrued interest
    
    $
    902
    
    
    $
    1,350Fixed assets acquired through debt and capital lease obligations
    
    $
    906
    
    
    $
    220Conversion of preferred stock to common stock
    
    $
    128
    
    
    $
    2Issuance of stock for payment of interest
    
    $
    
    
    
    $
    14Preferred dividend accrual
    
    $
    
    
    
    $
    135Fair value of warrants issued for debt private placement
    
    $
    
    
    
    $
    1,295Issue of stock for acquisitions
    
    $
    22,148
    
    
    $
    3,808Issuance of notes payable for acquisition
    
    $
    22,375
    
    
    $
    12,600Issuance of stock for supply agreement
    
    $
    
    
    
    $
    1,350Debt assumed in acquisition
    
    $
    13,771
    
    
    $
    1,897Amortization of preferred stock issuance costs and beneficial
conversion as preferred stock dividends
    
    $
    
    
    
    $
    587Fair value of warrant issued as prepaid acquisition costs
    
    $
    
    
    
    $
    500Shares issued for prepaid consulting
    
    $
    
    
    
    $
    67Inventory received for reduction of note receivable from
Cornerstone
    
    $
    2,125
    
    
    $
    Issuance of common stock for preferred dividends
    
    $
    
    
    
    $
    209Reclassification of assets held for sale to property and equipment
    
    $
    840
    
    
    $
    Issuance of common stock for accrued expenses
    
    $
    257
    
    
    $
    
 See Notes to Consolidated Financial Statements.
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Home Solutions of America, Inc.
Notes to Consolidated Financial Statements
September 30, 2006
 NOTE 1  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Interim Unaudited Condensed Consolidated Financial Statements
  Company Description and Nature of Operations
   Recovery and Restoration.
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Rebuilding/Remodeling.
 Principles of Consolidation
  Use of Estimates
  Long-Lived Assets
  Inventories
  Intangibles
  Estimated UsefulBalance
    
    
    Life (Years)Trade name
    
    $
    4,540
    
    
    
    15Customer list
    
    
    4,100
    
    
    
    15Supply agreement
    
    
    1,350
    
    
    
    20Non compete
    
    
    441
    
    
    
    610,431Accumulated amortization
    
    
    (1,518
    )$
    8,913
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##### Table of Contents



2007
    
    $
    7252008
    
    
    7252009
    
    
    7252010
    
    
    7252011
    
    
    725
 Goodwill
 Goodwill and Other Intangible Assets.
  Balance as of December 31, 2005
    
    $
    41,882Goodwill acquired during the nine months ended September 30, 2006
    
    
    49,817Goodwill adjustment related to the FERS net assets acquired
    
    
    347Balance as of September 30, 2006
    
    $
    92,046
 Revenue Recognition
 Revenue Recognition in Financial Statements
    Costs in Excess of Billings
  Costs incurred on uncompleted contracts
    
    $
    56,162,899Estimated earnings
    
    
    39,903,70496,066,603Billings to date
    
    
    (83,972,231
    )$
    12,094,372Costs in excess of billings
    
    $
    13,020,384Billings in excess of costs
    
    
    (926,012
    )$
    12,094,372
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Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for Stock Based
Compensation
 Share Based Payment
    For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006SFAS 123R
    
    
    APB 25
    
    
    SFAS 123R
    
    
    APB 25Income from continuing
operations before income
taxes and minority interest
    
    $
    12,665
    
    
    $
    12,897
    
    
    $
    22,649
    
    
    $
    23,340Net income
    
    $
    8,084
    
    
    $
    8,235
    
    
    $
    15,675
    
    
    $
    16,124Basic income per share
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.41Diluted income per share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.38
    
    
    $
    0.39
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For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    2,356
    
    
    $
    4,443Add: Share-based employee compensation expense included
in net income, net of related tax effects, as reported
    
    
    1,108
    
    
    
    1,108Deduct: Share-based employee compensation expense
determined under the fair value method, net of related tax
tax effects  pro forma
    
    
    (332
    )
    
    
    (910
    )Net income  pro forma
    
    $
    3,132
    
    
    $
    4,641Net income per common share, as reportedBasic
    
    $
    0.08
    
    
    $
    0.18Diluted
    
    $
    0.08
    
    
    $
    0.18Net income per common share, proformaBasic
    
    $
    0.13
    
    
    $
    0.23Diluted
    
    $
    0.11
    
    
    $
    0.20
 Stock Plans
   September 30, 2006Shares Reserved
    
    Awards Availablefor Grant
    
    for Grant1998 Stock Plan
    
    
    3,500
    
    
    
    3932001 Stock Plan
    
    
    6,500
    
    
    
    2,82810,000
    
    
    
    3,221
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, Implementation of FASB 123R
 For the Nine Months Ended September 30,2006
    
    2005Expected term (in years)
    
    
    6.5
    
    
    
    5Expected volatility
    
    
    77
    %
    
    
    65
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    3.5
    %Dividend yield
    
    
    
    
    
    
    
  September 30, 2006Weighted-AverageRemaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOutstanding at December 31, 2005
    
    
    4,731
    
    
    $
    0.86Granted
    
    
    905
    
    
    
    5.57Cancelled/forfeited
    
    
    (75
    )
    
    
    1.25Exercised
    
    
    (3,514
    )
    
    
    1.67
    
    
    
    
    
    
    $
    33,962Outstanding at September 30, 2006
    
    
    2,047
    
    
    $
    4.10
    
    
    
    7.0
    
    
    $
    3,118Options vested and expected to vest
    
    
    2,030
    
    
    $
    3.37
    
    
    
    7.0
    
    
    $
    3,112Options exercisable at end of period
    
    
    1,183
    
    
    $
    2.85
    
    
    
    4.9
    
    
    $
    2,811
  Summary of Restricted Stock Awards
   Weighted-AverageNumber
    
    
    Grant Dateof Shares
    
    
    Fair ValueNonvested at December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    335
    
    
    
    5.64Vested
    
    
    (119
    )
    
    
    4.36Forfeited
    
    
    
    
    
    
    Nonvested at September 30, 2006
    
    
    216
    
    
    $
    6.35
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Issuance of stock for Non-Cash Consideration
  Per Share Data
   For the Three Months Ended September 30, 2006Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    8,086Income available to common stockholders
    
    
    8,086
    
    
    
    43,229
    
    
    $
    0.19Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    1,952Diluted EPS:Income available to common stockholders
    
    $
    8,086
    
    
    
    45,181
    
    
    $
    0.18
  For the Three Months Ended September 30, 2005Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    2,356Less: convertible preferred stock dividends
    
    
    (28
    )Less: amortization of convertible preferred stock
issuance costs and beneficial conversion feature
    
    
    (334
    )Income available to common stockholders
    
    
    1,994
    
    
    
    23,737
    
    
    $
    0.08Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    2,278Assumed conversion of debt
    
    
    
    
    
    
    1,818Diluted EPS:Amortization of debt discount
    
    
    107Interest expense
    
    
    34Amortization of debt issue costs
    
    
    Income available to common stockholders
    
    $
    2,135
    
    
    
    27,833
    
    
    $
    0.08
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For the Nine Months Ended September 30, 2006Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    15,675Income available to common stockholders
    
    
    15,675
    
    
    
    39,167
    
    
    $
    0.40Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    2,272Diluted EPS:Income available to common stockholders
    
    $
    15,675
    
    
    
    41,439
    
    
    $
    0.38
  For the Nine Months Ended September 30, 2005Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    4,443Less: convertible preferred stock dividends
    
    
    (135
    )Less: amortization of convertible preferred stock
issuance costs and beneficial conversion feature
    
    
    (587
    )Income available to common stockholders
    
    
    3,721
    
    
    
    20,569
    
    
    $
    0.18Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    784Assumed conversion of debt
    
    
    
    
    
    
    1,818Diluted EPS:Amortization of debt discount
    
    
    295Interest expense
    
    
    101Amortization of debt issue costs
    
    
    Income available to common stockholders
    
    $
    4,117
    
    
    
    23,171
    
    
    $
    0.18
 Recent Accounting Pronouncements
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NOTE 2
 SEGMENT INFORMATION
  NOTE 3
 ACQUISITIONS AND DISPOSALS
 Associated Contractors II, LLC
  Fireline Restoration, Inc.
   Cash paid to the seller in July 2006
    
    $
    11,500Note payable to seller (see Note 5  Debt)
    
    
    21,650Estimated value of common stock issued to seller
    
    
    22,148Estimated legal, accounting and other costs
    
    
    1,213$
    56,511The purchase price was tentatively allocated as follows:Current assets
    
    
    26,471Property and equipment
    
    
    1,479Other assets
    
    
    75Current liabilities
    
    
    (19,968
    )Long-term liabilities
    
    
    (443
    )Estimated fair value of tangible net assets acquired
    
    
    7,614Goodwill
    
    
    48,897$
    56,511
 13




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##### Table of Contents



For the Nine Months Ended
    
    For the ThreeSeptember 30,
    
    Months Ended2006
    
    2005
    
    September 30, 2005Revenues
    
    $
    111,180
    
    
    $
    86,191
    
    
    $
    36,643Net Income
    
    
    17,834
    
    
    
    11,153
    
    
    
    4,909Shares outstanding:Basic
    
    
    39,167
    
    
    
    24,569
    
    
    
    27,737Diluted
    
    
    41,439
    
    
    
    27,171
    
    
    
    31,833Basic earnings per share
    
    
    0.42
    
    
    
    0.43
    
    
    
    0.16Diluted earnings per share
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.15
 Cornerstone Building and Remodeling Division
   Accounting for the Impairment of Disposal of Long Lived Assets
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Results of discontinued operations:Net sales
    
    $
    
    
    
    $
    1,399
    
    
    $
    514
    
    
    $
    4,722Loss before income taxes
    
    
    
    
    
    
    (297
    )
    
    
    (478
    )
    
    
    (304
    )Gain on sale of discontinued operations:Sales price
    
    
    
    
    
    
    
    
    
    
    3,500
    
    
    
    Net assets sold
    
    
    
    
    
    
    
    
    
    
    (323
    )
    
    
    Gain on sale
    
    
    
    
    
    
    
    
    
    
    3,177
    
    
    
    Income (loss) from discontinued operations
before income taxes
    
    
    
    
    
    
    (297
    )
    
    
    2,699
    
    
    
    (304
    )Income taxes
    
    
    
    
    
    
    (6
    )
    
    
    (958
    )
    
    
    (18
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    (303
    )
    
    $
    1,741
    
    
    $
    (322
    )
 14




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##### Table of Contents



Other Acquisitions
  NOTE 4
 NOTES RECEIVABLE
   NOTE 5
 DEBT
      15




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##### Table of Contents



Lines of CreditRevolving credit note payable to bank, interest of prime
less .25%. Interest was payable monthly. The line of
credit would have expired and become due on September 1,
2007. At September 30, 2006 the interest rate was 8%. In
November 2006, the note was terminated in connection with
the Company obtaining a new credit facility
    
    $
    9,000Revolving credit note payable to bank, interest of prime
plus .5% and due on demand. At September 30, 2006 the
interest rate was 8.75%. In November 2006, the note was
terminated in connection with the Company obtaining a new
credit facility
    
    
    9,719$
    18,719Notes PayableNote payable, non-interest bearing, payable in $5 monthly
installments until paid in full to the seller of Fiber
Seal Systems of Los Angeles (FSSLA)
    
    $
    180Note payable to Fireline seller, interest at prime (8.25%
at September 30, 2006) until November 17, 2006 and if the
maturity date extends to January 31, 2007 the interest
rate will be 12%. Accrued interest on the outstanding
principal balance is due monthly. The seller agrees to
pay the Company interest on certain accounts receivable
beginning January 31, 2007 and if the accounts receivable
are uncollected as of June 30, 2007, the seller will pay
the Company the outstanding balance. As of November 1,
2006, the note is subordinated to the Companys new credit
facility
    
    
    21,650Term loan with a financial institution with interest at prime plus 1%
(9.25% at September 30, 2006), with monthly payments of interest only,
due November 2006 and secured by accounts receivable.
    
    
    5,000Notes and leases payable to various financial
institutions, collateralized by various equipment and
automobiles, bearing interest at various annual interest
rates ranging from prime plus 0.75% to 13.21% principal
and interest payable in monthly installments ranging from
$0.4 to $1 through March 2011
    
    
    858Term loans with various financial institutions with
interest at various annual interest rates ranging from
7.5% to 9.25%, payable in monthly installments ranging
from $.5 to $2, due through September 2009, secured by
accounts receivable and equipment
    
    
    364Total notes payable
    
    
    28,052Less current portion of notes payable
    
    
    (27,227
    )Non-current portion of notes payable
    
    $
    825
 NOTE 6
 EQUITY
 Common Stock
    16




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##### Table of Contents



NOTE 7
 COMMITMENTS AND CONTINGENCIES
 Litigation
   Indemnities and Guarantees
   17




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##### Table of Contents



NOTE 8
 SEGMENT REPORTING
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales:Recovery/Restoration services
    
    $
    39,774
    
    
    $
    10,546
    
    
    $
    63,399
    
    
    $
    20,557Rebuilding/Remodeling
    
    
    9,303
    
    
    
    8,431
    
    
    
    29,111
    
    
    
    20,514Total segment net sales
    
    $
    49,077
    
    
    $
    18,977
    
    
    $
    92,510
    
    
    $
    41,071Operating Income:Recovery/Restoration services
    
    $
    14,104
    
    
    $
    4,089
    
    
    $
    23,082
    
    
    $
    5,916Rebuilding/Remodeling
    
    
    1,177
    
    
    
    1,274
    
    
    
    4,695
    
    
    
    4,010Corporate
    
    
    (2,001
    )
    
    
    (1,614
    )
    
    
    (4,596
    )
    
    
    (2,699
    )Total segment operating income
    
    $
    13,280
    
    
    $
    3,749
    
    
    $
    23,181
    
    
    $
    7,227Depreciation and amortization included in operating
income:Recovery/Restoration services
    
    $
    195
    
    
    $
    127
    
    
    $
    550
    
    
    $
    388Rebuilding/Remodeling
    
    
    181
    
    
    
    139
    
    
    
    538
    
    
    
    395Corporate
    
    
    95
    
    
    
    38
    
    
    
    152
    
    
    
    121Total segment depreciation and amortization
    
    $
    471
    
    
    $
    304
    
    
    $
    1,240
    
    
    $
    904Identifiable assets:Recovery/Restoration services
    
    
    
    
    
    
    
    
    
    $
    153,598
    
    
    $
    35,860Rebuilding/Remodeling
    
    
    
    
    
    
    
    
    
    
    37,964
    
    
    
    32,805Corporate
    
    
    
    
    
    
    
    
    
    
    10,929
    
    
    
    5,295Total segment identifiable assets
    
    
    
    
    
    
    
    
    
    $
    202,491
    
    
    $
    73,960
  NOTE 9  RELATED PARTY TRANSACTIONS
     18




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##### Table of Contents



NOTE
10  SUBSEQUENT EVENTS
 Associated Acquisition
     Credit Facility
    19




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##### Table of Contents



Other Events
  RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENT INCLUDED IN THIS FORM 10-Q
  20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations or
Plan of Operation (Dollars and shares in thousands except per share data).
 Overview
  Growth Strategy
    Service Offerings
  Recovery
  21




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##### Table of Contents



Restoration
  General Contractor Services
 Fire and Water Damage Restoration
 Indoor Air Contamination
 Cleaning and Fabric Protection
 Rebuilding/Remodeling
  Use of Estimates and Critical Accounting Policies
  22




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##### Table of Contents



Revenue Recognition
    Stock-Based Compensation
  Share-Based Payment, Accounting for Stock-Based
Compensation
 Accounting for Stock Issued to Employees Accounting for Stock Based Compensation
   23




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##### Table of Contents



(a)
    
    The expected volatility of our common stock price, which we determine based on
historical volatility of our common stock over the prior eighteen month period;(b)
    
    Expected dividends (which do not apply, as we do not anticipate issuing dividends);(c)
    
    Expected life of the award, which is estimated based on the historical award exercise
behavior of our employees; and(d)
    
    Expected forfeitures of awards, which is estimated based on the historical turnover of
our employees and expected turnover in the future. Prior to adoption of SFAS No. 123(R),
we recognized forfeitures under SFAS No. 123 as they occurred.
   Goodwill
 Goodwill and Other Intangible
Assets.
  Results of Operations (Dollars and Shares in Thousands)
 Comparison of three months ended September 30, 2006 to three months ended September 30, 2005
 Recovery/Restoration Services
 Net Sales .
 Costs of Sales .
 Selling, General and Administrative Expenses .
 24




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##### Table of Contents



Rebuilding/Remodeling
 Net Sales .
 Costs of Sales .
 Selling, General and Administrative Expenses .
 Corporate
 Selling, General and Administrative Expenses
 Other Income (Expense) .
 Income Taxes .
 Discontinued Operations .
 Comparison of nine months ended September 30, 2006 to nine months ended September 30, 2005
 Recovery/Restoration Services
 Net Sales .
 Costs of Sales .
 Selling, General and Administrative Expenses .
 25




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##### Table of Contents



Rebuilding/Remodeling
 Net Sales .
 Costs of Sales .
 Selling, General and Administrative Expenses .
 Corporate
 Selling, General and Administrative Expenses .
 Other Income (Expense) .
 Income Taxes .
 Discontinued Operations .
 Liquidity and Capital Resources
  26




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##### Table of Contents



Contractual Obligations
    Payments Due by PeriodLess than
    
    
    1  3
    
    
    4  5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsCapital lease obligations
    
    $
    889
    
    
    $
    174
    
    
    $
    399
    
    
    $
    316
    
    
    $
    Notes payable and lines of credit
    
    
    46,771
    
    
    
    45,946
    
    
    
    775
    
    
    
    50
    
    
    
    Operating leases
    
    
    1,377
    
    
    
    701
    
    
    
    608
    
    
    
    49
    
    
    
    19Total
    
    $
    49,037
    
    
    $
    46,821
    
    
    $
    1,782
    
    
    $
    415
    
    
    $
    19
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  27




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other information
 Listing on Nasdaq
  Board Compensation (numbers in thousands, except per share data)
  28




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##### Table of Contents



Executive Compensation
  Associated Acquisition
  Credit Facility
  
 Item 6. Exhibits
 2.1
    
    Stock Purchase Agreement among Fireline Restoration, Inc., Brian Marshall and Home Solutions
of America, Inc. dated July 31, 2006 (effective July 1, 2006); (filed with the SEC on August
4, 2006 as Exhibit 2.1 to the Companys Current Report on Form 8-K and incorporated herein by
reference).2.2
    
    Agreement and Plan of Merger among Home Solutions of America, Inc., Home Solutions
Restoration of Louisiana, Inc., Associated Contractors II, LLC, Stephen Scott Sewell, William
Aaron Bennett, William E. Edwards, William J. Bennett and BNOB Construction Services, LLC,
dated as of October 26, 2006 (filed with the SEC on November 1, 2006 as Exhibit 2.1 to the
Companys Current Report on Form 8-K and incorporated herein by reference)..3.1
    
    Certificate of Incorporation of the Company, as restated on July 31, 2001 (filed with the SEC
on July 9, 2001 as Exhibit A to the Companys Information Statement on Schedule 14C and
incorporated herein by reference).3.2
    
    Certificate of Amendment to the Certificate of Incorporation of Nextgen Communications
Corporation, changing the corporations name to Home Solutions of America, Inc., as filed
with the Secretary of State of Delaware on December 23, 2002 (filed with the SEC on December
22, 2002 as Exhibit A to the Companys Information Statement on Schedule 14C and incorporated
herein by reference).3.3
    
    Certificate of Amendment to the Restated Certificate of Incorporation of Home Solutions of
America, Inc. as filed with the Delaware Secretary of State on June 16, 2006 (filed with the
SEC on July 14, 2006 as Exhibit 3.3 to the Companys Registration Statement on Form 8-A and
incorporated herein by reference).
 29




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##### Table of Contents



3.4
    
    Amended and Restated Bylaws of the Company, as amended on April 4, 2006 (filed with the SEC
on May 15, 2006 as Exhibit 3.3 to the Companys Quarterly Report on Form 10-Q and incorporated
herein by reference).4.1
    
    Warrant Certificate issued by Home Solutions of America, Inc. to Stephen Scott Sewell,
William Aaron Bennett, William E. Edwards, William J. Bennett and BNOB Construction Services,
LLC, dated as of October 26, 2006 (filed with the SEC on November 1, 2006 as Exhibit 2.1 to
the Companys Current Report on Form 8-K and incorporated herein by reference).10.1
    
    Form of Restricted Stock Purchase Agreement between Home Solutions of America, Inc. and its
Directors. +10.2
    
    Board Compensation Plan. +10.3
    
    Promissory Note issued by Home Solutions of America, Inc. to Brian Marshall in the principal
amount of $21,650,000, dated as of July 1, 2006 (the effective date) (filed with the SEC on
August 4, 2006 as Exhibit 10.01 to the Companys Current Report on Form 8-K and incorporated
herein by reference).10.4
    
    Employment Agreement among Home Solutions of America, Inc., Fireline Restoration, Inc. and
Brian Marshall dated as of July 1, 2006 (the effective date) (filed with the SEC on August 4,
2006 as Exhibit 10.02 to the Companys Current Report on Form 8-K and incorporated herein by
reference).10.5
    
    Amended and Restated Employment Agreement between Home Solutions of America, Inc. and Frank
J. Fradella dated September 8, 2006) (filed with the SEC on September 14, 2006 as Exhibit 10.1
to the Companys Current Report on Form 8-K and incorporated herein by reference).10.6
    
    Amended and Restated Employment Agreement between Home Solutions of America, Inc. and Rick J.
OBrien dated September 8, 2006 ) (filed with the SEC on September 14, 2006 as Exhibit 10.2 to
the Companys Current Report on Form 8-K and incorporated herein by reference).10.7
    
    Amended and Restated Employment Agreement between Home Solutions of America, Inc. and Jeffrey
M. Mattich dated September 8, 2006 ) (filed with the SEC on September 14, 2006 as Exhibit 10.3
to the Companys Current Report on Form 8-K and incorporated herein by reference).10.8
    
    Executive Employment Agreement by and among Home Solutions Restoration of Louisiana, Inc.,
Home Solutions of America, Inc. and Stephen Scott Sewell, dated as of October 26, 2006 (filed
with the SEC on November 1, 2006 as Exhibit 10.1 to the Companys Current Report on Form 8-K
and incorporated herein by reference).10.9
    
    Credit Agreement among Home Solutions of America, Inc., Texas Capital Bank, National
Association, Amegy Bank, N.A., Bank of Oklahoma, NA, and Compass Bank, dated as of November 1,
2006 (filed with the SEC on November 7, 2006 as Exhibit 10.1 to the Companys Current Report
on Form 8-K and incorporated herein by reference).10.10
    
    Promissory Note Revolving Credit Commitment issued by Home Solutions of America, Inc., to
the order of Texas Capital Bank, National Association in the principal amount of
$22,500,000.00 dated November 1, 2006 (filed with the SEC on November 7, 2006 as Exhibit 10.2
to the Companys Current Report on Form 8-K and incorporated herein by reference)..10.11
    
    Promissory Note Revolving Credit Commitment issued by Home Solutions of America, Inc., to
the order of Amegy Bank, N.A. in the principal amount of $11,250,000.00 dated November 1,
2006. (filed with the SEC on November 7, 2006 as Exhibit 10.3 to the Companys Current Report
on Form 8-K and incorporated herein by reference).10.12
    
    Promissory Note Revolving Credit Commitment issued by Home Solutions of America, Inc., to
the order of Bank of Oklahoma, NA in the principal amount of $3,748,500.00 dated November 1,
2006 (filed with the SEC on November 7, 2006 as Exhibit 10.4 to the Companys Current Report
on Form 8-K and incorporated herein by reference).10.13
    
    Promissory Note Revolving Credit Commitment issued by Home Solutions of America, Inc., to
the order of Compass Bank in the principal amount of $7,501,500.00 dated November 1, 2006
(filed with the SEC on November 7, 2006 as Exhibit 10.5 to the Companys Current Report on
Form 8-K and incorporated herein by reference).10.14
    
    Promissory Note Term Loan Commitment issued by Home Solutions of America, Inc., to the order
of Texas Capital Bank, National Association in the principal amount of $7,500,000.00 dated
November 1, 2006 (filed with the SEC on November 7, 2006 as Exhibit 10.6 to the Companys
Current Report on Form 8-K and incorporated herein by reference).
 30




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##### Table of Contents



10.15
    
    Promissory Note Term Loan Commitment issued by Home Solutions of America, Inc., to the order
of Amegy Bank, N. A. in the principal amount of $3,750,000.00 dated November 1, 2006 (filed
with the SEC on November 7, 2006 as Exhibit 10.7 to the Companys Current Report on Form 8-K
and incorporated herein by reference).10.16
    
    Promissory Note Term Loan Commitment issued by Home Solutions of America, Inc., to the order
of Bank of Oklahoma, NA in the principal amount of $1,251,500.00 dated November 1, 2006 (filed
with the SEC on November 7, 2006 as Exhibit 10.8 to the Companys Current Report on Form 8-K
and incorporated herein by reference).10.17
    
    Promissory Note Term Loan Commitment issued by Home Solutions of America, Inc., to the order
of Compass Bank in the principal amount of $2,498,500.00 dated November 1, 2006 (filed with
the SEC on November 7, 2006 as Exhibit 10.9 to the Companys Current Report on Form 8-K and
incorporated herein by reference).10.18
    
    Pledge and Security Agreement among Home Solutions of America, Inc., Cornerstone Marble &
Granite, Inc., Fiber-Seal Systems, L.P., Fireline Restoration, Inc., Home Solutions
Restoration of Louisiana, Inc., P.W. Stephens, Inc., Southern Exposure Unlimited of Florida,
Inc., S.E. Tops of Florida, Inc., FSS Holding Corp. and Southern Exposure Holdings, Inc. for
the benefit of Texas Capital Bank, National Association, dated November 1, 2006 (filed with
the SEC on November 7, 2006 as Exhibit 10.10 to the Companys Current Report on Form 8-K and
incorporated herein by reference).10.19
    
    Guaranty Agreement among Cornerstone Marble & Granite, Inc., Fiber-Seal Systems, L.P., Home
Solutions Restoration of Louisiana, Inc., P.W. Stephens, Inc., Southern Exposure Unlimited of
Florida, Inc., S.E. Tops of Florida, Inc., FSS Holding Corp., Southern Exposure Holdings, Inc.
and Fireline Restoration, Inc., for the benefit of Texas Capital Bank, National Association,
dated November 1, 2006 (filed with the SEC on November 7, 2006 as Exhibit 10.11 to the
Companys Current Report on Form 8-K and incorporated herein by reference).31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications. +32.1
    
    Section 1350 Certifications. +
 
 +
    
    Filed herewith. 31




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##### Table of Contents



Signatures
  HOME SOLUTIONS OF AMERICA, INC.RegistrantNovember 14, 2006
    
    /s/ Frank J. FradellaFrank J. FradellaChairman and Chief Executive OfficerNovember 14, 2006
    
    /s/ Jeffrey M. MattichJeffrey M. MattichChief Financial Officer
 32