**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM10-QSB**

               (Mark One)

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

                For thequarterly period ended September 30, 2005

                [  ]Transition report under Section 13 or 15(d) of the ExchangeAct of 1934

                For thetransition period from                             to                           

               Commission file number         0-22388                                            

**HOME SOLUTIONS OF AMERICA, INC.**

(Exact nameof small business issuer as specified in its charter) 

| Delaware 				99-0273889 
(State or other jurisdiction of incorporation or organization)  (IRS Employer			Identification No.)
 

1500			Dragon Street Suite B Dallas, Texas 75207

(Address of principal		executive offices)
  
(214) 623-8446

(Issuer's telephonenumber)
  
5565 Red			Bird Center Drive Suite 150  Dallas, Texas 75237 

(Former name, formeraddress and former fiscal Year, 		if changed since last report)

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.Yes         X              No                         

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act) Yes                       No         X               

The number of shares outstanding ofthe registrant's common stock, $.001 par value per share, as of November 14, 2005 was 29,215,147.  

Transitional Small Business Disclosure Format: Yes                       No         X             

 
****
**PART I****FINANCIAL INFORMATION**

**Item 1.  Financial Statements.**

**HOME SOLUTIONS OF AMERICA, INC.**

**CONSOLIDATED BALANCE SHEET**

**(In Thousands,  Except Per Share Data)**

**(Unaudited)**

September 30, 

2005 

**ASSETS**

Current assets:

Cash

 $

5,059 

Accounts receivable, net of  allowance for doubtful accounts of $557

16,742 

Note receivable 

886 

Inventories

2,014 

Costs in excess of billings

82 

Prepaid expenses and other  current assets

806 

Assets held for sale

940 

Total current assets

26,529 

Property and  equipment, net of accumulated depreciation of $1,004

2,903 
           
Intangibles, net of  accumulated amortization of $782

8,123 
  
Goodwill

36,260 
  
Due from related party

5 
  
Other assets

140 

 $

73,960 

**LIABILITIES AND  STOCKHOLDERS' EQUITY**

Current liabilities:

Accounts payable and accrued  expenses

 $

7,033 

Current portion of  debt                                   	

17,557 

Current portion of capital lease  obligations 

73 

Billings in excess of costs

1,219 

Due to related party

492 

Notes payable to related  party

750 

Total current liabilities

27,124 

Long-term liabilities:

Debt, net of current  portion                          	

7,038 

      

Minority interest

431 

Capital lease obligations,  net of current portion

104 

Total liabilities

34,697 

Commitments and  contingencies

Stockholders' equity:

Common stock, $0.001 par  value, 50,000 shares authorized; 28,224 shares issued and outstanding

28 

Additional paid-in capital

56,528 

Accumulated deficit

    

(17,293)

Total stockholders' equity

39,263 

 $

73,960 
   
 The accompanying notes are an integral part	of these consolidated financial statements
1

** **
**HOME SOLUTIONS OF AMERICA, INC.****CONSOLIDATED STATEMENTS OF INCOME****(In Thousands, Except Per Share Amounts)****(Unaudited)**                  
Three Months Ended
   
Nine Months Ended
   
September 30,
   
September 30,
   
2005 
   
2004 
   
2005 
   
2004 
                                      
Net sales

 $

20,376 

 $

7,943 

 $

45,793 

 $

22,131 
   
Costs and  expenses:
   
Cost of sales

11,261 

4,266 

25,648 

11,949 

Selling, general  and administrative expenses

5,642 

2,651 

13,186 

7,817 

16,903 

6,917 

38,834 

19,766 
   
Operating income

3,473 

1,026 

6,959 

2,365 
   
Other income  (expense):
   
Gain(loss)onsaleofassets

25 

(3)

26 

(14)

Interestincome

15 

7 

46 

10 

Interest expense

(641)

(175)

(1,434)

(483)

Other income

28  

23 

75 

199 

Total other (expense)

(573)

(148)

(1,287)

(288)
   
Income before  income taxes and minority interest

2,900 

878 

5,672 

2,077  
   
Income taxes

(292)

- 

(498)

- 
   
Minority  interest in income of consolidated subsidiary

(252)

(193)

(731)

(386)

  
      
Net income

 $

2,356 

 $

685 

 $

4,443 

 $

1,691 
   
Net income  available to common stockholders per share:
   
Basic 

 $

0.08 

 $

0.03 

 $

0.18 

 $

0.08 

    Diluted

0.08 

   	

0.03 

0.18 

0.07 
   
Weighted average  number of common shares outstanding:
   
Basic

23,737 

16,528 

20,569 

16,248 

Diluted

27,833 

16,950 

23,171 

16,899 
                             
The accompanying  notes are an integral part of these financial statements.

2

 

 

**HOME SOLUTIONS OF AMERICA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands, Except Per Share Amounts)**

**(Unaudited)**
                 
	Nine Months Ended
            
September30,
            
	2005 

	2004 
CASH FLOWS  FROM OPERATING ACTIVITIES:   Net income   $
4,443 
 $
1,691 
   Adjustments  to reconcile net income to net cash (used in) provided by           Operating activities:      Depreciation  and amortization
1,366 

811 
      Minority  interest in income of consolidated subsidiary
731 

386 
      Provision  for doubtful accounts
434 

2 
      Gain on  sale of assets 
(26)
             	
14 
      Stock-based  compensation
1,108 

113 
      Gain on  extinguishment of debt
- 

(129)
      Changes in  operating assets and liabilities, net of acquisitions and divestitures:                       Accounts  receivable
(8,160)

(420)
         Prepaid  expenses and other current assets
65 

(305)
         Inventories
(631)
         Other  assets
1 

142 
         Cost in  excess of billings
(57)

- 
         Accounts  payable and accrued expenses
400 

3 
         Billings in excess of cost 
(1,083)

- 
         Due to related  party
97 

19 
   Net cash (used  in) provided by operating activities
(1,312)

2,327 
            CASH FLOWS  FROM INVESTING ACTIVITIES:        Proceeds  from sale of property and equipment
- 

45 
   Payments  received on notes receivable
431 

- 
   Costs  incurred for pending acquisition
- 

(82)
   Purchase  of Southern Exposure Unlimited of Florida, Inc. and related Companies ("SE"),  including acquisition costs 
- 

(4,886)
   Cash  acquired in Florida Environmental Services, Inc. ("FERS") acquisition, net of acquisition costs
761 

- 
   Purchase  of Cornerstone Building & Remodeling, Inc. ("Cornerstone"), including  acquisition costs
(2,122)

- 
   Purchases  of property and equipment
(199)

(157)
   Net cash  used in investing activities
(1,129)

(5,080)
            CASH  FLOWS FROM FINANCING ACTIVITIES:   Net  repayments on line of credit
- 

(519)
   Net payments  on note payable to related party 
- 

(250)
   Principal  payments on debt and capital leases
(5,484)

(3,727)
   Proceeds  from preferred stock, net of cash issuance costs
- 

2,878 
   Proceeds  from notes payable, net of cash issuance costs
8,536 

3,628 
   Proceeds  from exercise of warrants and  options
3,861 

3 
   Distributions  to minority stockholder
(541)

(126)
   Net cash  provided by financing activities
6,372 

1,887 
            NET INCREASE  (DECREASE) IN CASH
3,931 

(866)
            CASH AT  BEGINNING OF PERIOD
1,128 

2,728 
            CASH AT  END OF PERIOD $
5,059 
 $
1,862 

** **

3

 

 

** ****HOME SOLUTIONS OF AMERICA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands, Except Per Share Amounts)**

**(Unaudited)**

Nine Months Ended

September 30,

2005 

2004 
   Cash paid  for:                            Interest $
878 
    $
362 
             Income  taxes $
157 
    $
- 
                       Supplemental  schedule of non-cash investing and financing activities:                  Issuance of note payable in  FERS acquisition $
11,000 
    $
- 
   Issuance  of stock for conversion of debt and  accrued interest $
1,350 
    $
- 
   Fixed  assets acquired through capital lease obligations $
107 
    $
15 
   Conversion of preferred stock to common stock $
2 
    $
- 
Issuance  of stock for payment of interest $
14 
 $
- 
Fixed  assets acquired through debt $
113 
 $
12 
Preferred  dividend accrual $
135 
 $
102 
Fair  value of warrants issued for debt private placement $
1,295 
 $
118 
Reduction  of notes payable for settlement of obligations $
- 
 $
171 
Disposal  of assets for settlement of accounts payable $
- 
 $
18 
Issue of  stock for acquisition $
3,808 
 $
- 
Issuance  of notes payable for acquisition $
1,600 
 $
- 
Issuance  of stock for supply agreement $
1,350 
 $
- 
Debt  assumed in acquisition $
1,897 
 $
- 
Amortization  of preferred stock issuance costs and beneficial conversion as preferred  stock dividends $
587 
 $
364 
Fair value of warrant issued  as prepaid acquisition costs $
500 
 $
- 
Fair  value of warrants issued in connection with preferred stock and beneficial    conversion feature of preferred stock $
- 
 $
1,093 
Shares  issued for prepaid consulting $
67 
 $
159 
Issuance  of common stock for preferred dividends $
209 
 $
75 

The accompanying notes are an integral part of these  consolidated financial statements.

**  **

4

**  **

**        HOME SOLUTIONS OFAMERICA, INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**** (Dollars and Shares inThousands, Except Per Share Data)****September 30, 2005**

** **

**NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Company Description andNature of Operations**

Home Solutions of America,Inc. ("we," "us," "Home Solutions," or the "Company")a Delaware corporation, is a provider of recovery, restoration andrebuilding/remodeling services to commercial and residential areas that are (i)prone to flooding, hurricanes, tornados, fires or other naturally occurring andrepetitive weather related emergencies; and/or (ii) experiencing robust housingdevelopment. Our growth strategy is to capitalize on the growing demand for oursuite of Recovery, Restoration and Rebuilding/Remodeling services. We seek toexpand our core service offerings through the future acquisition of strategic,specialized, profitable and well-managed residential service companies with aproven history of internal growth.

Our business segments consist ofthree integrated service offerings:  (i) Recovery, (ii) Restoration and (iii)Rebuilding/Remodeling.  Our Recovery services, which are provided through ourwholly-owned subsidiary, Home Solutions Restoration of Louisiana, Inc. ("HSR ofLouisiana") and, to a lesser extent, through our wholly-owned subsidiary, PWStephens, Inc. ("PWS"), include first response clean up and removal of debris,drying and dehumidification, and preparing affected areas for the next stage ofrestoration and rebuilding.  Our Restoration business segment includes PWS andour wholly-owned subsidiary, Fiber Seal Systems, L.P. ("FSS").  Servicespresently included in our Restoration business segment involve water and firerestoration services, air decontamination, and removal of mold, asbestos andlead paint provided through PWS, and cleaning, drying, and deodorization ofcarpet and furniture as well as moving and storage services provided throughFSS.  Our Rebuilding/Remodeling products and services currently consist of theproduction and installation of custom kitchen cabinets and countertops providedthrough our wholly-owned subsidiary, Southern Exposure Unlimited of Florida,Inc. and its wholly-owned subsidiary, SouthernStone Cabinets, Inc. (collectively, "SouthernExposure") and the installation of custom marble and granite countertopsthrough our wholly-owned subsidiary, Cornerstone Building and Remodeling, Inc.("Cornerstone").  

**Principles ofConsolidation**

The accompanying consolidatedfinancial statements include the accounts of Home Solutions of America, Inc.and its wholly and majority ownedsubsidiaries. All significant intercompany transactionsand balances have been eliminated in consolidation.   The minority owner'sinterest in a subsidiary has been reflected as minority interest in theaccompanying consolidated balance sheet.

**Use of Estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofthe contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period. Significantestimates made by management include, among others, the realizability ofaccounts and note receivable, inventories, recoverability of property andequipment, intangibles and goodwill and valuation of deferred tax assets. Actual results could differ from these estimates. 

**Assets Held for Sale**

The Company currently has a building and land for salewith a net book value of $940 that was its former administrative headquarters. TheCompany is actively marketing the property.  The property is recorded at thelower of cost or market.

**Property and Equipment**

Property and equipment arestated at cost, and are beingdepreciated using the straight-line method over the estimated useful lives ofthe related assets, ranging from 3 to 20 years.  Leasehold improvements areamortized using the straight-line method over the lesser of the estimateduseful lives of the assets or the related lease terms.  Equipment under capitallease obligations is depreciated over the shorter of the estimated useful lifeor the term of the lease.  Maintenance and routine repairs are charged toexpense as incurred.  Significant renewals and betterments are capitalized.  Atthe time of retirement or other disposition of property and equipment, the costand accumulated depreciation are removed from the accounts and any resultinggain or loss is reflected in the statements of income.

**Long-Lived Assets**

The Company's management assessesthe recoverability of its long-lived assets upon the occurrence of a triggeringevent by determining whether the depreciation and amortization of long-livedassets over their remaining lives can be recovered through projectedundiscounted future cash flows.  The amount of long-lived asset impairment, ifany, is measured based on fair value and is charged to operations in the periodin which long-lived asset impairment is determined by management.  At September30, 2005, the Company's management believes there is no impairment of itslong-lived assets.  There can be no assurance, however, that market conditionswill not change or demand for the Company's products and services willcontinue, which could result in impairment of long-lived assets in the future.

5

**     HOME SOLUTIONS OFAMERICA, INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September 30, 2005**

** **

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

**Goodwill and OtherIntangible Assets**

Goodwill represents the excessof acquisition cost over the net assets acquired in a business combination andis not amortized in accordance with Statement of Financial Accounting Standards("SFAS") No. 142, "*Goodwill and Other Intangible Assets."* The provisionsof SFAS No. 142 require that the Company allocate its goodwill and intangibleassets to its various reporting units, determine the carrying value of thosebusinesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed.  In the first step of thegoodwill impairment test, the fair value of each reporting unit is compared toits carrying value.  Management reviews, on an annual basis, the carrying valueof goodwill and other intangible assets in order to determine whetherimpairment has occurred.  Impairment is based on several factors including theCompany's projection of future undiscounted operating cash flows. If animpairment of the carrying value were to be indicated by this review, theCompany would perform the second step of the goodwill impairment test in orderto determine the amount of goodwill impairment, if any.

Identifiable assets and liabilities acquired inconnection with business acquisitions accounted for under the purchase methodare recorded at their respective fair values. The Company is amortizing the identifiableintangibles over their estimated useful lives. Intangibles consist of thefollowing at September 30, 2005:

 
Balance
Estimated Useful
 

Life (Years)    
Trade name

3,240 

15

Customer list

4,100 

15

Supply agreement

1,350 

20

Non-compete

215 

6

 

8,905 
Accumulated amortization

(782)

 

8,123    
Amortization expense totaled $350 and $162 for the ninemonths ended September 30, 2005 and 2004, respectively.

**RevenueRecognition**

The Company recognizes revenue in accordance with StaffAccounting Bulletin ("SAB") No. 101, "Revenue Recognition in FinancialStatements", as revised by SAB 104. As such, the Company recognizes revenuewhen persuasive evidence of an arrangement exists, title transfer has occurred,the price is fixed or readily determinable and collectibility is probable.Sales are recorded net of sales discounts.

PWS, FSS, and HSR of Louisiana recognize revenue at the time the contract and relatedservices are performed.

Southern Exposure and Cornerstone recognize revenue for product sales atthe time the related products are shipped to the customer. These subsidiaries recognize revenue for installation jobs uponcomplete installation of the cabinets and inspection by the customer. Deferredrevenue represents amounts billed to customers and collected prior tocompletion of the cabinets and inspection by the customer.

Cornerstone recognizes revenue from its building andremodeling jobs using the percentage of completion method for financialreporting purposes. Under the percentage of completion method, revenues withrespect to individual contracts are recognized in the proportion that costsincurred to date bear to total estimated costs. Revenue and costs estimates aresubject to revision during the terms of the contracts and any required adjustments are made in the periods in which the revisionsbecome known. General and administrative costs are not allocated to contractcosts and are charged to expense as incurred.

**BeneficialConversion Feature**

Certain convertible features of notes payable (see Note5) and preferred stock (see Note 6) providefor a rate of conversion that is below market value.This feature is normally characterized as a beneficial conversion feature("BCF"), which is recorded by the Company, pursuant to Emerging Issues TaskForce ("EITF") Issue No. 98-5 ("EITF 98-05"), "Accounting For ConvertibleSecurities with Beneficial Conversion Features or Contingency AdjustableConversion Ratio," and EITF Issue No. 00-27, "Application of EITF Issue No.98-5  to Certain Convertible Instruments." 

** **

6

**HOME SOLUTIONS OF AMERICA, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (Continued)**

**Stock-Based Compensation**

The Company uses the intrinsic value method ofaccounting for stock-based compensation to employees in accordance withAccounting Principles Board Opinion ("APB") No. 25, as amended, *"**Accounting for StockIssued to Employees."*  The Company accounts for non-employee stock-based compensation under SFAS No.123, *"**Accountingfor Stock-Based Compensation."* At September 30, 2005, the Company has two stock-based employeecompensation plans, which are described more fully in Note 6.  During the ninemonths ended September 30, 2005 and 2004, compensation expense of $1,108 wasrecognized in the accompanying statements of operations for options issued toemployees below market value pursuant to APB No. 25.  No other stockoption-based employee compensation cost is reflected in the 2005 and 2004statements of operations, as all other options granted in 2005 and 2004 underthose plans had exercise prices equal to or greater than the market value ofthe underlying common stock on the dates of grant.  The following tableillustrates the effect on net income and income per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, to stock-basedemployee compensation.

      	Three  Months Ended September 30,

       	Nine Months Ended September 30,

2005

2004

2005

2004

Net  income as reported

 $

2,356 

 $

685 

 $

4,443 

 $

1,691 

Add:  Total stock-based  employee compensation expense under APB 25

1,108 

-- 

1,108 

-- 
                 
Deduct:  Total stock-based  employee compensation expense under fair value based method for all awards,  net of related tax effects

(332)

(92)

(910)

(195)
  
------------------ 

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

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

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

Pro forma net income 

 $

3,132 

 $

593 

 $

4,641 

 $

1,496 
  
==========

==========

==========

==========

Income per share - as  reported

Basic

 $

0.08 

 $

0.03 

 $

0.18 

 $

0.08 

Diluted

 $

0.08 

 $

0.03 

 $

0.18 

 $

0.07 
  
Income per share - pro forma

Basic

 $

0.13 

 $

0.03 

 $

0.23 

 $

0.09 

Diluted

 $

0.11 

 $

0.03 

 $

0.20 

 $

0.08 

**Issuance of Stockfor Non-cash Consideration**

All issuances of the Company's stock for non-cashconsideration have been assigned a dollar amount equaling either the marketvalue of the shares issued or the value of consideration received whichever ismore readily determinable. The majority of the non-cash consideration receivedpertains to services rendered by consultants and others and have been valued atthe market value of the shares issued. In certain issuances, the Company maydiscount the value assigned to the issued for illiquidity and restriction onresale. 

**Comprehensive Income**

During the periods presented, the Company had no itemsof comprehensive income and, therefore, has not presented a statement ofcomprehensive income.

**Per Share Data**

Basic earnings per share ("BEPS")are computed by dividing income available to common stockholders by theweighted average number of outstanding common shares during the period ofcomputation. Diluted earnings per share ("DEPS") give effect to allpotential dilutive common shares outstanding during the period of computation.The computation of DEPS does not assume conversion, exercise or contingentexercise of securities that would have an anti-dilutive effect on earnings.

7

**    HOME SOLUTIONS OF AMERICA, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (Continued)**

The following is a tablereconciling BEPS and DEPS and the related weighted average number of sharesoutstanding for the three and Nine months ended September 30, 2005:

** **

Three  months ended  September 30, 2005

Numerator (Income)

Denominator (Shares)

Per Share Amount

Basic EPS:

Net income

 $

2,356 

       	

Less: convertible preferred stock     dividends

(28)

Amortization of convertible preferred stock issuance costs and beneficial  conversion feature

(334)
     
Income available to common stockholders

1,994 

23,737 

 $

0.08 
     
Effect of dilutive securities:

Options and warrants

- 

2,278 

Options and warrants

- 

1,818 
     
Diluted EPS:

     Plus:

Amortization of debt discount

107 

Interest expense

34 

Amortization of debt issue costs

- 

Income available to common stockholders  plus assumed conversions

 $

2,135 

27,833 

 $

0.08 

 

Nine months ended September 30, 2005

Numerator (Loss)

Denominator (Shares)

Per Share Amount

Basic EPS:

 Net loss

 $

4,443 

       	

 Less: Convertible preferred stock dividends

(135)

     Amortization  of convertible preferred stock issuance costs and  beneficial conversion feature

(587)

 Income available to common stockholders

3,721 

20,569 

 $

0.18 

Options and warrants

784 

Assumed conversion of debt

- 

1,818 

Diluted EPS:

     Plus:

Amortization of debt discount

295 

Interest expense

101 

Amortization of debt issue costs

- 

Income available to common stockholders 	plus assumed conversions

 $

4,117 

23,171 

 $

0.18 

 

**NOTE 2 - SEGMENT INFORMATION**

The Company operates in two segments: Recovery/Restoration Services, including indoor air contaminationremoval, carpet cleaning, air duct cleaning and fabric protection services forprimarily residential properties and Rebuilding/Remodeling, which includes cabinet and countertopinstallation services. See Note 8 for segment disclosure. 

 

8

 

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 3 - ACQUISITIONS**

**Cornerstone**

Pursuant to a merger agreement, on March 31, 2005, the Companyacquired 100% of the capital stock of CornerstoneBuilding and Remodeling, Inc. d/b/aCornerstone Granite & Marble. The acquisition wasaccounted for as a purchase.  

The purchase price was comprised of the following:
   
Cash  paid to seller (paid in April 2005)
$
1,700 
   
Notes  payable (1)
   
1,600 
   
Common  stock issued to seller (2,471 shares)
   
3,335 
   
Non  cash costs (350 shares of common stock and 1,333 warrants  issued)
   973    
Legal,  accounting and other costs
   
422 
  $
8,030 

(1)  Notes payable were deemed to be paid in full andextinguished pursuant to a letter agreement dated June 30, 2005.

        The purchase price was tentativelyallocated as follows:
   
Current  assets
$
2,064 
   
Property  and equipment
   
1,824 
   
Other  long-term assets
   
11 
   
Current  liabilities
   
(5,770)
   
Long-term liabilities   
   
(1,460)
              
Estimated  fair value of tangible net assets acquired
   
(3,331)
   
Intangibles
   
4,315 
   
Goodwill
   
7,046 
  $8,030 
Of the acquired intangibleassets, $4,315 has been assigned to Cornerstone's customer relationships andnon-compete agreements and are subject to amortization based on an estimateduseful life of 6-15 years. The remaining amount of acquired intangible assetsof $7,46been assigned to goodwill as of September 30, 2005 in the accompanyingconsolidated balance sheet. The Company completed theanalysis of the components of the intangible assets and an appraisal was done by a third party to determine the final purchase price allocation. Goodwill increased by$2103 during the period ended September 30, 2005 related to adjustments to theacquired assets and liabilities.

For each of three consecutivecalendar years commencing with 2005, in the event that Cornerstone producesearnings before interest, taxes, depreciation and amortization ("EBITDA") in suchcalendar year in excess of $2,400, the Company agreed toissue to the seller additionalshares of the Company's common stock representing 30% of the EBITDA amount inexcess of $2,400 (50% under certain circumstances) and as specified in themerger agreement. In lieu of issuing shares of common stock, the Company hasthe option of making a cash payment to the seller equal to 30% of the excessEBITDA amount.

**FloridaEnvironmental Services, Inc.**

On September 27, 2005, HSR of Louisiana closed thepurchase of substantially all of the assets of Florida Environmental Services,Inc., a Florida corporation ("FERS"), a company engaged in recovery servicesprior to the acquisition. The acquisition was effective on September 1, 2005. The acquisition was accounted for as a purchase. The purchase price wascomprised of the following:
   
Note payable to seller (See  Note 5)

$

11,000 
   
Non cash costs (175 shares  of common  stock) 
625    
Legal, accounting and other  costs 

 

160 
   
$

11,785 

The purchaseprice was tentatively allocated as follows:
   
Current assets

$

2,994 
   
Property and equipment

72 
   
Other long-term assets

1 
   
Current liabilities   

    

(643)
      
Estimated fair value of  tangible net assets acquired

2,424 
   
Goodwill

 

9,361 
   
$

11,785 

The excess of the purchase price greater than tangiblenet assets acquired is tentatively assigned to goodwill as of September 30,2005 in the accompanying consolidated balance sheet. The Company willcomplete an appraisal by a third party to determine the final purchase priceallocation.

9

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares in Thousands,Except Per Share Data)****September30, 2005**

**NOTE3 - ACQUISITIONS (Continued)**

In connection with theacquisition, Home Solutions issued to FERS, a warrant exercisable for 1,054 shares of HomeSolutions' common stock, at an exercise price of $.001 per share with anestimated fair value of $4,415.  The warrantbecomes exercisable only if during the period from September 27, 2005 toSeptember 27, 2006, HSR of Louisiana either (i) meets or exceeds $20 million ingross billings related to the acquired assets, or (ii) meets or exceeds $8 millionin EBITDA related to the acquired assets.  If HSR of Louisiana meets either ofthese goals, then the warrant shall be exercisable from the date the goal ismet, as determined by HSR of Louisiana and confirmed by its independent publicaccountants, until December 31, 2006.  If HSR of Louisiana fails to meet atleast one of these goals, then the warrant will not become exercisable andinstead, becomes void and of no force or effect.  

In addition,FERS is entitled to receive anamount equal to ten percent (10%) of the excess of the HSR of Louisiana'sEBITDA with respect to the acquired assets related to the business, if any,that exceeds $15,000 million in each of fiscal years 2006 and 2007, subject tothe terms and provisions of the purchase agreement (the "Earnout Amount"). In each of fiscal year 2006 and 2007, the Earnout Amount, if any, shall bedetermined by the Company in accordance with generally accepted accountingprinciples for that fiscal year and confirmed by its independent publicaccountants within 90 days following the end of such fiscal year. If FERS is entitled to an Earnout Amount, it shall be paid bythe Company in cash or, at HSR of Louisiana's option, by the issuance of restricted shares of Home Solutions' common stock valuedat the five-day trailing average of the closing price ofthe common stock as quoted on theAmerican Stock Exchange in the five days immediately prior to the last day ofthe fiscal year for which the shares are to be issued.

The following pro forma information presents theresults of operations for the three and nine months ended September 30, 2004and 2005, as though the Cornerstone and FERS acquisitions had occurred on January1, 2004. 
   
 

Nine  Months Ended

Three  Months Ended      
September30,       

September30,      
   
 

2005
20042005
2004
   
Revenue

$55,637
$47,291$25,151
$11,294
   
Net  Income

3,224
1,041
3,043
712
   
Basic  earnings per share

0.14
0.05
0.11

0.03
   
Diluted  earnings per share

0.14

0.05
0.00
0.03

Letter of Intent

PWS has entered into a Letter of Intent to acquire agranite and marble fabrication and installation company in southern California.The acquisition is subject to certain closing conditions. There can be noassurances that the Company will successfully complete this transaction.

**NOTE 4 - NOTE RECEIVABLE**On June 2, 2004, the Company,PWS, Jane C. Barber ("Barber") and Spruce MacIntyre HoldingCorp. ("Spruce") entered into a Fourth Amendment to Stock Purchase Agreementand Global Settlement and Release Agreement (the "Barber Global Settlement"),whereby certain lawsuits were dismissed by the Company with prejudice, and theparties released each other from any liability other than their respectiveobligations under the Barber Global Settlement and relatedagreements.  Pursuant to the Barber Global Settlement,Barber assigned to the Company a promissory note in theoriginal principal amount of $1,550 (the "Note Receivable"), secured by 745shares of the Company's common stock owned by Barber (the "Barber Shares'), which Barber had obtained from athird party in connection with the sale of the Barber Shares to such thirdparty.  The Note Receivable requires payments to the Company of $15 per week,without interest unless a default occurs, commencing on July 9, 2004, until theNote Receivable is paid in full.  The Note Receivable is personally guaranteedby a third party.  The Company recorded this Note Receivable with an implicitrate of 4.55%, resulting in an initial balance of $1,481. As of September 30, 2005, the Note Receivable balance is $886.

 

10

** **

** **

** HOME SOLUTIONS OF AMERICA, INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 5 - DEBT**

Infiscal year 2005, the Company has conducted a number of private placements ofmezzanine debt, which are described below.

InMarch 2005, the Company raised $4,000 in a private placement of mezzanine debt withPetra Mezzanine Fund, L.P. ("Petra").  The original principal amount of thepromissory note issued to Petra was $4,000 ("Petra Note") and Petra was alsoissued a warrant to purchase 533 shares of the Company's common stock for $0.01per share.  The Petra Note earns interest at 12.0% per annum, is secured by allof the assets of the Company, PWS and Cornerstone and has a five-year term. TheCompany incurred $1,116 in related debt issue costs ($294 cash, $822 non-cash).The non-cash costs of $822 represent the relative fair value of the warrant andsuch costs will be amortized to interest expense over the term of the relateddebt instrument along with the debt issue costs. The net proceeds of the loanfrom Petra were used to pay the cash portion of the purchase price ofCornerstone and to inject working capital into Cornerstone. At September 30,2005, Petra had exercised all of its warrants.

InApril 2005, the Company raised $500 in a private placement of mezzanine debt withLaddcap Value Partners ("Laddcap"). The original principal amount of thepromissory note issued to Laddcap was $500 ("Laddcap Note") and Laddcap wasalso issued a warrant to purchase 67 shares of the Company's common stock for$0.01 per share.  The Laddcap Note earns interest at 12.0% per annum, issecured by all of the assets of the Company, PWS and Cornerstone and has afive-year term. The Company incurred $123 in related debt issue costs ($20cash, $103 non-cash). The non-cash costs of $103 represent the relative fairvalue of the warrant and such costs will be amortized to interest expense overthe term of the related debt instrument along with the debt issue costs. Thenet proceeds of the loan from Laddcap were used to inject working capital intoCornerstone. At September 30, 2005, Laddcap had exercised all of its warrants.

 InMay and July 2005, the Company raised $2,500 in a private placement ofmezzanine debt with Patriot Capital, L.P. ("Patriot"). The original principalamount of the promissory note issued to Patriot was $2,500 ("Patriot Note") andPatriot was also issued a warrant to purchase 333 shares of the Company'scommon stock for $0.01 per share.  The Patriot Note earns interest at 12.0% perannum, is secured by all of the assets of the Company, PWS and Cornerstone andhas a five-year term. The Company incurred $552 in related debt issue costs ($182cash, $370 non-cash). The non-cash costs of $370 represent the relative fairvalue of the warrant and such costs will be amortized to interest expense overthe term of the related debt instrument along with the debt issue costs. Thenet proceeds of the loan from Patriot were used primarily to pay a Cornerstoneseller note. At September 30, 2005, Patriot had exercised all of its warrants.

Debtconsists of the following at September 30, 2005:  

Note Payable to FERS, interest at 5% per annum, principal  and accrued interest payable in one installment, maturing January 2, 2006. 	

    

     $ 11,000
        
Note payable to the seller of Southern Exposure, interest at 2% in excess of one-month LIBOR rate  (adjusted on the first day of each calendar quarter beginning January 1,  2004, totaling 5.86% at September 30, 2005), principal and interest payments  due quarterly beginning July 1, 2004 and maturing January 1, 2012. The  payments are equal to the  greater of (i) the amount of principal and interest that would be payable  under a 10-year amortization or (ii) 60% of free cash flow (as defined) of  the calendar quarter that precedes the payment date by two calendar quarters,  commencing with the calendar quarter ended September 30, 2004, which shall be  measured against the calculation set forth above for the payment date of July  1, 2004. The note is secured by a security interest in all the assets and  stock of Southern Exposure Unlimited of Florida, Inc. and Southern  Exposure Tops of Florida, Inc. and a first lien on  50% of the stock of SouthernStone Cabinets, Inc.

2,740
     
Note payable to Petra, interest at 12% per annum,  interest payable only, quarterly in arrears, beginning September 30, 2005 and  continuing each calendar quarter until September 30, 2010 at which time the  outstanding balance together with all accrued and unpaid interest shall be  paid, net of  unamortized discount of $1,008. For the nine months ended September  30, 2005, $109 has been amortized.

2,992
     
Secured convertible revolving note payable to Laurus Master Fund, Ltd. ("Laurus"), interest at prime plus  2.5%, but not less than 6.5% (totaling 9.00% at September 30, 2005) interest  due in monthly installments with principal due January 2006, secured by all  the assets of the Company, net of unamortized debt discount of $40. For the nine months ended September 30, 2005, $184 has  been amortized. In August 2005, Laurus transferred $1,486 from the  convertible minimum borrowing note to the secured revolving note (See below).	

1,859

 

 11

 

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 5 - DEBT (Continued)**

Note payable to Patriot,  interest at 12% per annum, interest payable only, quarterly in arrears,  beginning September 30, 2005 and continuing each calendar quarter until  September 30, 2010 at which time the outstanding balance together with all  accrued and unpaid interest shall be paid, net of  unamortized discount of  $506. For the nine months ended September 30, 2005, $46 has been amortized.1,994         
Revolving credit note payable to bank, interest at  the higher of the prime rate or the federal funds rate plus 1/2 of 1%,  interest only payments paid monthly, maturing January 2006, guaranteed by the  Company and collateralized by the assets of Cornerstone. At September 30,  2005 the interest was 8.25%.
1,300 
        
Convertible minimum borrowing note payable to Laurus,  interest at prime plus 2.5%, but not less than 6.5% (totaling 9.00% at September  30, 2005) interest due in monthly installments with principal due January  2006, secured by all the assets of the Company. $1,500 of the convertible cote  can be converted into shares of common stock at a fixed conversion price  $1.88, net of unamortized debt discount of $24. The note contains certain  financial and non-financial covenants, with which the Company is in  compliance at September 30, 2005. During the nine months ended September 30,  2005 Laurus converted $1,337 for 886 shares and $14 for 10 shares of the  Company's common stock for the conversion of debt and accrued interest,  respectively. In August 2005, Laurus transferred $1,486 from the convertible  minimum borrowing note to the secured revolving note (See above).
1,476 
   
Note payable, secured by Note Receivable,  non-interest bearing, payable $15 weekly until paid in full, implicit  interest rate of 6.5%, net of unamortized debt discount of $4.

321 
     
Notes and capital leases payable to various financial  institutions collateralized by various trucks and equipment bearing interest  at various annual interest rates ranging from 0.75% to 13.58%, principal and  interest payable in monthly installments ranging from $0.4 to $1.0 through  December 27, 2010.

700 
     
Note payable to Laddcap, interest at 12% per annum,  interest payable only, quarterly in arrears, beginning on September 30, 2005  and continuing each calendar quarter thereafter until September 30, 2010 at  which time all principal and interest due shall be paid, net of unamortized  discount of $110. For the nine months ended September 30, 2005, $12 has been  amortized.

390 
     
24,772 

Less  current portion

(17,630)

Total

$                   7,142 

Duringthe nine months ended September 30, 2005 and 2004 the Company has amortized $491and $201 of debt issue and imputed interest costs to interest expense,respectively.

**NOTE 6 - EQUITY**

**Preferred Stock**

In March 2004, the Company raised $2,000 in a privateplacement of 0.08 shares ofSeries A Preferred Stock, $0.001 par value per share ("Series A PreferredStock"), all of which have been converted into common stockas described below.  Prior to the conversion, dividendson the Series A Preferred Stock werepayable semi-annually at a rate of 8% per annum, in cash or common stock, atthe option of the Company.  The Series A Preferred Stock wasconvertible into common stock at a conversion rateof $1.25 for each share of common stock at the option of the holder orautomatically after two years. Purchasers of the Series A Preferred Stockreceived Series A Warrants to purchase 1,600 shares of common stock at anexercise price of $1.75 per share, expiring 90 days from the effective date oftheir registration statement, and Series B Warrants to purchase 1,600 shares ofcommon stock at an exercise price of $2.25 per share, expiring March 2009.  Inthe event of a liquidation, dissolution or winding up of the affairs of theCompany, whether voluntary or involuntary, the holders of the Series APreferred Stock would have beenentitled to receive, out of the assets of the Company available fordistribution to its stockholders, an amount equal to $25,000 per share of theSeries A Preferred Stock plus any accrued and unpaid dividends before anypayment is made or any assets distributed to the holders of the common stock. Costs of this transaction of $876 will be amortized as additional dividends over the two-yearmaximum life of the Series A Preferred Stock.

Warrantsto purchase 1,600 shares of common stock at an exercise price of $1.75 pershare expired July 1, 2004 without exercise by the holdersof the Series A Preferred Stock. For the nine months ended September 30, 2005, the Company recorded $80 individends payable and $587 in amortization of issuance, warrant and BCF costs. For the nine months ended September 30, 2005 theCompany, at its option, issued 102 shares of common stock in lieu of cashpayment for $128 of accrued dividends. In 2004 the purchaser converted .014shares of Series A preferred Stock into 280 shares of the Company's commonstock. In August 2005, the remaining .068 outstanding shares of Series A Preferred Stock were converted into 1,360 shares of the Company's common stock. 

 

 12

 

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 6- EQUITY (Continued)**

In July 2004, the Company raised $1,000 in a privateplacement of 0.04 shares of Series B Preferred Stock, $0.001 par value pershare ("Series B Preferred Stock"), all of which has beenconverted to common stock as described below.  Prior to the conversion,dividends on the Series B Preferred Stock were payable semi-annually at a rateof 8% per annum, in cash or common stock, at the option of the Company.  TheSeries B Preferred Stock convertedinto common stock at a conversion rate of $1.50 for each share of common stockat the option of the holder or automatically after two years.  In the event ofa liquidation, dissolution or winding up of the affairs of the Company, whethervoluntary or involuntary, the holders of the Series B Preferred Stock would have been entitled to receive,out of the assets of the Company available for distribution to its stockholders,an amount equal to $25,000 per share of the Series B Preferred Stock plus anyaccrued and unpaid dividends before any payment is made or any assetsdistributed to the holders of the common stock. For the nine months endedSeptember 30, 2005, the Company has recorded $57 in dividends payable and, atits option, issued 54 shares of common stock in lieu of cash payment for $81 ofthe accrued dividends. In September 2005, all 0.04 shares of outstanding Series B Preferred Stock were converted into 667 shares of the Company's common stock.

**Common Stock**

During the nine months ended September 30, 2005, theCompany issued 2,471 shares of common stock to the seller of Cornerstone and350 shares to entities in connection with fees related to the acquisition ofCornerstone (See Note 3).  

During the nine months ended September 30, 2005, theCompany issued 1,000 shares of its restricted common stock in connection withits wholly -owned subsidiary,Cornerstone, entering into an exclusive supply agreement with a vendor toobtain certain products. The initial term of the agreement is 20 years.  Theproducts are priced toCornerstone at the vendor's necessary, documented out -of -pocketcosts of obtaining and shipping products to Cornerstone, plus a 20% mark-up; provided, that the vendor assures Cornerstone of its lowest pricing.Cornerstone agrees to purchase at least $325 per month of products from thevendor during the term of the agreement.  

In March 2005, the Company issued 50 shares to anentity in consideration of services provided under a consulting agreement. The shares were valued at $1.35per share, totaling $68 and wererecorded to prepaid expense. The $68 amount was amortized to expense throughSeptember 30, 2005.

During the nine months ended September 30, 2005, theCompany issued 102 shares of common stock in lieu ofcash payment for $128 in accrued dividends to the holders ofthe Series A Preferred Stock.

During the nine months ended September 30, 2005, theCompany issued 54 shares of common stock in lieu of cashpayment for $81 in accrued dividends to the holders of the Series B Preferred Stock.

During the nine months ended September 30, 2005, theCompany issued 886 shares of common stock in connectionwith the conversion of $1,337 in debtby Laurus.

During the nine months ended September30, 2005, the Company issued 10 shares of common stock for $14in connection with the payment of interest on debt owed to Laurus.

During the nine months ended September30, 2005, the Company issued 3,820 shares of common stock for $3,698 inconnection with the exercise of warrants.

During the nine months ended September30, 2005, the Company issued 1,360 shares of common stock in connection withthe conversion of .068 shares of Series A Preferred Stock.

During the nine months ended September30, 2005, the Company issued 667 shares of common stock for in connection withthe conversion of .040 shares of Series B Preferred Stock.

During the nine months ended September30, 2005, the Company issued 419 shares of common stock for $63 in connectionwith the exercise of options.

**Stock Options**

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-qualifiedstock options, and restricted stock purchase rights. At the Company's 2005annual stockholders' meeting, which was held on June 17, 2005, the Company'sstockholders approved an amendment to the 2001 Plan that increased the optionsavailable for grant under the 2001 Plan by 1,000, bringing the total to 4,000. The exercise price of the awards shall be determined by the Plan administratorat the date of grant, but shall not be less than the fair market value of thestock on the date of grant for employees, or 85% of the fair market value for non-employees. The exerciseperiod shall be no more than 10 years and the awards will vest over a period oftime determinable by the Board of Directors.  The number of options under the2001 Plan available for grant at September 30, 2005 was 848.

During the nine months ended September30, 2005, the Company issued 500 options under the 2001 Plan to employees to purchaseshares of the Company's common stock at $1.59 (fair value on the date of thegrant). 

 

13

 

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 6 - EQUITY (Continued)**

The Company's Board ofDirectors approved the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plancovers two types of options: incentive stock options and non-qualified stockoptions. At the Company's 2005 annual stockholders' meeting, which was held on June17, 2005, the Company's stockholders approved an amendment to the 1998 Planthat increased the options available for grant under the 1998 Plan by 1,500,bringing the total to 3,500. The exercise price for the options shall bedetermined by the Plan administrator at the date of grant, but shall not beless than the fair market value of the stock at the date of grant. The optionperiod can be no more than 10 years and the options will vest over a period oftime determinable by the Board of Directors.  The number of options under the1998 Plan available for grant at September 30, 2005 was 1,325.  

Duringthe nine months ended September 30, 2005, the Company issued 292 options underthe 1998 plan to employees to purchase shares of the Company's common stock at$2.53 (fair value on the date of the grant). 

**Warrants**

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

During the nine months ended September30, 2005, as part of a $7,000 debt financing, the Company issued warrants topurchase 933 shares of the Company's common stock with a relative fair value of$1,295 under SFAS No.123 and recorded such amount as a debt discount at September30, 2005 (see Note 5). These warrants have an exercise price of $0.01, werefully vested upon grant and expire in March 2010.

**NOTE 7 - COMMITMENTS AND CONTINGENCIES**

**Litigation**

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 September 30, 2005, there were no claims and disputes incidental tothe business that management believes will have a material affect on thefinancial position or results of operation of the Company.

**Indemnitiesand Guarantees**

The Company has made certainindemnities and guarantees, under which it may be required to make payments toa guaranteed or indemnified party, in relation to certain transactions.  TheCompany indemnifies its directors, officers, employees and agents to themaximum extent permitted under the laws of the State of Delaware.  Inconnection with its facility leases, the Company has indemnified its lessor forcertain claims arising from the use of the facilities.  In connection withcertain of its debt, stock purchase and other agreements, the Company hasindemnified lenders, sellers, and various other parties for certain claimsarising from the Company's breach of representations, warranties and otherprovisions contained in the agreements.  Historically,the Company has not been obligated to make any payments for these obligationsand no liabilities have been recorded for these indemnities and guarantees inthe accompanying consolidated balance sheet.

 

14

 

**HOME SOLUTIONS OF AMERICA,INC.****NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS****(Dollars and Shares inThousands, Except Per Share Data)****September30, 2005**

**NOTE 8 - SEGMENT REPORTING**

The Company reports its business segments based on industry classification, which are as follows:
 
    
Three Months Ended	September30,
 
Nine Months Ended	September30,
 2005 2004 2005 2004        
Net sales:       
  Recovery/Restoration services
 $
10,546  
 $
4,040  
 $
20,557  
11,625 
  Rebuilding/Remodeling
9,830  
3,903  
25,236  
10,506 
      Total segment net sales
 $
20,376  
 $
7,943  
 $
45,793  
 $
22,131      
   
  Operating income:       
  Recovery/Restoration services
 $
4,089  
575  
 $
5,916  
1,571 
  Rebuilding/Remodeling
998  
1,091  
3,742  
2,658 
  Corporate
(1,614) 
(640) 
(2,699) 
(1,864)
     Total segment operating income
 $
3,473  
1,026  
 $
6,959  
2,365         
Depreciation and amortization included in operating income:       
  Recovery/Restoration services
 $
127  
 $
127  
 $
388  
 $
383 
  Rebuilding/Remodeling
185  
22  
395  
66 
  Corporate
38  
116  
121  
362 
     Total segment depreciation and  amortization
 $
350  
 $
265  
 $
904  
 $
811        	 	 
  Identifiable assets:       
Recovery/Restoration services    
 $
35,860 
 
 $
16,611 
 Rebuilding/Remodeling    
32,805 
 
13,960 
 Corporate    
5,295 
 
2,727 
     Total segment identifiable assets    
 $
73,960 
 
 $
33,338         
There were no inter-segment sales. Operating income isdefined as third party sales less operating expenses. All of the Company'sbusiness activities are conducted within the United States geographic boundaries.

**NOTE 9 - RELATED PARTY TRANSACTIONS**

The Company is involved in various related partytransactions. These transactions are summarized as follows: 

The Company has a notepayable to a related party for the purchase of the land and building for theCompany's corporate headquarters.  The note is secured by a deed of trust,accrues interest at 12% per annum, payable monthly with an unpaid principalbalance of $750 at September 30, 2005. The note is payable upon sale of theland and building. Interest expense on the note was $68 and $68 for the nine monthsended September 30, 2005 and 2004, respectively.

The Company leases awarehouse facility from a related party under a non-cancelable lease. The leaseis for one year through December 2005 for $10 monthly. The Company also leases administrative spaces from arelated party under a non-cancelable lease. The lease is through January 2015for $12 monthly.  

**NOTE 10 - SUBSEQUENT EVENTS**

In October, 2005 the Company issued 36 shares of commonstock in connection with the non cash exercise of options.

In November, 2005, Laurusconverted $1,500 in debt to 798 shares of common stock at aconversion price of $1.88 per share.

 

15

 

**Item2. Management's Discussion and Analysis or Plan of Operation (Dollarsand shares in thousands except per share data).**

**Overview**

                HomeSolutions is a provider of recovery, restoration and rebuilding/remodeling services tocommercial and residential areas that are (i) prone to flooding, hurricanes,tornados, fires or other naturally occurring and repetitive weather emergencies;and/or (ii) experiencing robust housing development.  With operations in theSouth, Gulf Coast regions and California, we believe that the Company is wellpositioned to capitalize on the growing demand for our suite of Recovery,Restoration and Rebuilding/Remodeling services.  Home Solutions is a Delaware corporation with principal executive officeslocated at 1500 Dragon, Suite B, Dallas, Texas 75207.  Our website is locatedat www.HOMcorp.com.  Our Chairman of the Board, President and Chief ExecutiveOfficer is Frank Fradella, and our Senior Vice President, Chief FinancialOfficer, Secretary and Treasurer is Rick O'Brien.

**Growth Strategy**

                Ourgrowth strategy is to target markets that are (i) prone to flooding,hurricanes, tornados, fires or other naturally occurring and repetitive weatheremergencies; and/or (ii) experiencing robust housing development, and penetratethese markets through internal growth of its existing operating subsidiariesand a well-executed acquisition program to expand the Company's serviceofferings.  We have closed five acquisitions since November of 2002.  Werecently implemented our initiative to expand into the hardest hit areas of the2005 hurricane season by forming HSR of Louisiana, a wholly-owned subsidiary,and acquiring substantially all of the assets of FERS in September of 2005.  Initially, the services providedby these operations will involve the drying, dehumidifying, clean up andremoval of debris at many of the hurricane-affected locations prior tocommencing restoration services.  We expect the recovery, restoration andrebuilding effort associated with the 2005 hurricanes to happen in stages andlast between two to five years.  The Company plans to take advantage of theopportunity to service these areas through each stage with each of itsRecovery, Restoration and Rebuilding/Remodeling service offerings.

                We also see the opportunity to further capitalize on therobust growth in housing in our target markets through the Company'srelationship with Centex Corp. ("Centex"), a leading homebuilder, as well as with the expansion ofour relationships with retailers including Home Depot, Inc.("Home Depot").  

**Service Offerings**

Ourbusiness consists of three integrated service offerings:  (i) Recovery; (ii)Restoration; and (iii) Rebuilding/Remodeling.  We believe that the natural progressionof our business offerings in markets affected by weather-related emergencies,from Recovery, to Restoration, to Rebuilding/Remodeling, increases ouropportunities across all three service offerings. 

**               Recovery**

With its recent expansioninto the Louisiana area as well as with its completion of the FERS acquisition,the Company is a first responder to clean up activities after weather-relatedemergencies.  It has significant currently ongoing operations throughoutimpacted areas in Florida, Louisiana, Mississippi, and Texas.  The Company andFERS (prior to its acquisition by HSR of Louisiana) also provided recoveryservices in Florida during the 2004 hurricane season, which we believe willposition the Company to generate revenue in our Restoration andRebuilding/Remodeling segments in the Florida markets.  As of November 1,2005, we employed approximately 500 trained employees who provide onsite firstresponse technical services in these markets through contracts with commercialand residential clients.  Currently, the Company's Recovery services includeproviding initial set up services in an impacted area (including power,lodging, sustenance, and training) and then providing the drying,dehumidification, cleanup and removal of debris from commercial and residentialareas to prepare the areas for the next stage of restoration.  We believe theRecovery segment of our business to not only be of high growth andprofitability, but we also seek to capitalize on synergistic opportunities bycontinuing to  provide these services in areas that need the full spectrum ofrestoration, rebuilding and remodeling services that the Company can provide. Currently we provide these services on an hourly rate to our commercial andresidential clients, principally as a subcontractor to customers providingadditional services in these markets.  We intend to pursue bids on recoveryservices contracts with insurance agencies and government branches andagencies.  Although we believe that we will provide recovery services in thefuture to insurers and government agencies, there is no assurance that we will winany of these contracts.  

**              Restoration**

The following details thetypes of restoration services we provide:

**    Fire andWater Damage Restoration**: We providetrained employees to respond to fire, water and weather-related emergencies, toinspect structural members and contents damaged by water, to determine thelikelihood or extent of mold growth, and to provide immediate cleaning, drying,moving, storage, and deodorization, among other services.  As most cases ofmold are associated with excess moisture, we believe that our Recoveryservices' response to event-related damage will provide significant additionalrevenue opportunities for our Restoration segment.  The cost and timerequirements of restoration projects can vary dramatically from case-to-case.

**    Indoor AirContamination**: Through PWS, we provide indoor aircontamination services, including contamination from mold, asbestos and leadpaint to homeowners.  With increased media attention regarding the healththreat 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 propertyand system inspections, surface and air testing, project design, microbialremoval, light interior demolition, repair and specialized cleaning work.  Homeinspections and testing can range from $0.2 to $0.8.  For the typicalmold-contaminated house, a remediation project can last approximately one weekand cost $10 or more.  Customer opportunities are developed through a regionalsales force as well as through referrals by real estate firms, insuranceadjusters, mortgage companies, attorneys and nationally branded retailers.  TheCompany believes it can use its industry experience to give efficacy to itsprocesses and provide homeowners with quality assurance.

 

16

 

**   Cleaning andFabric Protection**: Through FSS, weprovide fabric protection services to protect furniture, carpet and draperiesfrom stains and daily wear through both Company-owned locations as well as overforty licensed locations.  This niche market is primarily targeted atabove-average income homeowners with an average ticket of approximately $400. We also provide air duct cleaning services to remove particulate (organic andinorganic) material, which can cause allergic reactions and is often the breedingground for many types of mold, from heating and air conditioning systems. 

**         Rebuilding/Remodeling**

Through SouthernExposure and Cornerstone, we offer cabinet and countertop installationservices.  Our wholly-owned subsidiary, Southern Exposure,manufactures and installs a high-end product line of cabinets and countertops. Our position in this market was strengthened in March 2005 through theacquisition of Cornerstone, which installs custom marbleand granite countertops for residential customers.  Currently, we manufactureand install cabinets and kitchen countertops for Centex, a public homebuilder,in its southwest Florida market.  We also install granite countertops for HomeDepot in Florida, Georgia, Alabama and South Carolina, and for LowesCompanies, inc., ("Lowes") in Florida.  It is expected that a portion of ourcabinet and countertop installation services will generate additionalopportunities across our other business segments.  We expect to expand theservices provided by our Rebuilding/Remodeling business segment through futureacquisitions; however, there is no guaranty that we will expand our services inthis segment, or that acquisitions, if completed, will be profitable.

*Useof Estimates and Critical Accounting Policies*

                In preparing our consolidated financialstatements, we make estimates, assumptions and judgments that can have asignificant effect on our revenues, income (loss) from operations, and netincome (loss), as well as on the value of certain assets on our balance sheet. We believe that 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.  While there are a number of accountingpolicies, methods and estimates affecting our financial statements, areas thatare particularly significant include revenue recognition, stock-based compensation,and goodwill.  In addition, please refer to Note 1 to the accompanyingfinancial statements for further discussion of our accounting policies.

*RevenueRecognition*

                Revenue is primarily recognized at thetime the contract and related services are performed.On occasion the Company reportsrevenue from fixed price contracts using the percentage of completion methodfor financial reporting purposes. Under the percentage of completion method,revenues with respect to individual contracts are recognized in the proportionthat costs incurred to date bear to total estimated costs. Revenue and costsestimates are subject to revision during the terms of the contracts and anyrequired adjustment are made in the periods in which the revisions becomeknown. General and administrative costs are not allocated to contract costs andare charged to expense as incurred.

*Stock-BasedCompensation*

                The Companyuses the intrinsic value method of accounting for stock-based compensation toemployees in accordance with Accounting Principles Board Opinion ("APB")No. 25, as amended, *"**Accountingfor Stock Issued to Employees."*   The Company accounts for non-employee stock-basedcompensation under Statement of Financial Accounting Standards ("SFAS") No.123, *"**Accountingfor Stock-Based Compensation."* At September 30, 2005, the Company had two stock-based employeecompensation plans, which are described more fully in Note 6 of theaccompanying consolidated financial statements.  The Company accounts for thoseplans under the recognition and measurement principles of APB 25, and relatedinterpretations.  The Company has applied the disclosure provisions in SFAS No.148 in its consolidated financial statements and the accompanying notes. 

*Goodwill*

                Goodwill represents the excess ofacquisition cost over the net assets acquired in a business combination.Management reviews, on an annual basis, the carrying value of goodwill in orderto determine whether impairment has occurred. Impairment is based on severalfactors including the Company's projection of future undiscounted operatingcash flows. If an impairment of the carrying value were to be indicated by thisreview, the Company would adjust the carrying value of goodwill to itsestimated fair value.

**Results of Operations (Dollars and Shares in Thousands)**

**Comparison of three months ended September 30, 2005 tothree months ended September 30, 2004**

                The Cornerstone acquisition was effectiveMarch 31, 2005. Cornerstone's balance sheet is included in the Company'sconsolidated balance sheet as of September 30, 2005, and Cornerstone's resultsof operations for the three months ended September 30, 2005 are included in theCompany's consolidated results of operations for the third quarter of 2005. TheFERS acquisition was effective September 1, 2005. FERS' balance sheet is included in the Company'sconsolidated balance sheet as of September 30, 2005. and the FERS' September 2005results of operations are included in the Company's consolidated results ofoperations for the three months ended September 30, 2005.

 

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* *

*  *

*Net Sales*

**    Recovery/Restoration Services**                Sales for the three months ended September30, 2005 were $10,546 compared to $4,040 for the three months ended September30, 2004.  PWS sales from its Florida operations, which started in the lastquarter of 2004, were $91. PWS has substantially completed the Florida workstarted in the last quarter 2004. PWS and FSS sales compared to the same periodin 2004 and excluding the Florida sales, increased $146. For the month of September2005, FERS sales were $6,360 related to hurricane recovery work in Florida.

**   Rebuilding/Remodeling                   **Sales for thethree months ended September 30, 2005 were $9,830 compared to $3,903 for thethree months ended September 30, 2004.  The segment sales for the three monthsended September 30, 2005 include Cornerstone sales of $4,857. Cornerstone was acquiredeffective March 31, 2005. SouthernExposure sales increased $1,070 from the same period in 2004,due primarily to increased demand from its principal customer.

*Costs of Sales*

**    Recovery/Restoration Services**                 Costs of sales for the three monthsended September 30, 2005 were $4,916 compared to $1,970 for the three monthsended September 30, 2004. Recovery work costs of sales for September were$2,820. The increase in costs ofsales of $126 over and above the increase in recovery workcosts is due primarily to increased PWS sales fromthe same period in 2004. The PWS costs of sales percentage was 57% and 59% forthe three months ended September 30, 2005 and September 30, 2004, respectively.

**   Rebuilding/Remodeling**

**                  **Costs of salesfor the three months ended September 30, 2005 were $6,345 compared to $2,296for the three months ended September 30, 2004. The segment costs of sales forthe three months ended September 30, 2005 include Cornerstone costs of sales of$3,926. Cornerstone was acquired effective March 31, 2005. Costs of salesincreased additionally $123 from the same period in 2004 due to the Southern Exposure increased sales. TheSouthern Exposure costs of salespercentage was 59% and 57% for the three months ended September 30, 2005 and September30, 2004, respectively.

*Selling, General and Administrative Expenses*

    **Recovery/Restoration Services**                 Selling, general and administrativeexpenses were $1,541 for the three months ended September 30, 2005, compared to$1,495 for the three months ended September 30, 2004.  This represents anincrease of $46 from the same period in 2004, primarily due to the administrative expenses related to theacquisition of the FERS assets in September 2005.

    **Rebuilding/Remodeling**                  Selling, general and administrativeexpenses were $2,487 for the three months ended September 30, 2005, compared to$516 for the three months ended September 30, 2004. The segment selling,general and administrative expenses for the three months ended September 30,2005 include Cornerstone expenses of $1,793. Cornerstone increased its selling,general and administrative expenses during this quarter to support itsexpansion into additional stores. Cornerstone was acquired effective March 31,2005. Southern Exposure experiencedincreased expenses of $178 from the same period in 2004, primarily due toincreased worker's compensation insurance.        

    **Corporate**                  Corporate general and administrativeexpenses were $1,614 for the three months ended September 30, 2005 compared to$579 for the three months ended September 30, 2004. In September 2004, the Companypaid the CEO a special bonus of $163 consisting of $113 in common stock and $50in cash. In the three months ended September 30, 2005 the Company recorded anon cash expense of $1,108 related to the value of re-priced stock optionsgranted to employees. 

*Other Income (Expense)*

                Interest expense was $641 for the threemonths ended September 30, 2005, compared to $175 for the three months ended September30, 2004. The increase in interest expense in the three months ended September30, 2005 compared to the three months ended September 30, 2004 was primarilydue to the interest of $211 on debt related to mezzaninefinancings, and the related amortizationof debt issue costs of $242. Other income increased to $28 in 2005 from $23 in2004, primarily due to a net gain of $26 recorded in September 2005 related tothe sale of assets. In the three months ended September 30, 2005, the Companyalso recorded $8 in non-cash amortization of imputed interest income from anote receivable. 

*IncomeTaxes*

*            *Income tax expense was $292 for thethree months ended September 30, 2005 compared to $0 for the three months endedSeptember 30, 2004. In 2004 the Company utilized its net operating loss taxcarry forward provision to offset 2004 federal taxable income.

**Comparison of nine months ended September 30, 2005 to ninemonths ended September 30, 2004**

                The Cornerstone acquisition was closedon March 31, 2005.  As such, Cornerstone's balance sheet is included in theCompany's consolidated balance sheet as of September 30, 2005. Cornerstone'sresults of operations for the six months ended September 30, 2005 are includedin the Company's consolidated results of operations for the nine months endedSeptember 30, 2005. FERS' balance sheet is included in the Company's consolidatedbalance sheet as of September 30, 2005, and FERS' September 2005 results ofoperations are included in the Company's consolidated results of operations forthe three and nine months ended September 30, 2005.

 

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*Net Sales*

**    Recovery/Restoration Services**                The revenue for the nine months ended September30, 2005 was $20,557, compared to $11,625 for the nine months ended September30, 2004.  PWS had sales of approximately $1,851 from its Florida operations,which began in the last quarter of 2004. PWS has completed the Florida workstarted in the last quarter 2004. PWS and FSS restorationservices sales, excluding the Florida operations, increased $721 from the sameperiod in 2004, primarily due to the PWS work on asignificant project in 2005. HSR of Louisiana had salesof $6,360 in September 2005.

**    Rebuilding/Remodeling                   **The revenue forthe nine months ended September 30, 2005 was $25,236, compared to $10,506 forthe nine months ended September 30, 2004. The segment sales for the nine monthsended September 30, 2005 include Cornerstone sales of $10,927. .Southern Exposure salesincreased $3,803 from the same period in 2004. Southern Exposure met increased demand from its majorcustomer for its product compared to the same period in 2004.

*Costs of Sales*

**    Recovery/Restoration Services**                 Costs of sales for the nine monthsended September 30, 2005 were $9,802, compared to $5,680 for the nine monthsended September 30, 2004. An increase of $1,302 in the cost sales was due primarilyto increased PWS revenues from the same period in 2004. The PWS Florida costsof sales (40%) were lower than priorcosts of sales related to periods when PWS performedwork only in California (52%), because the Florida restoration work did not materially involve removal ofhazardous material. Recovery work costs of sales forSeptember were $2,820.

**    Rebuilding/Remodeling                  **Costs of salesfor the nine months ended September 30, 2005 were $15,846, compared to $6,269for the nine months ended September 30, 2004. The segment costs of sales forthe nine months ended September 30, 2005 include Cornerstone costs of sales of$8,154. Costs of sales also increased an additional$1,423 from the same period in 2004, due to the Southern Exposure increased sales. The Southern Exposure costs of sales percentage was 59% and 60%for the nine months ended September 30, 2005 and September 30, 2004,respectively

*Selling, General and Administrative Expenses*

    **Recovery/Restoration Services**                 Selling, general and administrativeexpenses were $4,839 for the nine months ended September 30, 2005, compared to$4,374 for the nine months ended September 30, 2004.  This represents anincrease of $465 from the same period in 2004, primarily due to PWS administrative expenses of $363 relatedto Florida operations PWS started. PWS started Floridaoperations in the last quarter of 2004.

    **Rebuilding/Remodeling**                  Selling, general and administrativeexpenses were $5,648 for the nine months ended September 30, 2005 compared to $1,579for the nine months ended September 30, 2004.  The segment selling, general andadministrative expenses for the nine months ended September 30, 2005 include Cornerstoneexpenses of $3,693. Cornerstone was acquired effective March31, 2005. Southern Exposure experienced increasedexpenses of $376 from the same period in 2004, primarily due to increasedfor worker's compensation insurance.   

    **Corporate**                 Corporate general and administrative expenses were $2,699for the nine months ended September 30, 2005, compared to $1,680 for the ninemonths ended September 30, 2004. In September 2004, the Company paid the CEO a bonus of $163,consisting of $113 in common stock and $50 in cash. In the three months endedSeptember 30, 2005 the Company recorded a non cash expense of $1,108 related tothe value of re-priced stock options granted to employees. 

*Other Income (Expense)*

                 Interest expense was $1,434 for the ninemonths ended September 30, 2005, compared to $483 for the nine months ended September30, 2004. The increase in the nine months ended September 30, 2005 compared tothe nine months ended September 30, 2004 was primarily due to the interest of$364 on debt related to mezzanine financing, the amortizationof the related debt issue costs of $462, the interest on the Acstar note of $11,Laurus debt accelerated debt issue cost amortization of $30, and interestexpense of $54 on the Laurus note which was issued February 2004. Other income decreased to $75during the nine months ended 2005 from $199 in the nine months ended September30, 2004, primarily due to a one-time gain of $129 in 2004 related to debtextinguishment. During the nine months ended September 30, 2005, the Company alsorecorded $28 in non-cash amortization of imputed interest income from a notereceivable. 

*IncomeTaxes*

*            *Income tax expense was $498 for thenine months ended September 30, 2005 compared to $0 for the nine months endedSeptember 30, 2004. In 2004 the Company utilized its net operating loss taxcarry forward provision to offset 2004 federal taxable income.    

 

19

 

** **

**Liquidityand Capital Resources**

                The Company'sexisting capital resources as of September 30, 2005, consist of cash and accounts receivable totaling $21,801, comparedto cash and accounts receivable of $5,990 as of September 30, 2004. The Companybelieves that the financing arrangements the Company currently and has plannedare sufficient throughout the next twelve months to finance its working capitalneeds.  Implementation of theCompany's strategic plan of acquiring niche residential services companies willrequire additional capital, however.

                Duringthe nine months ended September 30, 2005, the Company raised $7,000 in aprivate placement of mezzanine debt with Petra, Laddcap and Patriot, as further describedbelow. 

PetraNote.  Theoriginal principal amount of the promissory note issued to Petra was $4,000 and Petra was also issued a warrant to purchase 533 sharesof the Company's common stock for $0.01 per share.  The Company incurred $1,116in related debt issue costs ($294 cash, $822 non-cash). The non-cash costs of$822 represent the relative fair value of the warrant and such costs will beamortized to interest expense over the term of the related debt instrumentalong with the debt issue costs. For the nine months ended September 30, 2005,$109 has been amortized. 

LaddcapNote.  Theoriginal principal amount of the promissory note issued to Laddcap was $500 and Laddcap was also issued a warrant to purchase 67shares of the Company's common stock for $0.01 per share.  The Company incurred$123 in related debt issue costs ($20 cash, $103 non-cash). The non-cash costsof $103 represent the relative fair value of the warrant and such costs will beamortized to interest expense over the term of the related debt instrumentalong with the debt issue costs. For the nine months ended September 30, 2005,$12 has been amortized. 

PatriotNote.  Theoriginal principal amount of the promissory note issued to Patriot was $2,300 and Patriot was also issued a warrant to purchase 333shares of the Company's common stock for $0.01 per share. The Company incurred$552 in related debt issue costs ($182 cash, $370 non-cash). The non-cash costsof $370 represent the relative fair value of the warrant and such costs will beamortized to interest expense over the term of the related debt instrumentalong with the debt issue costs. For the nine months ended September 30, 2005,$46 has been amortized. 

All threemezzanine notesearn interest at 12.%  per annum, are secured by the all the assets of theCompany, PWS and Cornerstone and have a five-year term. The net proceeds fromthe notes were used to pay aportion of the Cornerstone seller note and to inject working capital intoCornerstone.

                In March 2004, the Company raised $2,000 in a privateplacement of 0.08 shares ofSeries A Preferred Stock, all of which have been convertedinto common stock as described below.  Prior to the conversion, dividends on the Series A Preferred Stock were payable semi-annually at a rate of 8% per annum, in cashor common stock, at the option of the Company.  The Series A Preferred Stock was convertible into common stock ata conversion rate of $1.25 for each share of common stock at the option of theholder or automatically after two years. Purchasers of the Series A PreferredStock received Series A Warrants to purchase 1,600 shares of common stock at anexercise price of $1.75 per share, expiring 90 days from the effective date oftheir registration statement, and Series B Warrants to purchase 1,600 shares ofcommon stock at an exercise price of $2.25 per share, expiring March 2009.  Inthe event of a liquidation, dissolution or winding up of the affairs of theCompany, whether voluntary or involuntary, the holders of the Series APreferred Stock would have beenentitled to receive, out of the assets of the Company available fordistribution to its stockholders, an amount equal to $25,000 per share of theSeries A Preferred Stock plus any accrued and unpaid dividends before anypayment is made or any assets distributed to the holders of the common stock. Costs of thistransaction of $876 will be amortized as additionaldividends over the two-year maximum life of the Series A Preferred Stock. The SeriesA Warrants to purchase 1,600 shares of common stock at an exercise price of$1.75 per share expired July 1, 2004 without exercise by theholders of the Series A Preferred Stock.  For the ninemonths ended September 30, 2005, the Company recorded $80 in dividends payableand $587 in amortization of issuance, warrant and BCF costs. For the nine months ended September 30, 2005 the Company,at its option, issued 102 sharesof common stock in lieu of cash payment for $128 of accrued dividends. In 2004 the purchaser converted 14 shares of Series APreferred Stock into common stock. In August 2005, the remaining .068 outstanding sharesof Series A Preferred Stock were converted into 1,360 shares of the Company's common stock for $1,700 and theremaining unamortized issuance and BCF costs were expensed.

In July 2004, the Companyraised $1,000 in a private placement of 0.04 shares of Series B PreferredStock, all of which have been converted to common stock asdescribed below.  Prior to the conversion, dividendson the Series B Preferred Stock werepayable semi-annually at a rate of 8% per annum, in cash or common stock, atthe option of the Company.  The Series B Preferred Stock converted into common stock at a conversion rate of $1.50 for eachshare of common stock at the option of the holder or automatically after twoyears.  In the event of a liquidation, dissolution or winding up of the affairsof the Company, whether voluntary or involuntary, the holders of the Series BPreferred Stock would have beenentitled to receive, out of the assets of the Company available fordistribution to its stockholders, an amount equal to $25,000 per share of theSeries B Preferred Stock plus any accrued and unpaid dividends before anypayment is made or any assets distributed to the holders of the common stock.For the nine months ended September 30, 2005, the Company has recorded $57 individends payable and, at its option, issued 54 shares of common stock in lieuof cash payment for $81 of the accrued dividends. In September 2005, all 0.04 shares of outstanding Series BPreferred Stock were convertedinto 667 shares of the Company's commonstock for $1,000. 

                During the nine months ended September30, 2005, the Company used net cash from operating activities of $1,312, includingnet income of $4,443.  

                The Company's investing activities usednet cash of $1,129 primarily due to Cornerstoneacquisition costs and purchase of property and equipment. Cash acquired fromthe FERS acquisition, net of acquisition costs, was $761.

 

20

 

                The Company's net cash from financingactivities of $6,372 was primarily due to proceeds from a private placement ofmezzanine debt and the cash exercise of warrants and options. Cash flow outlayswere for principal payments on long-term debt and capital leases and distributionsto minority stockholder.    

**RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTINCLUDED IN THIS FORM 10-QSB**

This Form 10-QSB contains certain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, which areintended to be covered by the safe harbors created thereby. These statementsinclude the plans and objectives of management for future operations, includingplans and objectives relating to the Company's residential services acquisitionstrategy and availability of capital to fund such strategy. The forward-lookingstatements included herein are based on current expectations that involvenumerous risks and uncertainties. Assumptions relating to the foregoing involvejudgments with respect to, among other things, future economic, competitive andmarket conditions, regulatory framework, and future business decisions, all ofwhich are difficult or impossible to predict accurately and many of which arebeyond the control of the Company. We refer you to the section entitled"Trends, Risks and Uncertainties" in Item 6 of Part II of our annual report onForm 10-KSB for the year ended December 31, 2004, for a list of specificfactors that could cause actual results to differ materially from thoseindicated by our forward-looking statements made herein and presented elsewhereby management. Although the Company believes that the assumptions underlyingthe forward-looking statements are reasonable, any of the assumptions could beinaccurate and, therefore, there can be no assurance that the forward-lookingstatements included in this Form 10-QSB will prove to be accurate. In light ofthe significant uncertainties inherent in the forward-looking statementsincluded herein, the inclusion of such information should not be regarded as arepresentation by the Company or any other person that the objectives and plansof the Company will be achieved. Furthermore, we do not undertake any obligationto update forward-looking statements made herein.

**Item 3. Controls andProcedures**

 (a) Evaluation of Disclosure Controls and Procedures. The Companycarried out an evaluation under the supervision and with the participation ofthe Company's management, including the Company's Chief Executive Officer("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of theCompany's disclosure controls and procedures. Based upon that evaluation, theCEO and CFO concluded that as of September 30, 2005 our disclosure controls andprocedures were effective in timely alerting them to the material informationrelating to the Company (or the Company's consolidated subsidiaries) requiredto be included in the Company's periodic filings with the SEC,such that the information relating to the Company, required to be disclosed inSEC reports (i) is recorded, processed, summarized and reported within the timeperiods specified in SEC rules and forms, and (ii) is accumulated andcommunicated to the Company's management, including our CEO and CFO, asappropriate to allow timely decisions regarding required disclosure.

(b) Changes in internalcontrol over financial reporting. There has been no change in the Company'sinternal control over financial reporting that occurred during the nine monthsended September 30, 2005 that has materially affected, or is reasonably likelyto materially affect, the Company's internal control over financial reporting.

The Company's management, including the CEO and CFO, does not expectthat our disclosure controls and procedures or our internal control overfinancial reporting will necessarily prevent all fraud and material error. Aninternal control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of the control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the internal control. The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions. Over time, control maybecome inadequate because of changes in conditions, and/or the degree ofcompliance with the policies or procedures may deteriorate.

 

 

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**PART IIOTHER INFORMATION**(Dollars and shares in thousands, except for per sharedata)

**Item 1. Legal Proceedings.**

The nature and scope of our business operations bringus into regular contact with the general public, a variety of businesses andgovernment agencies.  These activities inherently subject us to potentiallitigation, which we defend in the normal course of business. At September 30,2005, there were no claims anddisputes incidental to the business.  

**Item 2. Unregistered Salesof Equity Securities and Use of Proceeds.**

During the period from October 12, 2005, through November14, 2005 (any issuances previously disclosed by the Company on Form 8-K are notrepeated herein), the Company issued the following shares of its common stock and other equity securities without registration under theSecurities Act of 1933, as amended (the "Securities Act") (dollars and sharesare reported  in thousands):

1.   theCompany issued 150 shares of common stock for $188 (an exercise price of $1.25 per share) inconnection with the exercise of a stock option; 

2.   the Company issued 8 shares of common stock for $7 (an exerciseprice of $0.95 per share) in connection with the exercise of a warrant;and

3.   the Company issued  798 shares of common stock upon a noteholder's conversion of $1,500 of debt (aconversion price of $1.88 per share).

The above issuances were unregistered, as the Companywas relying on the exemptions from registration contained in Section 4(2) ofthe Securities Act, and in certain cases, Regulation Dpromulgated thereunder, on the basis that such transactions did not involvepublic offerings of securities.

**Item 6.        Exhibits**

2.1           Fourth Amendment to Stock PurchaseAgreement and Global Settlement and Release Agreement, effective December 31,2003, among Home Solutions of America, Inc., P.W. Stephens, Inc., Jane C.Barber, and Spruce MacIntyre Holdings Corporation (filed as Exhibit 2.26 to theCompany's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004,and incorporated herein by reference).

2.2           Amendedand Restated Promissory Note, in the original principal amount of $800,000,dated June 2, 2004, issued by Home Solutions of America, Inc. and P.W.Stephens, Inc. to Jane C. Barber (filed as Exhibit 2.27 to the Company'sQuarterly Report on Form 10-QSB for the quarter ended June 30, 2004, andincorporated herein by reference).

2.3           SecuredPromissory Note, in the original principal amount of $1,550,000, dated June 2,2004, issued by TFW Inc. to Jane C. Barber, as assigned to Home Solutions ofAmerica, Inc. on June 2, 2004 (filed as Exhibit 2.28 to the Company's QuarterlyReport on Form 10-QSB for the quarter ended June 30, 2004, and incorporatedherein by reference).  

2.4           PartnershipInterest Purchase Agreement, dated July 31, 2003, by and among Home Solutionsof America, Inc., FSS Holding Corp., Grassmere Computer Products, Inc., andMerritt Computer Products, Inc. (filed as Exhibit 2.15 to the Company'sQuarterly Report on Form 10-QSB for the quarter ended June 30, 2003, andincorporated herein by reference).

2.5           Agreement,dated December 2, 2003, by and among Home Solutions of America, Inc., FSSHolding Corp., Grassmere Computer Products, Inc., Merritt Computer Products,L.P. d/b/a Amherst Merritt International, Fiber-Seal Systems, L.P., and Rick J.O'Brien (filed as Exhibit 2.25 to the Company's Annual Report on Form 10-KSBfor the year ended December 31, 2003, and incorporated herein by reference).

2.6           Planof Merger and Stock Purchase Agreement, dated February 6, 2004, by and amongHome Solutions of America, Inc., Southern Exposure Holdings, Inc., S.E.Acquisition Corp. I, S.E. Acquisition Corp. II, Southern Exposure Unlimited ofFlorida, Inc., S.E. Tops of Florida, Inc., Dale W. Mars, and Dale W. Mars,Trustee for the Dale W. Mars Trust Dated 7-16-97 (filed as Exhibit 2.1 to theCompany's Current Report on Form 8-K filed on February 9, 2004, andincorporated herein by reference).

2.7           SubordinatedPromissory Note, in the original principal amount of $4,500,000, issued bySouthern Exposure Holdings, Inc. to Dale W. Mars, Trustee for the Dale W. MarsTrust Dated 7-16-97 (filed as Exhibit 2.3 to the Company's Current Report onForm 8-K filed on February 9, 2004, and incorporated herein by reference).

2.8           SubordinatedPromissory Note, in the original principal amount of $1,468,189, issued bySouthern Exposure Holdings, Inc. to Dale W. Mars, Trustee for the Dale W. MarsTrust Dated 7-16-97 (filed as Exhibit 2.4 to the Company's Current Report onForm 8-K filed on February 9, 2004, and incorporated herein by reference).

2.9           Pledgeand Security Agreement, dated February 6, 2004, by and among Southern ExposureHoldings, Inc., S.E. Acquisition Corp. I, S.E. Acquisition Corp. II, Dale W.Mars, and Dale W. Mars, Trustee for the Dale W. Mars Trust Dated 7-16-97 (filedas Exhibit 2.5 to the Company's Current Report on Form 8-K filed on February 9,2004, and incorporated herein by reference).

 

 

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2.10         GuarantyAgreement, dated February 6, 2004, provided by Home Solutions of America, Inc.to Dale W. Mars, Trustee for the Dale W. Mars Trust Dated 7-16-97 (filed asExhibit 2.6 to the Company's Current Report on Form 8-K filed on February 9,2004, and incorporated herein by reference).

2.11         ReorganizationAgreement and Plan of Merger, dated February 28, 2005, to be effective January3, 2005, by and among Home Solutions of America, Inc., CBR Acquisition Corp.,Cornerstone Building and Remodeling, Inc., and Anthony Leeber, Jr. (filed asExhibit 2.1 to the Company's Current Report on Form 8-K filed on April 6, 2005,and incorporated herein by reference).

2.12         FirstAmendment to Reorganization Agreement and Plan of Merger, dated March 30, 2005,to be effective January 3, 2005, by and among Home Solutions of America, Inc.,CBR Acquisition Corp., Cornerstone Building and Remodeling, Inc., and AnthonyLeeber, Jr. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-Kfiled on April 6, 2005, and incorporated herein by reference).

2.13         LetterAgreement, dated June 30, 2005, by and among between Home Solutions of America,Inc., Cornerstone Building and Remodeling, Inc., and Anthony Leeber, Jr. (filedas Exhibit 2.13 to the Company's Quarterly Report on Form 10-QSB for thequarter ended June 30, 2005, and incorporated herein by reference).

3.1           Certificateof Incorporation of the Company, as restated on July 31, 2001 (filed as ExhibitA to the Company's Information Statement on Schedule 14C filed on July 9, 2001,and incorporated herein by reference).

3.2           Certificateof Amendment to the Certificate of Incorporation of Nextgen CommunicationsCorporation, changing the corporation's name to "Home Solutions of America,Inc.", as filed on December 23, 2002 (filed as Exhibit A to the Company'sInformation Statement on Schedule 14C filed on December 22, 2002, andincorporated herein by reference).

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

4.1           Certificateof Designation of the Relative Rights and Preferences of the Series AConvertible Preferred Stock of Home Solutions of America, Inc., as filed withthe Secretary of State of Delaware on February 27, 2004 (filed as Exhibit 3.1to the Company's Registration Statement on Form S-3 filed on March 5, 2004, andincorporated herein by reference). 

4.2           Certificateof Designation of the Relative Rights and Preferences of the Series BConvertible Preferred Stock of Home Solutions of America, Inc., as filed withthe Secretary of State of Delaware on July 19, 2004 (filed as Exhibit 3.1 tothe Company's Current Report on Form 8-K filed on July 20, 2004, andincorporated herein by reference).

10.1         StockPurchase Warrant, dated July 18, 2005, issued by Home Solutions of America,Inc. to Patriot Capital, L.P. (filed as Exhibit 10.48 to the Company'sQuarterly Report on Form 10-QSB for the quarter ended June 30, 2005, andincorporated herein by reference).

10.1         Secured Convertible Minimum Borrowing Note Series B, datedAugust 18, 2005, in the original principal amount of $1,500,000, issued toLaurus Master Fund, Ltd. by Home Solutions of America, Inc. (filed as Exhibit10.1 to the Company's Registration Statement on Form S-3 filed on August 29,2005, and incorporated herein by reference).

10.3         AmendmentNo. 1 and Waiver, between Home Solutions of America, Inc. and Laurus MasterFund, Ltd., dated November 8, 2004 (filed as Exhibit 10.8 to the Company'sRegistration Statement on Form S-3/A filed on October 26, 2005, andincorporated herein by reference).

10.4         CommonStock Purchase Warrant to Purchase 50,000 Shares of Common Stock, issued byHome Solutions of America, Inc. to Laurus Master Fund, Ltd., dated November 8,2004 (filed as Exhibit 10.9 to the Company's Registration Statement on FormS-3/A filed on October 26, 2005, and incorporated herein by reference).

10.5 *      StockOption Agreement, dated August 30, 2005, between Frank J. Fradella andHome Solutions of America, Inc., for 165,448 shares of Common Stock (filed asExhibit 10.1 to the Company's Current Report on Form 8-K filed on September 2,2005, and incorporated herein by reference).

10.6 *      StockOption Agreement, dated August 30, 2005, between Rick J. O'Brien and HomeSolutions of America, Inc., for 110,296 shares of Common Stock (filed asExhibit 10.2 to the Company's Current Report on Form 8-K filed on September 2,2005, and incorporated herein by reference).

10.7 *      FirstAmendment to Stock Option Agreement dated December 20, 2004, dated August30, 2005, between Home Solutions of America, Inc. and Frank J. Fradella (filedas Exhibit 10.3 to the Company's Current Report on Form 8-K filed on September2, 2005, and incorporated herein by reference).

10.8 *      SecondAmendment to Stock Option Agreement dated July 31, 2003, dated August 30,2005, between Home Solutions of America, Inc. and Rick J. O'Brien (filed asExhibit 10.4 to the Company's Current Report on Form 8-K filed on September 2,2005, and incorporated herein by reference).

10.9 *      SecondAmendment to Stock Option Agreement dated December 2, 2003, dated August30, 2005, between Home Solutions of America, Inc. and Rick J. O'Brien (filed asExhibit 10.5 to the Company's Current Report on Form 8-K filed on September 2,2005, and incorporated herein by reference).

10.10       AssetPurchase Agreement among Home Solutions of America, Inc., Home SolutionsRestoration of Louisiana, Inc., Florida Environmental Remediation Services,Inc., Fernando Nava and Mike D. Lane dated September 27, 2005 (filed as Exhibit4.01 to the Company's Current Report on Form 8-K filed on September 29, 2005,and incorporated herein by reference).

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10.11       PromissoryNote dated September 27, 2005 in the principal amount of $11,000,000.00, issuedby Home Restoration Services of Louisiana, Inc. to Florida EnvironmentalRestoration Services, Inc. (filed as Exhibit 4.02 to the Company's CurrentReport on Form 8-K filed on September 29, 2005, and incorporated herein byreference).

10.12       WarrantCertificate dated September 27, 2005, issued by Home Solutions of America, Inc.to Florida Environmental Restoration Services, Inc. (filed as Exhibit 4.03 tothe Company's Current Report on Form 8-K filed on September 29, 2005, andincorporated herein by reference).

10.13       First Amendment toNonrecourse Promissory Note dated November 8, 2005 between Home SolutionsRestoration of Louisiana, Inc. and Florida Environmental Restoration Services,Inc. (filed as Exhibit 4.01 to the Company's Current Report on Form 8-K filedon November 10, 2005, and incorporated herein by reference).

10.14*     EmploymentAgreement dated September 27, 2005, between Home Solutions Restoration ofLouisiana, Inc., and Fernando Nava. +

31.1         Rule13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +

31.2         Rule13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +

32.1         Section 1350Certifications. +

* Denotes a managementcontract or compensatory plan or arrangement.

+ Filed herewith.

 

 

 

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SIGNATURES

            In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

           

                                       HOME SOLUTIONS OF AMERICA, INC.

** **

Dated:  November 14, 2005                                                              By:	      /s/ FRANK J.  FRADELLA       

                                                                                                                                Frank J. Fradella

                                                                                                            Chairman, President & Chief Executive Officer

 

** **

** **
Dated: November 14, 2005                                                              By:        /s/ RICK J. O'BRIEN              	
                                                                                                                               Rick J. O'Brien

                                                                                                             Chief Financial Officer

 

 

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