e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
for the fiscal year ended December 31, 2006
Or
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Transition report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
for the transition period from to
Commission File Number: 001-31711
HOME SOLUTIONS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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99-0273889 |
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(I.R.S. Employer Identification No.) |
1500 Dragon Street, Suite B Dallas, TX 75207
(Address of principal executive offices)
(214) 623-8446
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange on which registered |
| Common Stock, $.001 par value
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NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. $41,262,108
The number of shares outstanding of the registrant’s common stock, $.001 par value per share,
as of March 16, 2007 was 47,322,683
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed pursuant to
Regulation 14A, is incorporated by reference in Part III to the extent described therein.
FORM 10-K
December 31, 2006
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS
Overview
Home Solutions of America, Inc. (referred to herein as “we,” “us,” “our,” “Home Solutions,” or the
“Company”), a Delaware corporation, is a provider of restoration, construction and interior
services to commercial and residential areas that are (i) prone to flooding, hurricanes, tornados,
fires or other naturally occurring and repetitive weather related emergencies, and/or (ii)
experiencing robust commercial or residential development. With operations in the South, Gulf
Coast regions and California, we believe that the Company is well positioned to capitalize on the
growing demand for our suite of restoration, construction and interior services. We seek to expand
our core service offerings through the future acquisition of strategic, specialized, profitable and
well-managed companies operating in our target markets and business segments with a proven history
of internal growth.
Company History; Acquisitions
The Company was incorporated in Delaware on January 8, 1998, for the purpose of serving as the
successor corporation of EIF Holdings, Inc., a Hawaii corporation, pursuant to a reincorporation
merger that was completed in June 1998. During 1999 and most of 2000, the Company, then named U.S.
Industrial Services, Inc., operated through its wholly-owned subsidiaries as a multi-state service
company specializing in industrial cleaning services, including soil and groundwater remediation,
and hazardous material management and clean up.
From February 2002 until November 2002, the Company, then named Nextgen Communications, had no
significant operations.
In September 2002, we adopted a new corporate strategy of acquiring or generating projects that
focus on providing specialty residential services to homeowners. In November 2002, the Company
closed its first acquisition as part of this strategy, acquiring PW Stephens, Inc. (“PWS”), a
provider of indoor air contaminates removal services for homeowners in California. PWS has a
twenty-year operating history of providing indoor air contaminate removal services for residential
and light commercial clients.
In December 2002, in connection with the implementation of our residential services strategy, our
stockholders approved a change of our corporate name to Home Solutions of America, Inc.
In July 2003, Home Solutions closed the acquisition of Fiber Seal Systems, L.P. (“FSS”), a provider
of cleaning and fabric protection services based in Dallas, Texas. FSS provides cleaning and
fabric protection services through both company-owned and over 40 licensed locations across the
United States.
In December 2003, Home Solutions closed the acquisition of Southern Exposure Unlimited of Florida,
Inc. (“Southern Exposure”) and related companies, a provider of cabinet and countertop installation
services to homebuilders and homeowners throughout southwestern Florida.
On March 31, 2005, Home Solutions acquired Cornerstone Building and Remodeling, Inc.
(“Cornerstone”). Cornerstone, which has headquarters in Fort Myers, Florida, near the headquarters
of the Company’s Southern Exposure subsidiaries, is engaged in the business of installing custom
marble and granite countertops.
On September 27, 2005, our wholly owned subsidiary, Home Solutions Restoration of Louisiana, Inc.
(“HSR of Louisiana”) acquired substantially all of the assets of Florida Environmental Remediation
Services, Inc., (“FERS”), a restoration company operating in Florida, Louisiana and Mississippi.
This acquisition represented the Company’s entrance into the commercial restoration services
market.
On July 31, 2006, the Company consummated the acquisition of Fireline Restoration, Inc.
(“Fireline”), a privately held provider of recovery and restoration services throughout Florida,
Louisiana and Mississippi, pursuant to a purchase agreement entered into among Fireline, the owner
of Fireline and the Company, which was effective July 1, 2006. On October 26, 2006, HSR of
Louisiana acquired Associated Contractors LLC (“Associated”), a general contractor operating in
Louisiana and Mississippi engaged in providing construction and rebuilding services for commercial
and residential properties.
Home Solutions’ business plan is to contribute to its growth strategy with additional acquisitions
in the future.
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Business Segments
Our business consists of two integrated business segments: (i) restoration and construction
services and (ii) interior services. For financial information relating to our business segments,
please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item 8. Financial Statements and Supplementary Data.”
Restoration and Construction Services
Home Solutions is an emerging restoration and construction services company, offering diversified
general contracting, restoration, construction management and design-build services to private
clients and public agencies throughout the southern United States and California. We have
established a strong reputation within our markets by executing significant projects on time and
within budget while adhering to strict quality control measures. We offer general contracting,
preconstruction planning and comprehensive project management services, including planning,
scheduling and providing the manpower, equipment, materials and subcontractors required for a
project. A portion of our work requires surety bonding and the Company has surety bonding
agreements with various institutions to meet its bonding needs. We also serve as the subcontractor
on several projects in the same markets.
The Company’s restoration services include catastrophic storm response, clean up and removal of
debris, initial set up services in an impacted area (including power, lodging, sustenance and
training), water mitigation, drying, dehumidification and preparing affected areas for the next
stage of restoration and rebuilding. We have trained employees who provide onsite first response
to respond to fire, water and weather-related emergencies in our target markets to both commercial
and residential clients. These services are primarily provided through our wholly-owned
subsidiaries, Fireline, which we acquired effective July 1, 2006 pursuant to an acquisition closed
on July 31, 2006, and HSR of Louisiana, which commenced operations in September 2005 in connection
with the acquisition of substantially all the assets of FERS. HSR of Louisiana purchased
Associated in October 2006 to expand its business development and general contracting capabilities.
Our restoration services are currently provided in the areas of Florida, Louisiana, Mississippi,
Alabama, Georgia, South Carolina, Texas and California.
Our restoration services include servicing the next stage of the project after the initial clean up
and catastrophic storm response. Restoration services presently include water, fire and wind
restoration, mold remediation, contents restoration, air decontamination, asbestos and lead paint
removal, cleaning, drying, and deodorization of carpet and furniture and moving and storage
services. Fireline, which specializes in disaster recovery services and insurance estimates and
repairs for commercial, industrial and residential properties, is certified in multiple aspects of
the restoration industry, including smoke, fire, water and mold. Fireline is licensed as a general
contractor in Florida and offers full interior and exterior restoration and reconstruction services. Restoration business segment services are also provided through PWS and FSS, two of
our wholly-owned subsidiaries. PWS provides water and fire restoration services, air
decontamination and removal of mold, asbestos and lead paint in California and, to a lesser extent,
in Florida, and FSS provides cleaning, drying and deodorization of carpet and furniture as well as
moving and storage services in 24 states and the District of Columbia.
The following details the types of restoration and construction services we provide:
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Recovery: Our recovery services include providing initial set up services in an
impacted area (including power, lodging, and training) and then providing the drying,
dehumidification, cleanup and removal of debris from commercial and residential areas to
prepare the areas for the next stage of restoration. We provide these services on an
hourly rate to our commercial and residential clients, both as a contractor and as a
subcontractor to customers providing additional services in these markets. |
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Fire and Water Damage Restoration: We provide trained employees to respond to fire,
water and weather-related emergencies, to inspect structural members and contents damaged
by water, to determine the likelihood or extent of mold growth and to provide immediate
cleaning, drying, moving, storage and deodorization, among other services. |
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Construction: The Company’s construction services include providing services to a
number of high growth companies and specialized building markets, including hospitality and
gaming, insurance, education and healthcare markets. We believe our success in
construction services results from our proven ability to manage and perform meaningful,
complex projects while providing accurate budgeting and strict quality control. Although
price is a key competitive factor, we believe our strong reputation, long-standing customer
relationships and significant level of repeat and referral business have enabled us to
achieve our leading position. |
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Indoor Air Contamination: Through PWS, we provide indoor air contamination services,
including contamination from mold, asbestos and lead paint. With increased media attention
regarding the health threat of mold, fewer insurance options and property transfers at
risk, current market conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist of property and system
inspections, surface and air testing, project design, microbial removal, light interior
demolition, repair and specialized cleaning work. Home inspections and testing can range
from $200 to $800 per inspection. For the typical mold-contaminated house, a remediation
project can last approximately one week and cost $10,000 or more. Customer opportunities
are developed through a regional sales force as well as through |
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referrals by real estate firms, insurance adjusters, mortgage companies, attorneys and
nationally-branded retailers. The Company believes it can use its industry experience to
give efficacy to its processes and provide homeowners with quality assurance. |
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Cleaning and Fabric Protection: Through FSS, we provide fabric protection services to
protect furniture, carpet and draperies from stains and daily wear through both
Company-owned locations and over forty licensed locations. This niche market is primarily
targeted at above-average income homeowners with an average job of approximately $400. We
also provide air duct cleaning services to remove particulate (organic and inorganic)
material, which can cause allergic reactions and is often the breeding ground for many
types of mold, from heating and air conditioning systems. |
Interior Services
Through our wholly-owned subsidiaries, Southern Exposure and Cornerstone, we offer cabinet and
countertop installation services. 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 the acquisition of Cornerstone, which installs custom marble and granite countertops for
residential customers. Currently, we manufacture cabinets and install cabinets and kitchen
countertops for Centex Corporation (“Centex”), one of the largest homebuilders in the nation, in
its southwest Florida market. We also install granite countertops for Home Depot, Inc. (“Home
Depot”) in Florida, Georgia, Alabama and South Carolina. The Home Depot contract may be terminated
at any time upon notice to us. Furthermore, Home Depot is not obligated to use our services under
these contracts. We have no contract with Centex, and Centex is not obligated to buy our products
or use our services. We also have granite fabrication and installation operations in Southern
California which services the residential and multi-family markets.
Backlog
We include restoration and construction projects in our backlog at such time as a contract is
awarded or a firm letter of commitment is obtained and funding is in place. As a result, the
backlog figures are firm, subject only to the cancellation provisions contained in the various
contracts. As of December 31, 2006, construction backlog was
approximately $40,000, as compared to $0 as of
December 31, 2005.
Competition
The restoration and construction industry and the interior services industry are highly competitive
and the markets in which we compete have numerous and often larger companies that provide similar
services. In certain end markets there are competitors with significantly greater capabilities and
resources. In our restoration and construction segment, we compete with a variety of national and
regional contractors. We believe price, experience, reputation, responsiveness, customer
relationships, project completion track record and quality of work are key factors in customers
awarding contracts across our end markets.
Growth Strategy
Our growth strategy is to target markets that are (i) prone to flooding, hurricanes, tornados,
fires or other naturally occurring and repetitive weather emergencies, and/or (ii) experiencing
robust housing development, and penetrate these markets through internal growth of our existing
operating subsidiaries and a well-executed acquisition program to expand the Company’s service
offerings. During 2005 we implemented our initiative to expand into the hardest hit areas of the
2005 hurricane season by forming HSR of Louisiana and acquiring substantially all of the assets of
FERS in September of 2005. Initially, the services provided by these operations will involve the
drying, dehumidifying, clean up and removal of debris at many of the disaster-affected locations
prior to commencing Restoration and Construction services. We expect the Restoration, Construction
and rebuilding effort associated with the 2005 hurricanes to happen in stages and last between two
and five years. The Company plans to take advantage of the opportunity to service these areas
through each stage with each of its restoration, construction and interior services offerings.
We also see the opportunity to further capitalize on the robust growth in housing in our target
markets through the Company’s relationship with Centex as well as with the expansion of our
relationships with retailers including Home Depot.
Regulatory Matters
Portions of our operations, particularly our restoration and construction business segment, are
highly regulated and subject to a variety of federal and state laws, including environmental laws,
which require that we obtain various licenses, permits and approvals. We must obtain and maintain
various federal, state and local governmental licenses, permits and approvals in order to provide
our services. We believe we are in material compliance with all applicable licensing and similar
regulatory requirements. However, there is no assurance that we can maintain our licenses or
registrations in the states in which we currently do business, or that we can obtain licenses or
registrations required by any states in which we may desire to expand our business.
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Employees
As of December 31, 2006, we had an aggregate of 458 employees, including leased employees. The
Company utilizes an employee leasing company to provide services such as screening, U.S.
citizenship verification, workers compensation and payroll administration. None of these employees
are represented by collective bargaining agreements.
Corporate Information
Home Solutions of America, Inc. is a Delaware corporation with principal executive offices located
at 1500 Dragon Street, Suite B, Dallas, Texas 75207. Our website address is www.hsoacorp.com. We
make available on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K and any amendments to such reports, as soon as
reasonably practicable after we electronically file such materials with, or furnish them to, the
Securities and Exchange Commission (“SEC”).
ITEM 1A. RISK FACTORS
We have sought to identify what we believe to be the most significant risks to our business, but we
cannot predict whether or to what extent any of such risks may be realized, nor are there any
assurances that the Company has identified all possible risks that might arise. Our revenues are
derived from specialty restoration, construction and interior services products and services.
There are numerous and varied risks, known and unknown, that may prevent us from achieving our
goals. Some of these risks are set forth below.
Unless otherwise indicated, all numbers (except per share amounts) presented under this Item 1A are
stated in thousands.
Our limited operating history makes it difficult for us to evaluate our future business prospects
and make decisions based on those estimates of our future performance.
We did not begin operations of our current business concept until November 2002. We have a limited
operating history in our current combined form, which makes it difficult to evaluate our business
on the basis of historical operations. The revenues from two of our operating subsidiaries,
Fireline and HSR of Louisiana, which account for a significant portion of our revenue for fiscal
year 2006, were the result of acquisitions that we closed in October 2006, July 2006 and September
2005. As a consequence, it is difficult, if not impossible, to forecast our future
results based upon our historical data. Reliance on the historical results of our acquisition
targets may not be representative of the results we will achieve, particularly in our combined
form. Because of the uncertainties related to our lack of historical operations, we may be
hindered in our ability to anticipate and timely adapt to increases or decreases in sales, revenues
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we
could be less profitable or incur losses, which may result in a decline in our stock price.
Our results of operations have not been consistent, and we may not be able to maintain
profitability.
We incurred a consolidated net loss of ($702) for the year ended December 31, 2003, yet we achieved
a consolidated net profit of $2,563 for the year ended December 31, 2004, a net profit of $7,185
for the year ended December 31, 2005 and a net profit of $17,898 for the year ended December 31,
2006. Our management believes that our current business plan will be successful and that we will
continue to maintain and grow profitability; however, our business plan is speculative and
unproven. Although our revenues grew substantially due to our growth strategy and we achieved a
profit in fiscal years 2004, 2005 and 2006, there is no assurance that we will be successful in
executing our business plan or, even if we successfully implement our business plan, that we will
sustain profitability now or in the future. If we incur significant operating losses, our stock
price may decline, perhaps significantly.
Our business depends on the demand for restoration, construction and interior services, and if the
demand for those services decreases, our revenues could decline.
Our business depends upon the demand for the services that we provide, which include restoration,
construction and interior services that we provide to residential home owners and commercial
properties. Because of our significant emphasis on the construction and reconstruction of
residential and commercial properties, we would be adversely affected by any slowdown in the growth
of, or reduction in demand for, these services. Demand for our restoration services is event-based
and depends upon the frequency and intensity of natural disasters and the type and scope of damage
to properties. Additionally, demand for our services depends on numerous other factors, including:
the amount and growth of household income; the financial condition of the end user of our services,
and whether an insurance policy or reimbursement from the federal or state government is available
to pay the cost of our services; changes in mortgage rates and decreases in housing growth in
markets where the Company operates; and general economic conditions.
If demand for the services that we provide decreases, then we may experience a decline in sales
resulting in decreased profits. If demand for our services decreases and our management fails to
implement appropriate adjustments, then our profitability could suffer and the price of our common
stock could decline.
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A significant portion of our interior services business segment is dependent upon relationships
with two customers.
Our interior services business segment currently consists of the manufacture and installation of
custom kitchen cabinets and the installation of kitchen countertops. These products and services
are offered to residential customers primarily through a furnish and installation contract with
Home Depot, and through a relationship with Centex. The Home Depot contract may be terminated by
Home Depot at any time upon notice to us. Furthermore, Home Depot is not obligated to use our
services under this contract. We have no contract with Centex, and Centex is not obligated to buy
our products or use our services. If Home Depot terminates its contract with us, or if Home Depot
or Centex choose not to buy our products or use our services, we would experience an immediate
detrimental impact on our interior services business segment, resulting in a material adverse
effect on our results of operations.
We intend to engage in acquisitions as part of our growth strategy, which will consume resources
and may be unsuccessful or unprofitable.
We have pursued, and we intend to continue to pursue, a strategy of acquiring businesses that fit
within our business model. However, acquisitions are not always successful or profitable. Any
future acquisitions could expose us to risks, including risks associated with assimilating new
operations and personnel; diversion of resources from our existing businesses; inability to
generate revenues sufficient to offset associated acquisition costs; the maintenance of uniform
standards, controls, procedures and policies. Acquisitions may also result in additional expenses
from amortizing acquired intangible assets. If we attempt an acquisition and are unsuccessful in
its completion, we will likely incur significant expenses without any benefit to our Company. If
we are successful in completing an acquisition, the risks and other problems we face may ultimately
make the acquisition unprofitable. Failed acquisition transactions and underperforming completed
acquisitions would burden us with significant costs without any corresponding benefits to us, which
could cause our stock price to decrease, perhaps significantly.
We expect that we will need to raise additional funds to pursue our growth strategy, and these
funds may not be available when we need them.
We believe that we will need to raise additional monies in order to fund our growth strategy and
implement our business plan. Specifically, we expect that we will need to raise additional funds
in order to pursue rapid expansion, develop new or enhanced services and products, and acquire
complementary businesses or assets. Additionally, we may need funds to respond to unanticipated
events that require us to make additional investments in our business. There can be no assurance
that additional financing will be available when needed on favorable terms, or at all. If these
funds are not available when we need them, then we may need to change our business strategy and
reduce our targeted rate of growth.
We must effectively manage the growth of our operations, or our results of operations will suffer.
Our ability to successfully implement our business plan requires an effective planning and
management process. If funding is available, we intend to increase the scope of our operations and
acquire complementary businesses. Implementing our business plan will require significant
additional funding and resources. If we are successful in growing our operations, we will need to
hire additional employees and make significant capital investments. As we continue to grow our
operations, it may place a significant strain on our management and our resources. As a result of
our recent growth and any continued growth, we will need to improve our financial and managerial
controls and reporting systems and procedures, and we will need to expand, train and manage our
workforce. Any failure to manage any of the foregoing areas efficiently and effectively could
cause our results of operations to suffer.
We face competition from numerous sources and competition may increase, leading to a decline in
revenues.
We compete primarily with well-established companies, many of which we believe have greater
resources than Home Solutions. We believe that barriers to entry in our restoration and
construction services and interior services business segments are not significant and start-up
costs are relatively low, so our competition may increase in the future. New competitors may be
able to launch new businesses similar to ours, and current competitors may replicate our business
model, at a relatively low cost. If competitors with significantly greater resources than ours
decide to replicate our business model, they may be able to quickly gain recognition and acceptance
of their business methods and products through marketing and promotion. We may not have the
resources to compete effectively with current or future competitors. If we are unable to
effectively compete, we will lose sales to our competitors and our revenues will decline.
Our failure to comply with federal and state environmental laws and regulations could result in
fines or injunctions, which could materially impair the operation of our business.
Portions of our business are heavily regulated by federal, state and local environmental laws and
regulations, including those promulgated under the Environmental Protection Agency. These federal,
state and local environmental laws and regulations govern the discharge of hazardous materials into
the air and water, as well as the handling, storage, and disposal of hazardous materials and
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the remediation of contaminated sites. Our businesses involve working around and with volatile,
toxic and hazardous substances and other regulated substances. We may become liable under these
federal, state and local laws and regulations for the improper characterization, handling or
disposal of hazardous or other regulated substances. We may become subject to claims for personal
injury or property damage related to accidents, spills, and exposure to hazardous substances that
are related to our business. It is possible that some of our operations could become subject to an
injunction which would impede or even prevent us from operating that portion of our business. Any
significant environmental claim or injunction could have a material adverse impact on our financial
condition. Additionally, environmental regulations and laws are constantly changing, and changes
in those laws and regulations could significantly increase our compliance costs and divert our
human and other resources from revenue-generating activities.
The failure to obtain and maintain required governmental licenses, permits and approvals could have
a substantial adverse effect on our operations.
Portions of our operations, particularly our restoration and construction services business
segment, are highly regulated and subject to a variety of federal and state laws, including
environmental laws which require that we obtain various licenses, permits and approvals. We must
obtain and maintain various federal, state and local governmental licenses, permits and approvals
in order to provide our services. We may not be successful in obtaining or maintaining any
necessary license, permit or approval. Further, as we seek to expand our operations into new
markets, regulatory and licensing requirements may delay our entry into new markets, or make entry
into new markets cost-prohibitive. We cannot assure you that we will be able to obtain or, once
obtained, maintain our licenses or registrations in any states where we are required to be licensed
or registered to operate our business. Our activities in states where necessary licenses or
registrations are not available could be curtailed pending processing of an application, and we may
be required to cease operating in states where we do not have valid licenses or registrations. We
could also become subject to civil or criminal penalties for operating without required licenses or
registrations. These costs may be substantial and may materially impair our prospects, business,
financial condition and results of operations.
If the Company fails to maintain adequate insurance, our financial results could be negatively
impacted.
We carry standard general liability insurance in amounts determined to be reasonable by our
management. We are also covered through standard worker’s compensation insurance against claims by
our employees for injuries and other conditions contacted while on the job. Although we believe we
are adequately insured, if we fail to adequately assess our insurance needs or if a significant
amount of claims are made by workers or others, there can be no assurance that the amount of such
claims will not exceed our available insurance, resulting in a material negative impact on our
financial results. This could have an adverse impact on the price of our common stock.
We are heavily dependent on our senior management, and a loss of a member of our senior management
team could cause our stock price to suffer.
If we lose members of our senior management, we may not be able to find appropriate replacements on
a timely basis, and our business could be adversely affected. Our existing operations and
continued future development depend to a significant extent upon the performance and active
participation of certain key individuals, including our Chief Executive Officer and Chief Financial
Officer. We cannot guarantee that we will be successful in retaining the services of these or
other key personnel. If we were to lose any of these individuals, we may not be able to find
appropriate replacements on a timely basis and our financial condition and results of operations
could be materially adversely affected.
Our inability to hire, train and retain qualified employees could cause our financial condition to
suffer.
The success of our business is highly dependent upon our ability to hire, train and retain
qualified employees. We face competition from other employers for laborers, and the availability
of labor is limited, particularly in areas serviced by our Restoration and Construction Services
segment. We must offer a competitive employment package in order to hire and retain employees, and
any increase in competition for labor may require us to increase wages or benefits in order to
maintain a sufficient work force, resulting in higher operation costs. Additionally, we must
successfully train our employees in order to provide high-quality services. In the event of high
turnover or a labor shortage, we may experience difficulty in providing consistent high-quality
services, which could adversely affect our results of operations.
We
have identified 18 material weaknesses in our internal control over financial reporting
and cannot assure you that additional material weaknesses will not be identified in the future. If
our internal control over financial reporting or disclosure controls and procedures are not
effective, there may be errors in our financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in our reported financial information,
which could lead to a decline in our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each year, and to include a management
report assessing the effectiveness of our internal control over financial reporting in each Annual
Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to
attest to, and report on, management’s assessment of our internal control over financial reporting.
We
have identified several material weaknesses in our internal control over
financial reporting as discussed in Item 9A.
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Our management, including our Chief Executive Officer and Chief Financial Officer, does
not expect that our internal control over financial reporting will prevent all error and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the
controls. Over time, controls may become inadequate because changes in conditions or deterioration
in the degree of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
As a result, we cannot assure you that significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or any difficulties we encounter in their
implementation, could result in significant deficiencies or material weaknesses, cause us to fail
to timely meet our periodic reporting obligations, or result in material misstatements in our
financial statements. Any such failure could also adversely affect the results of periodic
management evaluations and annual auditor attestation reports regarding disclosure controls and the
effectiveness of our internal control over financial reporting required under Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material
weakness could result in errors in our financial statements that could result in a restatement of
financial statements, cause us to fail to timely meet our reporting obligations and cause investors
to lose confidence in our reported financial information, leading to a decline in our stock price.
We may be unable to pay our debts when due, which could materially impact our profitability and our
stock price.
Historically we have incurred debt in order to pursue our acquisition strategy, and we will likely
incur additional debt in the future as we continue to implement our business plan, which involves
engaging in strategic acquisitions. There is no guarantee that revenues from operations will be
sufficient to pay our debts as they become due. We may need to attract new investors or lenders in
order to refinance existing debt or incur new debt, and we may not be successful in doing so. Even
if we are able to attract new investors or lenders or otherwise obtain additional financing, we
could still suffer financial hardships if unexpected expenses arise or if revenues fail to meet our
expectations. If we fail to obtain financing or attract other investors, our results of operations
may suffer, which could result in a decline in the price of our common stock.
SPECIFIC RISKS RELATED TO RESTORATION AND CONSTRUCTION SERVICES
Our subsidiaries Fireline and HSR of Louisiana are involved in providing restoration and
construction services to disaster-ravaged areas and the southern United States. Our management has
identified certain risks which it believes relate specifically to our restoration and construction
services segment, which are set forth below.
The need for restoration services is unpredictable and depends upon the nature and extent of
weather-related emergencies.
Our restoration services are significantly impacted by the frequency and intensity of
weather-related emergencies, which causes the results of this segment of our business to fluctuate.
Historically, the nature and frequency of weather-related emergencies has fluctuated between
periods of relative calm, as compared to periods with weather-related events of greater frequency
or intensity. In a period with few weather-related emergencies or in which weather-related
emergencies cause comparatively less damage, we expect our revenues from this business segment to
decline. Although emergencies and disasters will always occur, we cannot predict the frequency of
occurrence, where they will occur and the extent of damage that will result. All of these factors
impact the need for restoration and construction services. If the need for restoration services
decline, our results of operations could suffer.
If we fail to win contracts that are ultimately reimbursable by insurers and federal, state and
local governments, it may impede our ability to grow our restoration services segment.
The end users of our restoration services currently consist primarily of large commercial
businesses and homeowners that have the funds and resources to begin recovery of their properties
that have been damaged in natural disasters. We believe that individuals and smaller commercial
businesses who have experienced damage or destruction to their homes and properties, but do not
have the resources to respond immediately, will rely upon insurance companies and federal, state
and local governments to assist them in repairing their properties. We pursue bids on recovery
services contracts, the costs of which are likely to be reimbursed by insurance agencies and
government branches and agencies. Some of our competitors may have better resources than we do or
may have long standing relationships that will place us at a competitive disadvantage in winning
contracts that are ultimately reimbursable by insurance or government funds. If we are
unsuccessful in obtaining contracts that are reimbursable by insurance and government funds, it may
impede the ability of our restoration and construction services segment to continue to grow, which
could result in a reduction in revenues and a decline in the price of our common stock.
If insurance proceeds and federal funds are not available to our customers, then our revenues may
decline, and the demand for our restoration and construction services may decline.
There is no assurance that any particular contract for our restoration and construction services
segment will ultimately be paid by insurance or reimbursed by government funds. If insurance
proceeds or federal funds are not available to reimburse customers for our restoration and
construction services, then our current customers may delay or forego payment on current projects,
and potential new customers may delay projects until funds are available, or decide not to rebuild.
If a lack of insurance proceeds or federal funds causes a delay in payment or a failure to pay one
or more individual material contracts, or a significant aggregate amount of smaller contracts, then
our revenues could decline, perhaps significantly. Furthermore, overall demand for recovery
services could decrease, resulting in decreased demand for our services and a decrease in our
revenues.
9
RISKS RELATED TO OUR COMMON STOCK
Our common stock could be delisted from the NASDAQ if we do not comply with the NASDAQ continued
listing standards.
We have only been listed on NASDAQ since July 2006, and prior to that, we were on the American
Stock Exchange from June 2003 through July 2006. To maintain our listing, we must meet NASDAQ’s
continued listing standards. If our common stock was delisted from the NASDAQ for any reason, it
would reduce our liquidity and could seriously reduce the value of our common stock, reduce our
ability to raise additional financing, limit our use of equity instruments to satisfy outstanding
obligations, and limit our ability to attract qualified employees. Any or all of these factors
could result in stockholders losing a portion or all of their investment in the Company.
Because of our low stock price, we may become subject to “penny stock” regulations, which place
restrictions on the trading of our common stock.
The SEC has adopted regulations that generally define a penny stock to be any equity security that
has a market price of less than $5 per share, subject to certain exemptions. Our trading price has
historically ranged from $1 to $3 per share in the fiscal years ended December 31, 2003 and
December 31, 2004, and from $1 to $6 in the fiscal year ended December 31, 2005, although our
common stock traded generally at prices above $5 per share in fiscal 2006. Regardless of our
current trading price, we are currently exempt from complying with the SEC’s penny stock
regulations because our common stock is listed for trading on NASDAQ. However, we could become
subject to the penny stock regulations if we are delisted from NASDAQ or if the SEC expands the
coverage of its penny stock regulations so that NASDAQ listing is no longer an exemption. The
penny stock regulations provide that unless an exemption is available, a penny stock transaction
must be preceded by the delivery of a disclosure schedule explaining the penny stock market and its
risks. In addition, under these regulations broker/dealers who recommend penny stocks to persons
other than established customers and certain accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser’s written agreement to the
proposed transaction prior to the sale. If we become subject to penny stock regulations, it would
be more difficult for investors to purchase or sell our common stock due to the additional
restrictions imposed by those regulations, which could reduce our stock price.
Effects of anti-takeover provisions could inhibit potential investors or delay or prevent a change
of control that may favor stockholders.
Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could,
together or separately:
| |
• |
|
discourage potential acquisition proposals; |
| |
| |
• |
|
delay or prevent a change in control; and |
| |
| |
• |
|
limit the price that investors might be willing to pay in the future for shares of our common stock. |
In particular, our board of directors is authorized to issue preferred stock and debt instruments
with rights and privileges that might be senior to our common stock, without the consent of the
holders of the common stock. The issuance of preferred stock and debt instruments could cause the
price of our common stock to decline, even if our business is doing well.
We have not paid dividends in the past, and do not anticipate paying dividends in the future.
We have not paid or declared cash dividends to the holders of our common stock, and do not intend
to do so in the foreseeable future. We intend to use any excess funds from our operations to
operate and grow our Company. We cannot assure you that we will ever pay dividends to the holders
of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In October 2002, the Company purchased an office building at 11850 Jones Road, Houston, Texas, that
served as its corporate offices, consisting of approximately 8,000 square feet of office space. In
May 2004, the Company moved its corporate headquarters to Dallas, Texas and currently leases an
office building co-located with FSS consisting of approximately 6,000 square feet. The lease
agreement for this property expires in 2011. The Company currently has the Houston, Texas building
and land listed for sale and is actively marketing the property.
PWS leases an office building used as its headquarters in Huntington Beach, California and has
additional offices in Fremont, El Cajon, and Corona California. These lease agreements for these
properties expire in 2007 to 2008.
10
Southern Exposure leases an office building used as its headquarters in Fort Myers, Florida. The
lease agreement for this property expires in 2007.
Cornerstone leases an office building used as its headquarters in Fort Myers, Florida on a
month-to-month basis with a 60-day notice provision. Cornerstone leases an additional office in
Tampa, Florida. The Tampa lease expires in 2009.
HSR of Louisiana leases an office building used as its headquarters in Mandeville, Louisiana and
leases a Florida office in Fort Lauderdale. The lease agreements for these properties expire in
2008 and 2009.
Fireline leases an office building used as its headquarters in Tampa, Florida. Fireline also
leases office in St. Rose, Louisiana and Vero Beach, Florida. The lease agreements for these
properties expire in 2007 to 2008.
ITEM 3. LEGAL PROCEEDINGS
The nature and scope of the Company’s business operations bring it into regular contact with the
general public, a variety of businesses and government agencies. These activities inherently
subject the Company to potential litigation, which are defended in the normal course of business.
On June 20, 2006, a class action lawsuit was filed in the United States District Court for the
Northern District of Texas. Home Solutions and the Chief Executive Officer, President and Chief
Financial Officer of Home Solutions are named as defendants in that action. The complaint alleges
claims against Home Solutions and such officers for violations of the Securities Act of 1934. The
complaint alleges that the defendants disseminated false and misleading information to the public
which misrepresented the accuracy of the Company’s financial condition and future revenue
prospects. The complaint further alleges that the effect of the purported fraud was to manipulate
Home Solution’s stock price so that the defendants could profit from the manipulation. The action
seeks damages in an unspecified amount. The Company intends to vigorously defend the action.
On June 27, 2006 and on July 6, 2006, two additional class action lawsuits were filed in the United
States District Court for the Northern District of Texas. Home Solutions and its directors are
named as defendants in those actions. The allegations in these two additional class action
lawsuits are substantially similar to those in the first lawsuit. The actions seek damages in an
unspecified amount. The Company intends to vigorously defend the actions.
Home Solutions is occasionally involved in other litigation matters relating to claims arising out
of the ordinary course of business. Other than the class action lawsuits described above, the
Company’s management believes that there are no claims or actions pending or threatened against the
Company, the ultimate disposition of which would have a material adverse effect on our business,
results of operations and financial condition. However, if a court or jury rules against us and
the ruling is ultimately sustained on appeal and damages are awarded against us, such ruling could
have a material and adverse effect on our business, results of operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
(All dollar and share amounts presented in Part II, except per share data, are stated in thousands)
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices
The common stock of the Company is traded on the NASDAQ Global Market and listed under the symbol
“HSOA.” The following table sets forth, for the fiscal quarters indicated, the range of the high
and low sales prices for the Company’s common stock as reported by the NASDAQ Global Market. These
quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.
| |
|
|
|
|
|
|
|
|
| Fiscal Year ended December 31, 2006: |
|
High |
|
Low |
Quarter ended December 31, 2006 |
|
$ |
6.72 |
|
|
$ |
4.92 |
|
Quarter ended September 30, 2006 |
|
|
7.27 |
|
|
|
4.50 |
|
Quarter ended June 30, 2006 |
|
|
13.20 |
|
|
|
6.17 |
|
Quarter ended March 31, 2006 |
|
|
7.20 |
|
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2005 |
|
$ |
6.70 |
|
|
$ |
4.36 |
|
Quarter ended September 30, 2005 |
|
|
5.29 |
|
|
|
1.32 |
|
Quarter ended June 30, 2005 |
|
|
1.67 |
|
|
|
1.26 |
|
Quarter ended March 31, 2005 |
|
|
1.69 |
|
|
|
1.47 |
|
11
Stockholders
As of March 15, 2007, the Company had approximately 133 record holders of its common stock, as
reflected on the books of the Company’s transfer agent. A significant number of shares were held
in street name and, as such, the Company believes that the actual number of beneficial owners is
significantly higher.
Dividends
The Company has not established a policy to pay dividends, nor has it paid any dividends on its
common stock to date. We plan to reinvest all profits in our business, and we do not anticipate
that we will adopt any policy to pay dividends in the foreseeable future. Furthermore, the
Company’s ability to pay dividends to holders of its common stock is restricted by the terms of
certain financing arrangements. Any payment of dividends in the future will be determined by the
Board of Directors in light of conditions then existing, including restrictions imposed by the
Company’s preferred stock then outstanding, the Company’s earnings, financial condition, capital
requirements and debt covenants, and the tax treatment consequences of paying dividends.
Penny Stock
The Company’s common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the
“penny stock rule.” Section 15(g) sets for the certain requirements for transactions in penny
stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1
of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a
market price less than $5 per share, subject to certain exceptions. Regardless of our current
trading price, we are currently exempt from complying with the SEC’s penny stock regulations
because our Common Stock is listed for trading on NASDAQ. However, we could become subject to the
penny stock regulations if we are delisted from NASDAQ or if the SEC expands the coverage of its
penny stock regulations so that NASDAQ listing is no longer an exemption.
If the Company’s common stock is deemed to be penny stock, trading in the shares will be subject to
additional sales practice requirements on broker-dealers who sell penny stock to persons other than
established customers and accredited investors. “Accredited investors” are persons with assets in
excess of $1,000 or annual income exceeding $200 or $300 together with their spouse. For
transactions covered by these rules, broker-dealers must make a special suitability determination
for the purchase of such security and must have the purchaser’s written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt
the rules require the delivery, prior to the first transaction of a risk disclosure document,
prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information to the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or
maintain a market in the Company’s Common Stock and may affect the ability of the Company’s
stockholders to sell their shares.
Sale of Unregistered Securities
On
July 31, 2006, the Company issued 4,000 shares of common stock
valued at $22,148 to Brian Marshall, the former
owner of Fireline, in partial consideration for the acquisition of Fireline.
On
October 26, 2006, the Company issued 1,500 shares of common
stock valued at $8,144 to the former owners of Associated, in partial
consideration for the acquisition of Associated. Also on October 26, 2006, the Company issued to
the former owners of Associated, warrants exercisable for up to 2,000 shares of common stock at
an exercise price of $.01 per share that vest and become exercisable in increments of 100 shares
for every $2,500 in earnings before interest, taxes, depreciation and amortization (“EBITDA”) in
excess of $9,000 in EBITDA earned by the Associated division in the two-year period following the
closing of the Associated acquisition.
On
December 12, 2006 the Company issued 25 shares of common stock
valued at $108 to a consultant in exchange for
services rendered to the Company.
12
The securities were issued to accredited investors without public solicitation in accordance with
the exemption from registration available under Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”), and thus, were exempt from the registration requirements of the
Securities Act.
Equity Compensation Plans
The following table summarizes as of December 31, 2006, the shares of common stock authorized for
issuance under our equity compensation plans:
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities |
|
|
|
|
|
Number of securities |
| |
|
to be issued upon |
|
Weighted average |
|
remaining available |
| |
|
exercise of |
|
exercise price of |
|
for future issuance |
| |
|
outstanding options, |
|
outstanding options, |
|
under equity |
| Plan Category |
|
warrants and rights |
|
warrants and rights |
|
compensation plans |
| |
Equity compensation plans approved by security holders |
|
|
1,897 |
|
|
$ |
4.31 |
|
|
|
3,341 |
|
Equity compensation plans not approved by security
holders |
|
|
3,165 |
|
|
$ |
4.50 |
|
|
|
— |
|
| |
|
|
Total |
|
|
5,062 |
|
|
|
|
|
|
|
3,341 |
|
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Financial Data (Unaudited)
(Dollars in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Revenues |
|
$ |
127,220 |
|
|
$ |
68,135 |
|
|
$ |
31,121 |
|
|
$ |
13,996 |
|
|
$ |
2,559 |
|
Earnings (loss) from Continuing Operations |
|
$ |
16,157 |
|
|
$ |
8,630 |
|
|
$ |
2,563 |
|
|
$ |
(702 |
) |
|
$ |
(230 |
) |
Net Earnings |
|
$ |
17,898 |
|
|
$ |
7,185 |
|
|
$ |
2,563 |
|
|
$ |
(702 |
) |
|
$ |
(477 |
) |
Stockholders’ Equity |
|
$ |
143,939 |
|
|
$ |
75,605 |
|
|
$ |
21,282 |
|
|
$ |
14,751 |
|
|
$ |
4,680 |
|
Net Earnings (loss) as a Percentage of Average
Stockholders’ Equity |
|
|
16.3 |
% |
|
|
14.8 |
% |
|
|
14.2 |
% |
|
|
(7.2 |
%) |
|
|
(10.1 |
%) |
Total Assets |
|
$ |
222,725 |
|
|
$ |
88,667 |
|
|
$ |
34,487 |
|
|
$ |
33,298 |
|
|
$ |
18,538 |
|
Deferred Income Tax Assets |
|
$ |
1,337 |
|
|
$ |
793 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total Long-term Obligations |
|
$ |
34,343 |
|
|
$ |
1,638 |
|
|
$ |
7,145 |
|
|
$ |
5,487 |
|
|
$ |
6,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from Continuing Operations
Per Share – Basic |
|
$ |
0.40 |
|
|
$ |
0.34 |
|
|
$ |
0.11 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
Earnings (loss) from Continuing Operations
Per Share – Diluted |
|
$ |
0.39 |
|
|
$ |
0.30 |
|
|
$ |
0.10 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
Net Earnings (loss) Per Share – Basic |
|
$ |
0.44 |
|
|
$ |
0.28 |
|
|
$ |
0.11 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.05 |
) |
Net Earnings (loss) Per Share – Diluted |
|
$ |
0.43 |
|
|
$ |
0.25 |
|
|
$ |
0.10 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.05 |
) |
Cash Dividends |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,039 |
|
|
|
23,210 |
|
|
|
16,393 |
|
|
|
11,837 |
|
|
|
9,709 |
|
Diluted |
|
|
42,058 |
|
|
|
26,315 |
|
|
|
17,192 |
|
|
|
11,837 |
|
|
|
9,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
13.20 |
|
|
$ |
6.70 |
|
|
$ |
2.10 |
|
|
$ |
3.45 |
|
|
$ |
3.10 |
|
Low |
|
$ |
4.50 |
|
|
$ |
1.26 |
|
|
$ |
1.15 |
|
|
$ |
1.52 |
|
|
$ |
1.15 |
|
13
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Use of Estimates and Critical Accounting Policies
In preparing our consolidated financial statements, we make estimates, assumptions and judgments
that can have a significant effect on our revenues, income (loss) from operations, and net income,
as well as on the value of certain assets on our consolidated balance sheet. We believe that there
are several accounting policies that are critical to an understanding of our historical and future
performance as these policies affect the reported amounts of revenues, expenses and significant
estimates and judgments applied by management. While there are a number of accounting policies,
methods and estimates affecting our financial statements, areas that are particularly significant
include allowance for doubtful accounts, recoverability of long-lived
assets (including goodwill), revenue recognition,
stock-based compensation, and deferred taxes. In addition, please refer to Note 1 to the
accompanying financial statements for further discussion of our accounting policies.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and our best estimate of the likelihood of potential loss,
taking into account such factors as the financial condition and payment history of major customers.
We evaluate the collectibility of our receivables at least quarterly. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The differences could be material and could significantly
impact cash flows from operating activities.
Impairment of Long-Lived Assets
The Company’s management assesses the recoverability of its long-lived assets by determining
whether the depreciation and amortization of long-lived assets over their remaining lives can be
recovered through projected undiscounted future cash flows. The amount of long-lived asset
impairment is measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management.
Goodwill
Goodwill represents the excess of acquisition cost over the net assets acquired in a business
combination. Management reviews, on an annual basis, the carrying value of goodwill in order to
determine whether impairment has occurred. Impairment is based on several factors including the
Company’s projection of future undiscounted operating cash flows. If an impairment of the carrying
value were to be indicated by this review, the Company would adjust the carrying value of goodwill
to its estimated fair value.
Deferred Taxes
We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely
than not to be realized. We have considered estimated future taxable income an ongoing tax
planning strategies in assessing the amount needed for the valuation allowance.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements,” as revised by SAB 104. As such, the Company
recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred,
the price is fixed or readily determinable and collectibility is probable. Sales are recorded net
of sales discounts.
PWS, FSS, and HSR of Louisiana recognize revenue at the time the contract and related services are
performed.
Southern Exposure and Cornerstone recognize revenue for product sales at the time the related
products are shipped to the customer. These subsidiaries recognize revenue for installation jobs
upon complete installation of the cabinets and inspection by the customer. Deferred revenue
represents amounts billed to customers and collected prior to completion of the cabinets and
inspection by the customer.
Cornerstone recognized revenue from its building and remodeling jobs using the percentage of
completion method for financial reporting purposes. Under the percentage of completion method,
revenues with respect to individual contracts are recognized in the proportion that costs incurred
to date bear to total estimated costs. Revenue and costs estimates are subject to revision during
the terms of the contracts and any required adjustments are made in the periods in which the
revisions become known. To the extent that these adjustments result in an increase, a reduction or
an elimination of previously reported contract profit, we recognize a credit, or a charge against
current earnings, which could be material. General and administrative costs are not allocated to
contract costs and are charged to expense as incurred.
14
Fireline and Associated also recognize revenue from certain jobs using the percentage-of-completion
method. Under the percentage of completion method, revenues with respect to individual contracts
are recognized in the proportion that costs incurred to date bear to total estimated costs and
progress towards completion. These estimates are dependent upon judgments including material costs
and quantities, labor productivity, subcontractor performance and other costs. In addition,
disputes on our projects can and sometimes do occur with our customers, subcontractors and
equipment vendors that require significant judgment as to the ultimate resolution and may take an
extended period of time to resolve. As projects are executed, estimates of total revenues and
total costs at completion are refined and revised. These estimates change due to factors and
events affection execution and often include estimates for resolution of disputes that may be
settled in negotiations or through arbitration, mediation or other legal methods. The
percentage-of-completion method requires that adjustments to estimated revenues and costs,
including estimated claim recoveries, be recognized on a cumulative basis, when the adjustments are
identified. When these adjustments are identified near or at the end of a project, the full impact
of the change in estimate would be recognized as a change in the gross profit on the contract in
that period. This can result in a material impact on our results for a single reporting period.
General and administrative costs are not allocated to contract costs and are charged to expense as
incurred.
The business segment that used the percentage of completion method had revenues of
$88,754, and operating income of $32,282 for the year. At December 31, 2006, the costs in excess of
billings (asset) were $6,292, and the billings in excess of costs (liability) were $688. Should
these accounts be written off, the Company would recognize a loss of
approximately $5,604.
Stock-Based Compensation
The Company maintains two shareholder-approved stock-based incentive compensation plans that permit
the issuance of equity-based compensation awards to employees, qualified consultants and directors,
including stock options and stock purchase rights.
On January 1, 2006, the first day of the Company’s fiscal year 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified
prospective transaction method. Under this transition method, compensation cost recognized in the
year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted
and not yet vested prior to January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005,
based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Results for prior periods have not been restated. Since stock-based compensation expense
recognized in the consolidated statements of income for the year ended December 31, 2006 is based
on awards ultimately expected to vest, the compensation expense has been reduced for estimated
forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We
estimated forfeitures to be 2% of the awards issued.
Prior to the adoption of SFAS No. 123(R), the Company accounted for these plans under the
recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No.
123, Accounting for Stock Based Compensation. No stock-based employee compensation cost was
recognized in the consolidated statements of income for the year ended December 31, 2005, as all
options granted under the Stock Plans had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant.
Our assessment of the estimated fair value of the stock options granted is affected by our stock
price as well as assumptions regarding a number of complex and subjective variables and the related
tax impact. We utilize the Black-Scholes model to estimate the fair value of stock options
granted. Generally, our calculation of the fair value for options
granted under SFAS No. 123(R) is
similar to the calculation of fair value under SFAS No. 123 with the exception of the treatment of
forfeitures. The fair value of stock purchase rights is based on the market price of our common
stock on the grant date.
The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. This model also
requires the input of highly subjective assumptions including:
| |
(a) |
|
The expected volatility of our common stock price, which we determine based on
historical volatility of our common stock over the prior eighteen month period; |
| |
| |
(b) |
|
Expected dividends (which do not apply, as we do not anticipate issuing dividends); |
| |
| |
(c) |
|
Expected life of the award, which is estimated based on the historical award exercise
behavior of our employees; and |
| |
| |
(d) |
|
Expected forfeitures of awards, which is estimated based on the historical turnover of
our employees and expected turnover in the future. Prior to adoption of SFAS No. 123(R),
we recognized forfeitures under SFAS No. 123 as they occurred. |
15
In the future, we may elect to use different assumptions under the Black Scholes valuation model or
a different valuation model, which could result in a significantly different impact on our net
income or loss.
See Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – to the
consolidated financial statements contained in this report for additional information
regarding our accounting policies for stock-based compensation.
Results of Operations – Year ended December 31, 2006 compared to year ended December 31, 2005
Net Sales
Restoration and Construction Services
The revenue for the year ended December 31, 2006 was $88,754 compared to $37,142 for the year ended
December 31, 2005. The increase is primarily due to an increase in construction work for HSR of
Louisiana and the acquisitions of Fireline and Associated during 2006. The majority of the work
related to reconstruction projects in Florida and Louisiana as a result of post hurricane
buildback.
Interior Services
The revenue for the year ended December 31, 2006 was $38,466 compared to $30,993 for the year ended
December 31, 2005. The increase is due primarily to an increase in sales related to Southern
Exposure of $3,573 and an increase in sales related to Marble Man, a subsidiary of PWS, of $2,257.
Costs of Sales
Restoration and Construction Services
Costs of sales for the year ended December 31, 2006 were $41,569 compared to $18,642 for the year
ended December 31, 2005. Restoration and construction services cost of sales increased
primarily due to the increase in construction work for HSR of Louisiana and the acquisitions of
Fireline and Associated during 2006. Gross margins were 53% and 50% for the years ended December
31, 2006 and 2005, respectively.
Interior Services
Costs of sales for the year ended December 31, 2006 were $25,154 compared to $19,730 for the year
ended December 31, 2005. The increase in total costs of sales is due to the increase in Southern
Exposure’s cabinet and countertop sales and Marble Man sales.
Gross margins were 35% and 40% for the
years ended December 31, 2006 and 2005, respectively.
Selling, General and Administrative Expenses
Restoration and Construction Services
Selling, general and administrative expenses were $14,903 for the year ended December 31, 2006
compared to $6,642 for the year ended December 31, 2005. The increase of $8,261 from 2005 is due
to the increase in construction work for HSR of Louisiana and the acquisitions of Fireline and
Associated during 2006. Selling, general and administrative expenses as a percentage of revenues
were 17% and 18% for the years ended December 31, 2006 and December 31, 2005, respectively.
Interior Services
Selling, general and administrative expenses were $7,720 for the year ended December 31, 2006
compared to $5,379 for the year ended December 31, 2005. This increase is due to an increase in
sales for Southern Exposure and PWS. Selling, general and administrative expenses as a percentage
of revenues were 20% and 17% for the year ended December 31, 2006 and December 31, 2005,
respectively. The Cornerstone administrative costs are slightly higher than the Southern Exposure
business because of the higher administrative cost to service residential customers and
Cornerstone’s expansion to service additional Home Depot stores.
Corporate
Corporate general and administrative expenses were $7,262 for the year ended December 31, 2006
compared to $4,464 for the year ended December 31, 2005. The increase of $2,798 is due primarily
to an increase in consulting, legal and professional fees of $824, salaries and bonus expenses of
$496, board of directors’ compensation of $267, Sarbanes-Oxley
audit-related costs of $675 and investor
relations expenses of $101. Corporate expenses as a percentage of total revenues were 6% and 7%
for the years ended December 31, 2006 and December 31, 2005, respectively.
Other Income (Expense)
Interest expense was $2,345 for the year ended December 31, 2006 compared to $3,351 for the year
ended December 31, 2005. The decrease of $1,006 is primarily related to the mezzanine debt issue
cost of $2,147 and the associated interest of $518 in 2005, offset by
additional interest incurred during 2006 resulting from the addition
of debt. Other income was $132 for the year
ended December 31, 2006 compared to $97 in 2005. Interest income was $268 for the year ended
16
December 31, 2006 compared to $61 for the year ended December 31, 2005. The increase in interest
income in 2006 is related to the interest earned on cash received from private placement proceeds
in November 2005.
Discontinued Operations
During the year ended December 31, 2005, the Company’s management committed to a plan to dispose of
certain assets and liabilities of the building and remodeling division of Cornerstone. The
disposal allowed the Company to focus on supporting higher net profit margin opportunities. In
March of 2006, the Company sold the building and remodeling division of Cornerstone, which was
acquired in the Cornerstone acquisition. As a result of the sale, its operations were reclassified
to discontinued operations. The Company recognized a gain on discontinued operations during this
period of $1,741, net of tax, including a pre-tax gain of $2,698. Net sales from discontinued
operations for the year ended December 31, 2006 were $514 as compared to $4,213 for the year ended
December 31, 2005. For the year ended December 31, 2006 and 2005 cost of sales were $675 and
$3,844, respectively, and selling, general and administrative expenses were $317 and $2,559,
respectively.
Results of Operations – Year ended December 31, 2005 compared to year ended December 31, 2004
Net Sales
Restoration and Construction Services
The revenue for the year ended December 31, 2005 was $37,142 compared to $16,566 for the year ended
December 31, 2004. The increase was primarily due to the HSR of Louisiana acquisition of the FERS
assets effective September 1, 2005, which increased our volume of recovery work in the Southeastern
United States. Sales of PWS and FSS increased $1,656 from 2004. In 2005, PWS continued
recovery/restoration work from the 2004 hurricane season.
Interior Services
The revenue for the year ended December 31, 2005 was $30,993 compared to $14,555 for the year ended
December 31, 2004. The increase was due primarily to the Cornerstone acquisition effective March
31, 2005. Southern Exposure sales increased $5,004 primarily due to increased product demand from
its principal customer.
Costs of Sales
Restoration and Construction Services
Costs of sales for the year ended December 31, 2005 were $18,642 compared to $7,937 for the year
ended December 31, 2004. Restoration and Construction Services total cost of sales increased
primarily due to the HSR of Louisiana acquisition of the FERS assets effective December 31, 2005.
Restoration and Construction gross margins were 50% and 48% for the years ended December 31, 2005
and 2004, respectively. The increase in cost of sales from 2004 is due primarily to higher costs
of sales experienced for the recovery/restoration work performed by HSR of Louisiana in the
Southeastern United States.
Interior Services
Costs of sales for the year ended December 31, 2005 were $19,730 compared to $8,781 for the year
ended December 31, 2004. The increase in total costs of sales is due to the Cornerstone
acquisition effective March 31, 2005 and the increase in Southern Exposure sales. Southern
Exposure gross margins were 40% for the years ended December 31, 2005 and 2004.
Selling, General and Administrative Expenses
Restoration and Construction Services
Selling,
general and administrative expenses were $6,642 for the year ended December 31, 2005
compared to $6,097 for the year ended December 31, 2004. The
increase of $545 from 2004 is due
primarily to the HSR of Louisiana acquisition of the FERS assets effective December 31, 2005.
Selling, general and administrative expenses as a percentage of
revenues were 18% and 37% for the
years ended December 31, 2005 and December 31, 2004, respectively.
Interior Services
Selling,
general and administrative expenses were $5,379 for the year ended December 31, 2005
compared to $2,140 for the year ended December 31, 2004. This increase is due to the Cornerstone
acquisition effective March 31, 2005. Selling, general and administrative expenses as a percentage
of revenues were 17% and 15% for the years ended December 31, 2005 and December 31, 2004,
respectively. The Cornerstone administrative costs are slightly higher than the Southern Exposure
business because of the higher administrative cost to service residential customers and
Cornerstone’s expansion to additional Home Depot stores. The
Company also made two small acquisitions in the first quarter of 2007.
Corporate
Corporate
general and administrative expenses were $4,464 for the year ended December 31, 2005
compared to $2,119 for the year ended December 31, 2004. The
increase of $2,345 is due primarily
to the variable stock option expense of $952, increased salaries
17
and payroll taxes of $1,000 and stock compensation expense of $257. Corporate expenses as a
percentage of revenues were 7% and 7% for the year ended December 31, 2005 and December 31, 2004,
respectively.
Other Income (Expense)
Interest
expense was $3,351 for the year ended December 31, 2005 compared to $930 for the year
ended December 31, 2004. The increase of $2,421 is primarily related to the mezzanine debt issue
cost amortization of $1,791 and the associated interest of $518. Other income was $97 in 2005
compared to $224 in 2004. The year ended December 31, 2005 included a one time gain of $129
related to the forgiveness of debt. Interest income was $61 for the year ended December 31, 2005
compared to $38 for the year ended December 31, 2004. The increase in interest income in 2005 is
related to the interest earned from the private placement proceeds received in November 2005.
Selected Quarterly Financial Information
The following table presents the Company’s unaudited quarterly statements of operations for
each of the eight quarters in the two-year period ended December 31, 2006. The information in the
table should be read in conjunction with the Company’s audited consolidated financial statements
and related notes contained elsewhere in this report. The underlying unaudited financial statements
are prepared on the same basis as the audited consolidated financial statements included in this
report, which include all adjustments, consisting only of normal recurring adjustments, that are
considered necessary for the fair presentation of the Company’s financial position and operating
results for the quarters presented. Operating results for any quarter are not necessarily
indicative of results for any future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
| |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
2006 |
| |
|
(in thousands, except share and per share data) |
Net sales |
|
$ |
9,337 |
|
|
$ |
16,055 |
|
|
$ |
20,376 |
|
|
$ |
22,367 |
|
|
$ |
19,280 |
|
|
$ |
24,154 |
|
|
$ |
49,077 |
|
|
$ |
34,709 |
|
Cost of Sales |
|
|
4,871 |
|
|
|
9,490 |
|
|
|
11,261 |
|
|
$ |
12,750 |
|
|
|
9,332 |
|
|
|
12,781 |
|
|
|
28,058 |
|
|
$ |
16,551 |
|
| |
|
|
Gross profit |
|
|
4,466 |
|
|
|
6,565 |
|
|
|
9,115 |
|
|
|
9,617 |
|
|
|
9,948 |
|
|
|
11,373 |
|
|
|
21,019 |
|
|
|
18,158 |
|
Selling, general and administrative expenses |
|
|
2,927 |
|
|
|
4,705 |
|
|
|
5,642 |
|
|
$ |
3,211 |
|
|
|
5,949 |
|
|
|
5,471 |
|
|
|
7,739 |
|
|
$ |
10,725 |
|
| |
|
|
Operating Income |
|
|
1,539 |
|
|
|
1,860 |
|
|
|
3,473 |
|
|
|
6,406 |
|
|
|
3,999 |
|
|
|
5,902 |
|
|
|
13,280 |
|
|
|
7,433 |
|
Other income (expense), net |
|
|
(243 |
) |
|
|
(404 |
) |
|
|
(573 |
) |
|
$ |
(2,049 |
) |
|
|
14 |
|
|
|
45 |
|
|
|
(615 |
) |
|
$ |
(1,372 |
) |
| |
|
|
Income from continuing operations before income taxes and minority interest |
|
|
1,296 |
|
|
|
1,456 |
|
|
|
2,900 |
|
|
|
4,357 |
|
|
|
4,013 |
|
|
|
5,947 |
|
|
|
12,665 |
|
|
|
6,061 |
|
Income tax (expense) benefit |
|
|
(82 |
) |
|
|
(104 |
) |
|
|
(292 |
) |
|
$ |
32 |
|
|
|
(1,413 |
) |
|
|
(2,246 |
) |
|
|
(4,389 |
) |
|
$ |
(3,754 |
) |
Minority interest |
|
|
(193 |
) |
|
|
(287 |
) |
|
|
(252 |
) |
|
$ |
(201 |
) |
|
|
(258 |
) |
|
|
(208 |
) |
|
|
(192 |
) |
|
$ |
(69 |
) |
| |
|
|
Income before discontinued operations |
|
|
1,021 |
|
|
|
1,065 |
|
|
|
2,356 |
|
|
|
4,188 |
|
|
|
2,342 |
|
|
|
3,493 |
|
|
|
8,084 |
|
|
|
2,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,445 |
) |
|
|
781 |
|
|
|
975 |
|
|
|
— |
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,021 |
|
|
$ |
1,065 |
|
|
$ |
2,356 |
|
|
$ |
2,743 |
|
|
$ |
3,123 |
|
|
$ |
4,468 |
|
|
$ |
8,084 |
|
|
$ |
2,223 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
842 |
|
|
$ |
883 |
|
|
$ |
1,994 |
|
|
$ |
2,743 |
|
|
$ |
3,123 |
|
|
$ |
4,468 |
|
|
$ |
8,084 |
|
|
$ |
2,223 |
|
Diluted |
|
$ |
813 |
|
|
$ |
883 |
|
|
$ |
2,135 |
|
|
$ |
2,743 |
|
|
$ |
3,123 |
|
|
$ |
4,468 |
|
|
$ |
8,084 |
|
|
$ |
2,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.05 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
$ |
0.07 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.05 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.06 |
) |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
$ |
0.05 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.11 |
|
|
$ |
0.09 |
|
|
$ |
0.12 |
|
|
$ |
0.19 |
|
|
$ |
0.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
0.09 |
|
|
$ |
0.18 |
|
|
$ |
0.05 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.05 |
) |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
$ |
0.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,968 |
|
|
|
20,929 |
|
|
|
23,737 |
|
|
|
31,047 |
|
|
|
35,898 |
|
|
|
38,295 |
|
|
|
43,229 |
|
|
|
46,589 |
|
Diluted |
|
|
18,990 |
|
|
|
22,464 |
|
|
|
27,833 |
|
|
|
35,713 |
|
|
|
40,702 |
|
|
|
40,594 |
|
|
|
45,181 |
|
|
|
47,504 |
|
Home Solutions’ business plan is to contribute to its growth strategy with acquisitions.
During the period from March 31, 2005 to December 31, 2006, the Company has made several
acquisitions and experienced internal growth of the existing operations. The table above includes
the effective date of the each acquisition. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the notes to the consolidated financials included
elsewhere in this Form 10K and in the Form 10K for 2005 for additional information on the
acquisitions during the periods included in the table. Our management believes that our current
business plan will be successful and that we will continue to maintain and grow profitability;
however, our business plan is speculative and unproven. Although our revenues grew substantially
due to our growth strategy and we achieved a profit in fiscal years 2004, 2005 and 2006, there is
no assurance that we will be successful in executing our business plan or, even if we successfully
implement our business plan, that we will sustain profitability now or in the future.
Liquidity and Capital Resources
The Company’s existing capital resources as of December 31, 2006, consist of cash and accounts
receivable totaling $66,819, compared to cash and accounts receivable of $28,810 as of December 31,
2005. The increase in the accounts receivable is due primarily to the acquisitions of Fireline and
Associated, in July 2006 and October 2006, respectively, as well as increased revenues for the
reconstruction of New Orleans and other hurricane-affected areas. In addition, the hurricane
disaster recovery work has increased the amounts due from government agencies or entities owned by
the U.S. Government, primarily FEMA and state-owned or controlled entities. While we have a
history of recovering amounts related to work performed for the government, the current
circumstances increase the uncertainties in estimating the amounts we will actually recover under
existing contracts for work we have already performed. If our estimated amounts recoverable on
these projects differ from the amounts ultimately collected, those differences will be recognized
as income or loss and our earnings and cash flows could be materially impacted. The Company
believes that its current financing arrangements are sufficient to finance its working capital
needs for the next twelve months. However, continued implementation of the Company’s strategic
plan of expanding our core service offerings through the future acquisition of strategic,
specialized, profitable and well-managed companies will require additional capital.
In November 2006, the Company entered into a new $60,000 credit facility with a consortium of
financial institutions experienced in providing credit to construction companies. The new
facility, which replaces the Company’s previous $10,000 line of credit, was obtained to support the
Company’s working capital requirements and reduce the Company’s overall borrowing costs. The
Company has committed to provide Associated with a $15,000 working capital line of credit to be
used for construction projects, which is included in the $60,000 credit facility. The new facility
was used to finance acquisition debt and support future working capital needs of the Company.
In June
2006 Southern Family Insurance (“Southern”) was placed in
liquidation. Southern was the insurance carrier on Fireline’s
two significant customers. At December 31, 2006, the Company
had accounts receivable and recoverable costs from these customers aggregating
approximately $25,829. In order to protect its interests the Company
has filed a claim with the Florida Insurance Guarantee Association
(“FIGA”). Southern was an admitted insurance carrier in
Florida and state statutes insures the payment of valid claims by the
FIGA. FIGA has certified the Company’s claims as valid. Should the
Company be unable to collect the balances due, it
may have to initiate legal action. Unpaid balances related to this
receivable or any other account receivable balance acquired up to a
maximum of $19,400 would reduce the payment due on the
note payable to the seller described in Note 3. In addition, to
the right of offset against the seller note, the Company has lien
rights against the property in which the work related to the FIGA
claim was performed. The Company estimates that the amounts collected
will be between $24,000 and $30,000 and that any amounts not collected
will be applied against the amounts due on the note payable to the
seller.
During the year ended December 31, 2006, the Company used net cash from operating activities of
$12,509, including net income of $17,898. The Company’s
investing activities used net cash of $12,553
primarily due to Fireline acquisition costs and purchases of property and equipment. Cash provided
by investing activities includes repayments of notes receivable, net of issuances and acquisition
costs, net of cash received.
The
Company’s net cash from financing activities of $25,550 was primarily due to proceeds from the
exercises of warrants and options, borrowings on the line of credit
and notes payable and excess tax benefits from
option exercises. Cash flow outlays were for principal payments on long-term debt and capital
leases and distributions to a minority stockholder.
Contractual Obligations
On May 24, 2006, the Company entered into an exclusive agreement with a modular housing sales agent
to provide installation services for modular housing in New Orleans and surrounding areas. In
connection with the agreement, the Company agreed to loan the sales agent up to $800 under a
promissory note, which is secured by real estate and modular home units. See Note 4 – Notes
Receivable – to the consolidated financial statements contained in this report for additional
information regarding the transaction.
The following table presents our contractual obligations as of December 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less than |
|
|
1 – 3 |
|
|
4 – 5 |
|
|
More than |
|
| Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Capital lease obligations |
|
$ |
1,183 |
|
|
$ |
254 |
|
|
$ |
501 |
|
|
$ |
336 |
|
|
$ |
92 |
|
Notes payable and lines
of credit |
|
|
50,375 |
|
|
|
26,816 |
|
|
|
23,442 |
|
|
|
117 |
|
|
|
— |
|
Operating leases |
|
|
1,565 |
|
|
|
848 |
|
|
|
511 |
|
|
|
203 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,123 |
|
|
$ |
27,918 |
|
|
$ |
24,454 |
|
|
$ |
656 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Inflation
We believe that, for the year ended December 31, 2006, inflation has not had a material effect on
our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure relates to changes in interest rates. We are not subject to any
foreign currency exchange rate risk or commodity price risk, or any other material market rate or
price risks. We use short-term debt financing and working capital primarily to fund short-term
uses and acquisitions and generally expect to refinance such borrowings with cash from operating
activities or long-term debt.
We had
$50,100 of variable rate debt outstanding at December 31, 2006. The annual interest
rate on the Term Loan and the Line of Credit is equal to the higher of (a) the prime rate of
interest as quoted in the Wall Street Journal, less 25 basis points (0.25%) for periods prior to
June 30, 2007, and less 50 basis points (0.50%) for periods after June 30, 2007, or (b) the federal
funds rate, as published by the Federal Reserve Bank of New York, plus 25 basis points (0.25%) for
periods prior to June 30, 2007. The interest rate on the seller note is calculated at prime rate.
If the prime rate were higher by 1%, the interest expense would have
increased by $152.
Conversely, if the prime rate was lower by 1%, interest expense would
have decreased by $152.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Information
20
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of Home Solutions of America, Inc.:
We have audited the accompanying consolidated balance sheets of
Home Solutions of America, Inc. and subsidiaries (the
“Company”) as of December 31, 2006 and 2005, and
the related consolidated statements of income, cash flows and
stockholders’ equity for each of the three years in the
period ended December 31, 2006. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Home
Solutions of America, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for share-based
payments upon the adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, effective
January 1, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 16, 2007 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
adverse opinion on the effectiveness of the Company’s
internal control over financial reporting because of material
weaknesses.
/s/ KMJ Corbin & Company LLP
Irvine, California
March 16, 2007
21
\
Home Solutions of America, Inc.
Consolidated Balance Sheets
(Dollars and shares in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
8,713 |
|
|
$ |
8,225 |
|
Accounts receivable, net |
|
|
58,106 |
|
|
|
20,585 |
|
Current portion of notes receivable |
|
|
703 |
|
|
|
361 |
|
Inventories |
|
|
4,000 |
|
|
|
1,026 |
|
Current assets of discontinued operations held for sale |
|
|
— |
|
|
|
767 |
|
Prepaid expenses and other current assets |
|
|
4,654 |
|
|
|
1,041 |
|
Costs in excess of billings |
|
|
6,292 |
|
|
|
— |
|
Deferred tax asset |
|
|
1,337 |
|
|
|
— |
|
Assets held for sale |
|
|
— |
|
|
|
840 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
83,805 |
|
|
|
32,845 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
6,129 |
|
|
|
2,466 |
|
Intangibles, net |
|
|
8,732 |
|
|
|
9,501 |
|
Goodwill |
|
|
122,500 |
|
|
|
41,882 |
|
Notes receivable, net of current portion |
|
|
750 |
|
|
|
525 |
|
Non-current assets of discontinued operations held for sale |
|
|
— |
|
|
|
391 |
|
Deferred tax asset |
|
|
— |
|
|
|
793 |
|
Other assets |
|
|
809 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
$ |
222,725 |
|
|
$ |
88,667 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
15,608 |
|
|
$ |
6,267 |
|
Billings in excess of costs |
|
|
688 |
|
|
|
— |
|
Current portion of debt |
|
|
26,816 |
|
|
|
3,382 |
|
Current portion of capital lease obligations |
|
|
254 |
|
|
|
76 |
|
Current liabilities of discontinued operations held for sale |
|
|
— |
|
|
|
1,216 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
43,366 |
|
|
|
10,941 |
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Debt, net of current portion |
|
|
10,448 |
|
|
|
1,363 |
|
Non-current liabilities of discontinued operations held for sale |
|
|
— |
|
|
|
158 |
|
Line of credit |
|
|
13,111 |
|
|
|
|
|
Capital lease obligations, net of current portion |
|
|
929 |
|
|
|
117 |
|
Amounts due to seller |
|
|
9,855 |
|
|
|
— |
|
Deferred tax
liabilities |
|
|
890 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
78,599 |
|
|
|
12,579 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
237 |
|
|
|
483 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000 shares authorized; 47,297 and
35,510 shares issued and outstanding, respectively |
|
|
47 |
|
|
|
36 |
|
Additional paid-in capital |
|
|
140,497 |
|
|
|
90,122 |
|
Retained earnings (accumulated deficit) |
|
|
3,345 |
|
|
|
(14,553 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
143,889 |
|
|
|
75,605 |
|
|
|
|
|
|
|
|
|
|
$ |
222,725 |
|
|
$ |
88,667 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
22
Home Solutions of America, Inc.
Consolidated Statements of Income
(Dollars and shares in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
127,220 |
|
|
$ |
68,135 |
|
|
$ |
31,121 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
66,722 |
|
|
|
38,372 |
|
|
|
16,718 |
|
Selling, general and administrative expenses |
|
|
29,884 |
|
|
|
16,485 |
|
|
|
10,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,606 |
|
|
|
54,857 |
|
|
|
27,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
30,614 |
|
|
|
13,278 |
|
|
|
4,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets |
|
|
17 |
|
|
|
(76 |
) |
|
|
(17 |
) |
Interest income |
|
|
268 |
|
|
|
61 |
|
|
|
38 |
|
Interest expense |
|
|
(2,345 |
) |
|
|
(3,351 |
) |
|
|
(930 |
) |
Other income, net |
|
|
132 |
|
|
|
97 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
Total other
expense, net |
|
|
(1,928 |
) |
|
|
(3,269 |
) |
|
|
(685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest |
|
|
28,686 |
|
|
|
10,009 |
|
|
|
3,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
11,802 |
|
|
|
446 |
|
|
|
219 |
|
Minority interest |
|
|
727 |
|
|
|
933 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations |
|
|
16,157 |
|
|
|
8,630 |
|
|
|
2,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes |
|
|
1,741 |
|
|
|
(1,445 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,898 |
|
|
$ |
7,185 |
|
|
$ |
2,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
17,898 |
|
|
$ |
6,461 |
|
|
$ |
1,764 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
17,898 |
|
|
$ |
6,461 |
|
|
$ |
1,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.40 |
|
|
$ |
0.34 |
|
|
$ |
0.11 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
0.04 |
|
|
|
(0.06 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.44 |
|
|
$ |
0.28 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.39 |
|
|
$ |
0.30 |
|
|
$ |
0.10 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
0.04 |
|
|
|
(0.05 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.43 |
|
|
$ |
0.25 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,039 |
|
|
|
23,210 |
|
|
|
16,393 |
|
Diluted |
|
|
42,058 |
|
|
|
26,315 |
|
|
|
17,192 |
|
See Notes to Consolidated Financial Statements.
23
Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,898 |
|
|
$ |
7,185 |
|
|
$ |
2,563 |
|
Adjustments- |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,646 |
|
|
|
3,403 |
|
|
|
1,102 |
|
Minority interest in income of consolidated subsidiary |
|
|
727 |
|
|
|
933 |
|
|
|
580 |
|
Provision for doubtful accounts |
|
|
2,823 |
|
|
|
495 |
|
|
|
44 |
|
Gain on sale of assets |
|
|
(17 |
) |
|
|
76 |
|
|
|
17 |
|
Stock-based compensation |
|
|
1,433 |
|
|
|
952 |
|
|
|
113 |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
(129 |
) |
Gain on sale of discontinued operations |
|
|
(3,177 |
) |
|
|
— |
|
|
|
— |
|
Changes in assets and liabilities, net of acquisitions and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(15,883 |
) |
|
|
(13,710 |
) |
|
|
(989 |
) |
Prepaid expenses and other current assets |
|
|
(2,425 |
) |
|
|
(490 |
) |
|
|
(382 |
) |
Costs in excess of billings, net |
|
|
(5,177 |
) |
|
|
— |
|
|
|
— |
|
Inventories |
|
|
(729 |
) |
|
|
304 |
|
|
|
— |
|
Other assets |
|
|
(470 |
) |
|
|
(102 |
) |
|
|
135 |
|
Deferred taxes |
|
|
(544 |
) |
|
|
(2,475 |
) |
|
|
— |
|
Deferred tax
liability |
|
|
890 |
|
|
|
— |
|
|
|
— |
|
Accounts payable and accrued expenses |
|
|
(9,504 |
) |
|
|
(852 |
) |
|
|
(344 |
) |
Due to a related party |
|
|
— |
|
|
|
(395 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(12,509 |
) |
|
|
(4,676 |
) |
|
|
2,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
— |
|
|
|
— |
|
|
|
45 |
|
Cash advanced under note receivable |
|
|
(703 |
) |
|
|
— |
|
|
|
— |
|
Payments received on notes receivable |
|
|
1,525 |
|
|
|
431 |
|
|
|
165 |
|
Costs incurred in acquisitions, net of cash acquired |
|
|
(974 |
) |
|
|
— |
|
|
|
(96 |
) |
Purchase of Southern Exposure, including acquisition costs |
|
|
— |
|
|
|
— |
|
|
|
(4,951 |
) |
Cash acquired in FERS acquisition, net of acquisition costs |
|
|
— |
|
|
|
612 |
|
|
|
— |
|
| Purchase of Cornerstone, including acquisition costs |
|
|
— |
|
|
|
(2,171 |
) |
|
|
— |
|
Purchases of property and equipment |
|
|
(356 |
) |
|
|
(253 |
) |
|
|
(256 |
) |
Purchase of Fireline |
|
|
(11,500 |
) |
|
|
— |
|
|
|
— |
|
Purchase of
Marble Man, Inc. |
|
|
(545 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,553 |
) |
|
|
(1,381 |
) |
|
|
(5,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable, net of cash issuance costs |
|
|
14,201 |
|
|
|
8,579 |
|
|
|
3,778 |
|
Proceeds from notes payable to related party, net of payments |
|
|
— |
|
|
|
(750 |
) |
|
|
(250 |
) |
Principal payments on debt and capital leases |
|
|
(9,057 |
) |
|
|
(24,581 |
) |
|
|
(4,754 |
) |
Proceeds from private placement of common stock, net of costs |
|
|
— |
|
|
|
24,547 |
|
|
|
— |
|
Proceeds from preferred stock, net of cash issuance costs |
|
|
— |
|
|
|
— |
|
|
|
2,878 |
|
Proceeds
from line of credit, net of repayments |
|
|
3,878 |
|
|
|
— |
|
|
|
(519 |
) |
Excess tax benefit from options exercises |
|
|
9,121 |
|
|
|
— |
|
|
|
— |
|
Proceeds from exercise of warrants and options |
|
|
8,135 |
|
|
|
6,050 |
|
|
|
3 |
|
Distributions to minority stockholder |
|
|
(973 |
) |
|
|
(691 |
) |
|
|
(377 |
) |
Proceeds received from disgorgement of profits |
|
|
245 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
25,550 |
|
|
|
13,154 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
488 |
|
|
|
7,097 |
|
|
|
(1,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at
beginning of year |
|
|
8,225 |
|
|
|
1,128 |
|
|
|
2,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end
of year |
|
$ |
8,713 |
|
|
$ |
8,225 |
|
|
$ |
1,128 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
24
Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Years Ended December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,693 |
|
|
$ |
1,177 |
|
|
$ |
534 |
|
Income taxes |
|
$ |
3,983 |
|
|
$ |
2,418 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for conversion of debt and accrued interest |
|
$ |
903 |
|
|
$ |
3,850 |
|
|
$ |
150 |
|
Fixed assets acquired through debt and capital lease obligations |
|
$ |
1,438 |
|
|
$ |
137 |
|
|
$ |
68 |
|
Conversion of preferred stock to common stock |
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Preferred dividend accrual |
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
159 |
|
Fair value of warrants issued for debt private placement |
|
$ |
— |
|
|
$ |
1,294 |
|
|
$ |
250 |
|
Reduction of notes payable for settlement of obligations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
189 |
|
Issuance of stock for acquisitions |
|
$ |
30,293 |
|
|
$ |
4,236 |
|
|
$ |
— |
|
Issuance of notes payable for acquisition |
|
$ |
22,395 |
|
|
$ |
12,600 |
|
|
$ |
— |
|
Issuance of stock for supply agreement |
|
$ |
— |
|
|
$ |
1,350 |
|
|
$ |
— |
|
Amortization of preferred stock issuance costs and beneficial
conversion as preferred stock dividends |
|
$ |
— |
|
|
$ |
587 |
|
|
$ |
640 |
|
Fair value
of warrants issued in acquisitions |
|
$ |
— |
|
|
$ |
4,719 |
|
|
$ |
595 |
|
Issuance of notes payable secured by note receivable |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,482 |
|
Fair value of warrants issued in connection with preferred stock and
beneficial conversion feature of preferred stock |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,358 |
|
Shares and options/warrants issued for prepaid consulting |
|
$ |
108 |
|
|
$ |
— |
|
|
$ |
158 |
|
Increase in goodwill due to adjustments to net assets acquired |
|
$ |
347 |
|
|
$ |
— |
|
|
$ |
73 |
|
Inventory received for reduction of note receivable from
Cornerstone |
|
$ |
2,125 |
|
|
$ |
— |
|
|
$ |
— |
|
Issuance of common stock for preferred dividends |
|
$ |
— |
|
|
$ |
209 |
|
|
$ |
75 |
|
Increase in goodwill due to deferred tax liability |
|
$ |
— |
|
|
$ |
1,682 |
|
|
$ |
— |
|
Reclassification of assets held for sale to property and equipment |
|
$ |
840 |
|
|
$ |
— |
|
|
$ |
— |
|
Issuance of common stock for accrued expenses |
|
$ |
256 |
|
|
$ |
— |
|
|
$ |
— |
|
Amounts due
to seller in acquisition |
|
$ |
9,855 |
|
|
$ |
— |
|
|
$ |
— |
|
See Notes to Consolidated Financial Statements.
25
Home Solutions of America, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Deficit) |
|
Total |
| |
|
Preferred Shares |
|
Common Shares |
|
Paid-in |
|
Refined |
|
Stockholders’ |
| |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Equity |
| |
|
|
Balance, January 1, 2004 |
|
|
— |
|
|
$ |
— |
|
|
|
14,164 |
|
|
$ |
14 |
|
|
$ |
37,515 |
|
|
$ |
(22,778 |
) |
|
$ |
14,751 |
|
Issuance of shares for services |
|
|
— |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
|
|
158 |
|
|
|
— |
|
|
|
158 |
|
Issuance of shares in lieu of dividends
payable |
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
75 |
|
Issuance of shares for exercise of warrants |
|
|
— |
|
|
|
— |
|
|
|
293 |
|
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
|
|
3 |
|
Issuance of shares for officer bonus |
|
|
— |
|
|
|
— |
|
|
|
85 |
|
|
|
— |
|
|
|
113 |
|
|
|
— |
|
|
|
113 |
|
Issuance of shares for SE acquisition |
|
|
— |
|
|
|
— |
|
|
|
1,757 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
Issuance of shares for conversion of debt |
|
|
— |
|
|
|
— |
|
|
|
111 |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
|
|
150 |
|
Issuance of preferred stock, net of cash
issuance costs |
|
|
0.120 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,878 |
|
|
|
— |
|
|
|
2,878 |
|
Estimated value of beneficial conversion
feature from issuance of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
155 |
|
|
|
— |
|
|
|
155 |
|
Issuance of shares for conversion of Series A
preferred stock |
|
|
(0.012 |
) |
|
|
— |
|
|
|
240 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortize preferred stock issue and beneficial
conversion cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
640 |
|
|
|
(640 |
) |
|
|
— |
|
Preferred stock dividends payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(159 |
) |
|
|
(159 |
) |
Estimated fair market value of warrants
granted for proposed acquisition |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
595 |
|
|
|
— |
|
|
|
595 |
|
Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,563 |
|
|
|
2,563 |
|
| |
|
|
Balance, December 31, 2004 |
|
|
0.108 |
|
|
$ |
— |
|
|
|
16,860 |
|
|
$ |
17 |
|
|
$ |
42,279 |
|
|
$ |
(21,014 |
) |
|
$ |
21,282 |
|
Issuance of shares for services |
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
68 |
|
Issuance of shares in lieu of dividends
payable |
|
|
— |
|
|
|
— |
|
|
|
156 |
|
|
|
— |
|
|
|
209 |
|
|
|
— |
|
|
|
209 |
|
Compensation expense related to variable
stock option pricing |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
952 |
|
|
|
— |
|
|
|
952 |
|
Estimated fair value of warrants earned by
seller of FERS assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,719 |
|
|
|
— |
|
|
|
4,719 |
|
Issuance of shares for exercise of warrants
and options |
|
|
— |
|
|
|
— |
|
|
|
5,346 |
|
|
|
5 |
|
|
|
6,045 |
|
|
|
— |
|
|
|
6,050 |
|
Issuance of shares for supply agreement |
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
1 |
|
|
|
1,349 |
|
|
|
— |
|
|
|
1,350 |
|
Estimated fair value of warrants issued for
debt private placement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,294 |
|
|
|
— |
|
|
|
1,294 |
|
Issuance of shares for Cornerstone
acquisition |
|
|
— |
|
|
|
— |
|
|
|
2,821 |
|
|
|
3 |
|
|
|
3,805 |
|
|
|
— |
|
|
|
3,808 |
|
Issuance of shares for conversion of debt and
interest payable |
|
|
— |
|
|
|
— |
|
|
|
2,225 |
|
|
|
2 |
|
|
|
3,848 |
|
|
|
— |
|
|
|
3,850 |
|
Amortization of preferred stock issue and
beneficial conversion cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
587 |
|
|
|
(587 |
) |
|
|
— |
|
Issuance of shares for FERS acquisition |
|
|
— |
|
|
|
— |
|
|
|
175 |
|
|
|
1 |
|
|
|
427 |
|
|
|
— |
|
|
|
428 |
|
Preferred stock dividends payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(137 |
) |
|
|
(137 |
) |
Issuance of shares for conversion of Series A
preferred stock |
|
|
(0.068 |
) |
|
|
— |
|
|
|
1,360 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Issuance of shares for conversion of Series B
preferred stock |
|
|
(0.040 |
) |
|
|
— |
|
|
|
667 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Issuance of
shares for private placement, net
of costs |
|
|
— |
|
|
|
— |
|
|
|
4,850 |
|
|
|
5 |
|
|
|
24,542 |
|
|
|
— |
|
|
|
24,547 |
|
Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,185 |
|
|
|
7,185 |
|
| |
|
|
Balance, December 31, 2005 |
|
|
— |
|
|
$ |
— |
|
|
|
35,510 |
|
|
$ |
36 |
|
|
$ |
90,122 |
|
|
$ |
(14,553 |
) |
|
$ |
75,605 |
|
Issuance of shares for services |
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
109 |
|
|
|
— |
|
|
|
109 |
|
Issuance of shares for conversion of debt and
interest payable |
|
|
— |
|
|
|
— |
|
|
|
480 |
|
|
|
1 |
|
|
|
902 |
|
|
|
— |
|
|
|
903 |
|
Disgorgement of profits |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
245 |
|
|
|
— |
|
|
|
245 |
|
Issuance of shares for Fireline acquisition |
|
|
— |
|
|
|
— |
|
|
|
4,000 |
|
|
|
4 |
|
|
|
22,144 |
|
|
|
— |
|
|
|
22,148 |
|
Issuance of shares for Associated acquisition |
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
|
|
1 |
|
|
|
8,144 |
|
|
|
— |
|
|
|
8,145 |
|
Excess tax benefit on exercise of stock
options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,121 |
|
|
|
— |
|
|
|
9,121 |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
840 |
|
|
|
— |
|
|
|
840 |
|
Issuance of shares for exercise of warrants
and options |
|
|
|
|
|
|
|
|
|
|
5,567 |
|
|
|
5 |
|
|
|
8,130 |
|
|
|
|
|
|
|
8,135 |
|
Issuance of
shares for Board of Directors
stock
grants |
|
|
— |
|
|
|
— |
|
|
|
215 |
|
|
|
— |
|
|
|
740 |
|
|
|
— |
|
|
|
740 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,898 |
|
|
|
17,898 |
|
| |
|
|
Balance, December 31, 2006 |
|
|
— |
|
|
$ |
— |
|
|
|
47,297 |
|
|
$ |
47 |
|
|
$ |
140,497 |
|
|
$ |
3,345 |
|
|
$ |
143,889 |
|
| |
|
|
| |
|
|
See Notes to Consolidated Financial Statements.
26
Home Solutions of America, Inc.
Notes to Consolidated Financial Statements
(Unless otherwise indicated, dollars and shares in thousands, except per share data)
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Description and Nature of Operations
Home
Solutions of America, Inc. (“Home Solutions”, or “the Company”), a Delaware corporation, is a
provider of restoration, construction and interior services to commercial and residential areas
that are (i) prone to flooding, hurricanes, tornados, fires or other naturally occurring and
repetitive weather related emergencies, and/or (ii) experiencing robust housing development. With
operations in the South, Gulf Coast regions and California, the Company believes that it is well
positioned to capitalize on the growing demand for our restoration and construction services and
interior services business segments. The Company seeks to expand its core service offerings
through the future acquisition of strategic, specialized, profitable and well-managed companies
operating in its target markets and business segments with a proven history of internal growth.
The Company’s business consists of two integrated service offerings: (i) restoration and
construction services and (ii) interior services. See Note 9 – Segment Reporting for additional
segment information.
Restoration and Construction Services
Home Solutions is an emerging restoration and construction services company, offering diversified
general contracting, restoration, construction management and design-build services to private
clients and public agencies throughout the southern United States and California. We have
established a strong reputation within our markets by executing significant projects on time and
within budget while adhering to strict quality control measures. We offer general contracting,
preconstruction planning and comprehensive project management services, including planning,
scheduling and providing the manpower, equipment, materials and subcontractors required for a
project. A portion of our work requires surety bonding and the Company has surety bonding
agreements with various institutions to meet its bonding needs. We also serve as the subcontractor
on several projects in the same markets.
The Company’s restoration services include catastrophic storm response, clean up and removal of
debris, initial set up services in an impacted area (including power, lodging, sustenance and
training), water mitigation, drying, dehumidification and preparing affected areas for the next
stage of restoration and rebuilding. We have trained employees who provide onsite first response
to respond to fire, water and weather-related emergencies in our target markets to both commercial
and residential clients. These services are primarily provided through our wholly-owned
subsidiaries, Fireline, which we acquired effective July 1, 2006 pursuant to an acquisition closed
on July 31, 2006, and HSR of Louisiana, which commenced operations in September 2005 in connection
with the acquisition of substantially all the assets of FERS. HSR of Louisiana purchased
Associated in October 2006 to expand its business development and general contracting capabilities.
Our restoration services are currently provided in the areas of Florida, Louisiana, Mississippi,
Alabama, Georgia, South Carolina, Texas and California.
Our restoration services include servicing the next stage of the project after the initial clean up
and catastrophic storm response. Restoration services presently include water, fire and wind
restoration, mold remediation, contents restoration, air decontamination, asbestos and lead paint
removal, cleaning, drying, and deodorization of carpet and furniture and moving and storage
services. Fireline, which specializes in disaster recovery services and insurance estimates and
repairs for commercial, industrial and residential properties, is certified in multiple aspects of
the restoration industry, including smoke, fire, water and mold. Fireline is licensed as a general
contractor in Florida and offers full interior and exterior restoration and reconstruction services
in that state. Restoration business segment services are also provided through PWS and FSS, two of
our wholly-owned subsidiaries. PWS provides water and fire restoration services, air
decontamination and removal of mold, asbestos and lead paint in California and, to a lesser extent,
in Florida, and FSS provides cleaning, drying and deodorization of carpet and furniture as well as
moving and storage services in 24 states and the District of Columbia.
The following details the types of restoration and construction services we provide:
| |
• |
|
Recovery: Our recovery services include providing initial set up services in an
impacted area (including power, lodging, and training) and then providing the drying,
dehumidification, cleanup and removal of debris from commercial and residential areas to
prepare the areas for the next stage of restoration. We provide these services on an
hourly rate to our commercial and residential clients, both as a contractor and as a
subcontractor to customers providing additional services in these markets. |
| |
| |
• |
|
Fire and Water Damage Restoration: We provide trained employees to respond to fire,
water and weather-related emergencies, to inspect structural members and contents damaged
by water, to determine the likelihood or extent of mold growth and to provide immediate
cleaning, drying, moving, storage and deodorization, among other services. |
27
| |
• |
|
Construction: The Company’s construction services include providing services to a
number of high growth companies and specialized building markets, including hospitality and
gaming, insurance, education and healthcare markets. We believe our success in
construction services results from our proven ability to manage and perform meaningful,
complex projects while providing accurate budgeting and strict quality control. Although
price is a key competitive factor, we believe our strong reputation, long-standing customer
relationships and significant level of repeat and referral business have enabled us to
achieve our leading position. |
| |
| |
• |
|
Indoor Air Contamination: Through PWS, we provide indoor air contamination services,
including contamination from mold, asbestos and lead paint. With increased media attention
regarding the health threat of mold, fewer insurance options and property transfers at
risk, current market conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist of property and system
inspections, surface and air testing, project design, microbial removal, light interior
demolition, repair and specialized cleaning work. Home inspections and testing can range
from $200 to $800 per inspection. For the typical mold-contaminated house, a remediation
project can last approximately one week and cost $10,000 or more. Customer opportunities
are developed through a regional sales force as well as through referrals by real estate
firms, insurance adjusters, mortgage companies, attorneys and nationally-branded retailers.
The Company believes it can use its industry experience to give efficacy to its processes
and provide homeowners with quality assurance. |
| |
| |
• |
|
Cleaning and Fabric Protection: Through FSS, we provide fabric protection services to
protect furniture, carpet and draperies from stains and daily wear through both
Company-owned locations and over forty licensed locations. This niche market is primarily
targeted at above-average income homeowners with an average job of approximately $400. We
also provide air duct cleaning services to remove particulate (organic and inorganic)
material, which can cause allergic reactions and is often the breeding ground for many
types of mold, from heating and air conditioning systems. |
Interior Services
Through our wholly-owned subsidiaries, Southern Exposure and Cornerstone, we offer cabinet and
countertop installation services. 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 the acquisition of Cornerstone, which installs custom marble and granite countertops for
residential customers. Currently, we manufacture cabinets and install cabinets and kitchen
countertops for Centex Corporation (“Centex”), one of the largest homebuilders in the nation, in
its southwest Florida market. We also install granite countertops for Home Depot, Inc. (“Home
Depot”) in Florida, Georgia, Alabama and South Carolina. The Home Depot contract may be terminated
at any time upon notice to us. Furthermore, Home Depot is not obligated to use our services under
these contracts. We have no contract with Centex, and Centex is not obligated to buy our products
or use our services. We also have granite fabrication and installation operations in Southern
California which services the residential and multi-family markets.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Home Solutions and its
wholly and 50% owned subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. The minority owner’s interest in a subsidiary has been reflected
as minority interest in the accompanying consolidated balance sheets.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with accounting principles
generally accepted in the United States of America. For certain of the Company’s financial
instruments, including cash, accounts receivable, note receivable, accounts payable and accrued
expenses, the carrying amounts approximate fair value due to their short maturities. The fair
values of long-term debt and capital lease obligations approximate their carrying values due to
their short-term maturities or their generally variable interest rate terms.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of the contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by management include, among
others, the realizability of accounts and notes receivable, inventories, recoverability of property
and equipment, intangibles and goodwill and valuation of stock-based compensation and deferred tax
assets. Actual results could differ from these estimates.
28
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk,
consist of cash and receivables. The Company places its cash with financial institutions and may
exceed the Federal Deposit Insurance Corporation (“FDIC”) $100 insurance limit. At December 31,
2006, the Company had approximately $7,317 in these accounts in excess of the FDIC insurance
limits.
The Company offers its services predominately in the states of California, Texas, Louisiana and
Florida, and it extends credit based on an evaluation of a customer’s financial condition,
generally without collateral. Exposure to losses on accounts receivable is principally dependent
on each customer’s financial condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses, if required. Although the Company expects to collect
amounts due, actual collections may differ from the estimated amounts.
Two customers accounted for approximately 10% and 12% of total sales for the year ended December
31, 2006. One customer accounted for approximately 42% of accounts receivable as of December 31,
2006. In 2005 two customers accounted for approximately 17% and 23% of total sales for the year
and one customer accounted for approximately 52% of accounts
receivable. In 2004, one customer accounted for approximately 28% of
total sales.
In June
2006 Southern Family Insurance (“Southern”) was placed in
liquidation. Southern was the insurance carrier on Fireline’s
two significant customers. At December 31, 2006, the Company
had accounts receivable and recoverable costs from these customers aggregating
approximately $25,829. In order to protect its interests the Company
has filed a claim with the Florida Insurance Guarantee Association
(“FIGA”). Southern was an admitted insurance carrier in
Florida and state statutes insures the payment of valid claims by the
FIGA. FIGA has certified the Company’s claims as valid. Should the
Company be unable to collect the balances due, it
may have to initiate legal action. Unpaid balances related to this
receivable or any other account receivable balance acquired up to a
maximum of $19,400 would reduce the payment due on the
note payable to the seller described in Note 3. In addition, to
the right of offset against the seller note, the Company has lien
rights against the property in which the work related to the FIGA
claim was performed. The Company estimates that the amounts collected
will be between $24,000 and $30,000 and that any amounts not collected
will be applied against the amounts due on the note payable to the
seller.
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the straight-line method
over the estimated useful lives of the related assets, ranging from three to 20 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the estimated useful
lives of the assets or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful life or the term of the lease. Maintenance
and routine repairs are charged to expense as incurred. Significant renewals and betterments are
capitalized. At the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting gain or loss is
reflected in the consolidated statements of income.
Long-Lived Assets
The Company’s management assesses the recoverability of its long-lived assets upon the occurrence
of a triggering event by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted future cash flows. The
amount of long-lived asset impairment, if any, is measured based on fair value and is charged to
operations in the period in which long-lived asset impairment is determined by management. At
December 31, 2006 and 2005, the Company’s management believes there is no impairment of its long-lived
assets. There can be no assurance, however, that market conditions will not change or demand for
the Company’s products and services will continue, which could result in impairment of long-lived
assets in the future.
Inventories
Inventories
consist almost entirely of granite slabs and are valued at the lower of cost or market. As part of the
valuation process, excess and slow-moving inventories are reduced to their estimated net realizable
value.
Intangibles
Identifiable intangibles acquired in connection with business acquisitions accounted for under the
purchase method are recorded at their respective fair values. The Company is amortizing the
identifiable intangibles over their estimated useful lives, ranging from six to twenty years.
Intangibles consist of the following at December 31, 2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated Useful |
|
| |
|
Balance |
|
|
Life (Years) |
|
Trade name |
|
$ |
4,540 |
|
|
|
15 |
|
Customer list |
|
|
4,100 |
|
|
|
15 |
|
Supply agreement |
|
|
1,350 |
|
|
|
20 |
|
Non –compete |
|
|
441 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
10,431 |
|
|
|
|
|
Accumulated amortization |
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Amortization
expense totaled $769, $626 and $216 for the years ended December 31, 2006, 2005 and
2004 respectively. The estimated amortization for the next five years is as follows:
| |
|
|
|
|
2007 |
|
$ |
725 |
|
2008 |
|
|
725 |
|
2009 |
|
|
725 |
|
2010 |
|
|
725 |
|
2011 |
|
|
725 |
|
Goodwill
Goodwill represents the excess of acquisition cost over the net assets acquired in a business
combination and is not amortized in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 142 require
that the Company allocate its goodwill to its various reporting units, determine the carrying value
of those businesses, and estimate the fair value of the reporting units so that a two-step goodwill
impairment test can be performed. In the first step of the goodwill impairment test, the fair
value of each reporting unit is compared to its carrying value. Management reviews, on an annual
basis, the carrying value of goodwill in order to determine whether impairment has occurred.
Impairment is based on several factors including the Company’s projection of future discounted
operating cash flows. If an impairment of the carrying value were to be indicated by this review,
the Company would perform the second step of the goodwill impairment test in order to determine the
amount of goodwill impairment, if any.
The
changes in the carrying amount of goodwill for the years ended
December 31, 2005 and 2006 are as follows:
(see Note 3 – Acquisitions and Disposals):
| |
|
|
|
|
Balance as of December 31, 2004 |
|
$ |
19,853 |
|
Goodwill acquired during the year ended December 31, 2005 |
|
|
22,029 |
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
41,882 |
|
Goodwill acquired during the year ended December 31, 2006 |
|
|
80,271 |
|
Goodwill adjustment related to the FERS net assets acquired |
|
|
347 |
|
|
|
|
|
Balance as of December 31, 2006 |
|
$ |
122,500 |
|
|
|
|
|
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in Financial Statements, as revised by SAB No. 104. As such, the Company
recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred,
the price is fixed or readily determinable and collectibility is probable. Sales are recorded net
of sales discounts.
PWS, FSS, HSR of Louisiana and Fireline recognize revenue at the time the contract and related
services are performed.
Southern Exposure and Cornerstone recognize revenue for product sales at the time the related
products are shipped to the customer. These subsidiaries recognize revenue for installation jobs
upon complete installation of the cabinets or countertops and inspection by the customer. Deferred
revenue represents amounts billed to customers and collected prior to completion of the
installation of the cabinets or countertops and inspection by the customer.
Cornerstone
recognized revenue from its building and remodeling jobs using the percentage of
completion method for financial reporting purposes. Under the percentage of completion method,
revenues with respect to individual contracts are recognized in the proportion that costs incurred
to date bear to total estimated costs. Revenue and costs estimates are subject to revision during
the terms of the contracts and any required adjustments are made in the periods in which the
revisions become known. To the extent that these adjustments result in an increase, a reduction or
an elimination of previously reported contract profit, we recognize a credit, or a charge against
current earnings, which could be material. General and administrative costs are not allocated to
contract costs and are charged to expense as incurred. The portion of the business that used the
percentage of completion method had revenues of approximately $4,200 and a net loss (after tax
benefit) of $1,400. At December 31, 2005, the costs in excess of billings (asset) were $337, and
the billings in excess of costs (liability) were $287. During
the year ended Dec 31, 2006, the Company disposed of this division
(see Note 3).
Fireline
and Associated also recognize revenue from certain jobs using the percentage-of-completion method.
Under the percentage of completion method, revenues with respect to individual contracts are
recognized in the proportion that costs incurred to date bear to total estimated costs and progress
towards completion. These estimates are dependent upon judgments including material costs and
quantities, labor productivity, subcontractor performance and other costs. In addition, disputes
on our projects can and sometimes do occur with our customers, subcontractors and equipment vendors
that require significant judgment as to the ultimate resolution and may take an extended period of
time to resolve. As projects are executed, estimates of total revenues and total costs at
completion are
30
refined and revised. These estimates change due to factors and events affecting execution and
often include estimates for resolution of disputes that may be settled in negotiations or through
arbitration, mediation or other legal methods. The percentage-of-completion method requires that
adjustments to estimated revenues and costs, including estimated claim recoveries, be recognized on
a cumulative basis, when the adjustments are identified. When these adjustments are identified
near or at the end of a project, the full impact of the change in estimate would be recognized as a
change in the gross profit on the contract in that period. This can result in a material impact on
our results for a single reporting period. General and administrative costs are not allocated to
contract costs and are charged to expense as incurred.
The business segment that used the percentage of completion method had revenues of
$88,754, and operating income of $32,282 for the year. At December 31, 2006, the costs in excess of
billings (asset) were $6,292, and the billings in excess of costs (liability) were $688. Should
these accounts be written off, the Company would recognize a loss of approximately $5,604
Costs in Excess of Billings
Uncompleted contracts at December 31, 2006 were as follows:
| |
|
|
|
|
Costs incurred on uncompleted contracts |
|
$ |
28,641 |
|
Estimated earnings |
|
|
13,707 |
|
|
|
|
|
|
|
|
42,348 |
|
Billings to date |
|
|
(36,744 |
) |
|
|
|
|
|
|
$ |
5,604 |
|
|
|
|
|
|
|
|
|
|
Costs in excess of billings |
|
$ |
6,292 |
|
Billings in excess of costs |
|
|
(688 |
) |
|
|
|
|
|
|
$ |
5,604 |
|
|
|
|
|
Stock-Based Compensation
At December 31, 2006, the Company maintained two shareholder-approved stock-based incentive
compensation plans that permit the issuance of equity-based compensation awards to employees,
qualified consultants and directors, including stock options and stock purchase rights. Prior to
January 1, 2006, the Company accounted for these plans under the recognition and measurement
provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by SFAS No. 123, Accounting for Stock Based
Compensation. During the year ended December 31, 2005 and
2004, compensation expense of $952 and $0, respectively was
recognized in the accompanying consolidated statements of income for options issued to employees
below market value or for variable-priced options pursuant to APB No. 25.
On January 1, 2006, the first day of the Company’s fiscal year 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the
modified-prospective transition method. Under this transition method, compensation cost recognized
in the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments
granted and not yet vested prior to January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to December 31, 2005 based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not
been restated. Since stock-based compensation expense recognized in the consolidated statements of
income for the year ended December 31, 2006 is based on awards ultimately expected to vest, the
compensation expense has been reduced for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The
estimated average forfeiture rate for the year ended December 31,
2006 of approximately 2% was based on historical forfeiture
experience and estimated future employee forfeitures. In the
Company’s proforma information required under SFAS No. 123(R)
for the periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
The Company calculates stock-based compensation by estimating the fair value of each option using
the Black-Scholes option pricing model. The Company’s determination of fair value of share-based
payment awards is made as of their respective dates of grant using that option pricing model and
is affected by the Company’s stock price as well as a number of subjective assumptions. These
variables include, but are not limited to, the Company’s expected stock price volatility over the
term of the awards and actual and projected employee stock option exercise behavior. The expected
term of options granted is derived from historical data on employee exercises and post-vesting
employment termination behavior. The risk-free rate selected to value any particular grant is
based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of
the date of the grant. The expected volatility is based on the historical volatility of the
Company’s stock price. These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods. The Black-Scholes option pricing model was
developed for use in estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because the Company’s options have certain
characteristics that are significantly different from traded options, the existing valuation models
may not provide an accurate measure of the fair value of the Company’s options. Although the fair
value of the Company’s options is determined in accordance with SFAS No. 123(R) using an
option-pricing model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. The calculated compensation cost is recognized on a
straight-line basis over the vesting period of the options.
31
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the statement of cash
flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefit) to
be classified as financing cash flows. The $9,121 excess tax benefit classified as a financing
cash inflow during the year ended December 31, 2006, would have been classified as an operating
cash inflow if the Company had continued to account for its share-based payments under APB No. 25.
For the
year ended December 31, 2006, the Company recognized
compensation cost of $840, which is included in selling, general and administrative expenses in the
accompanying consolidated statements of income, as a result of the adoption of SFAS No. 123(R).
The effect of the change in applying the provisions of SFAS
No. 123(R) resulted in changing
income from continuing operations, income before taxes, net income and basic and diluted earnings
per share for the year ended December 31, 2006 as follows:
| |
|
|
|
|
|
|
|
|
| |
|
For the Year Ended |
|
| |
|
December 31, 2006 |
|
| |
|
SFAS 123R |
|
|
APB 25 |
|
Income from continuing operations
before income
taxes and minority interest |
|
$ |
28,686 |
|
|
$ |
26,418 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,898 |
|
|
$ |
16,537 |
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.44 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.43 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
The following table illustrates the effect on net income and net income per share for the years
ended December 31, 2005 and 2004 as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to options granted under the Company’s stock plans. For purposes of
this pro forma disclosure, the fair value of the options is estimated using the Black Scholes
option-pricing model and amortized on a straight-line basis to expense over the options’ vesting
period:
| |
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
7,185 |
|
|
$ |
2,563 |
|
Add: Share-based employee compensation expense included
in net income, net of related tax effects, as reported |
|
|
581 |
|
|
|
— |
|
Deduct: Share-based employee compensation expense
determined under the fair value method, net of related tax
tax effects – pro forma |
|
|
(1,546 |
) |
|
|
(970 |
) |
| |
|
|
Net income – pro forma |
|
$ |
6,220 |
|
|
$ |
1,593 |
|
|
|
|
|
|
|
|
|
|
Net income per common share, as reported
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.11 |
|
| |
|
|
Diluted |
|
$ |
0.25 |
|
|
$ |
0.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, proforma
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
0.10 |
|
| |
|
|
Diluted |
|
$ |
0.21 |
|
|
$ |
0.09 |
|
| |
|
|
Stock Plans
The Company maintains the 1998 Stock Option Plan (the “1998 Plan”) and the 2001 Stock Plan
(the “2001 Plan” and collectively, the “Stock Plans”). The Stock Plans are shareholder approved
stock-based incentive compensation plans that permit the issuance of equity-based compensation
awards, including incentive stock options, nonqualified stock options and stock purchase rights.
Under the Stock Plans, incentive stock options have been granted to employees, and non-qualified
stock options have been granted to employees, qualified consultants and board members. Stock
purchase rights, which are available under the 2001 Plan, have been granted to directors. The
compensation committee serves as the administrator of the 1998 Plan, and the entire board of
directors serves as the
32
administrator of the 2001 Plan. The administrator of each Stock Plan determines eligibility,
vesting schedules and exercise prices for awards granted under the Stock Plan which it administers.
The Company issues new shares or shares held in treasury to satisfy award exercises under its
Stock Plans.
A summary of the shares reserved for grant and awards available for grant under each Stock Plan is
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
| |
|
Shares Reserved |
|
|
Awards Available |
|
| |
|
for Grant |
|
|
for Grant |
|
1998 Stock Plan |
|
|
3,500 |
|
|
|
393 |
|
2001 Stock Plan |
|
|
6,500 |
|
|
|
2,948 |
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
3,341 |
|
The Company issues awards to employees, qualified consultants and directors that generally vest
over time based solely on continued employment or service during the related vesting period and are
exercisable over a five to ten year service period. Typically, employee awards vest monthly over a
three year period, although awards are sometimes granted with immediate vesting and in certain
cases, vesting of awards has been accelerated. Options are generally granted with an exercise
price equal to the market price of the Company’s stock at the date of grant, although in certain
instances, the exercise price has been higher than the market price on the date of grant.
Directors have typically received immediately vested share purchase rights at an exercise price of
$-0- per share, which are subject to forfeiture on a proportionate basis in the event that a
director’s service terminates prior to the end of the current board term.
The fair value of each stock-based award is estimated on the grant date using the Black Scholes
option-pricing model. Expected volatilities are based on the historical volatility of the
Company’s stock price. The expected term of options granted subsequent to the adoption of SFAS No.
123(R) is derived using the simplified method as defined in the SEC’s SAB No. 107, Implementation
of FASB 123R. The risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury interest rates in effect at the time of grant. The fair value of options granted
was estimated using the following weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
Expected term (in years) |
|
|
6.5 |
|
|
|
5 |
|
|
|
3 |
|
Expected volatility |
|
|
77 |
% |
|
|
65 |
% |
|
|
57 |
% |
Risk-free interest rate |
|
|
4.6 |
% |
|
|
3.5 |
% |
|
|
1.6 |
% |
Dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
A summary
of activity under the Stock Plans and changes during the years ended
December 31, 2004, 2005 and 2006 is
presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
Outstanding
at December 31, 2003 |
|
|
2,500 |
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,025 |
|
|
|
1.69 |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(68 |
) |
|
|
1.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2004 |
|
|
4,457 |
|
|
|
1.64 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,079 |
|
|
|
2.88 |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(5 |
) |
|
|
1.50 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(800 |
) |
|
|
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
4,731 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,120 |
|
|
|
4.76 |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(75 |
) |
|
|
1.25 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,879 |
) |
|
|
1.62 |
|
|
|
|
|
|
$ |
33,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,897 |
|
|
$ |
4.31 |
|
|
|
7.0 |
|
|
$ |
3,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest |
|
|
1,882 |
|
|
$ |
4.31 |
|
|
|
7.0 |
|
|
$ |
3,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
1,131 |
|
|
$ |
3.20 |
|
|
|
5.2 |
|
|
$ |
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $3,719 of
total unrecognized compensation cost, net of forfeitures, related to
unvested employee and director stock option compensation arrangements. That cost is expected to be
recognized on a straight-line basis over the next 2.5 weighted average years. The total fair value
of shares vested for the year ended December 31, 2006 was $840, net of an estimated forfeiture rate
of 2%.
33
Summary of Restricted Stock Awards
Restricted stock awards are independent of option grants and are generally subject to forfeiture if
employment terminates or a member of the Company’s board of directors resigns prior to the release
of the restrictions. The Company expenses the cost of the restricted stock awards, which is
determined to be the fair market value of the shares at the date of grant, ratably over the period
during which the restrictions lapse.
Nonvested restricted stock awards as of December 31, 2006 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
Number |
|
|
Grant Date |
|
| |
|
of Shares |
|
|
Fair Value |
|
Nonvested at December 31, 2005 |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
363 |
|
|
|
5.66 |
|
Vested |
|
|
(160 |
) |
|
|
4.73 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006 |
|
|
203 |
|
|
$ |
6.40 |
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $1,298 of unrecognized stock-based compensation expense related
to nonvested restricted stock awards. That cost is expected to be recognized over a
weighted-average period of 1.5 years. The Company recorded $484
and $256 of compensation expense in 2006 and 2005, respectively,
related to the vesting of restricted stock awards.
Issuance
of Stock for Non-Cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount
equaling either the market value of the shares issued or the value of consideration received,
whichever is more readily determinable. The majority of the non-cash consideration received
pertains to services rendered by consultants and others and have been valued at the market value of
the shares issued. In certain issuances, the Company may discount the value assigned to the issued
shares for illiquidity and restrictions on resale.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation
allowance is provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
Comprehensive Income
During the periods presented, the Company had no items of comprehensive income and, therefore, has
not presented a statement of comprehensive income.
Per Share Data
Basic earnings per share (“BEPS”) are computed by dividing income available to common stockholders
by the weighted average number of outstanding common shares during the period of computation.
Diluted earnings per share (“DEPS”) give effect to all potential dilutive common shares outstanding
during the period of computation. The computation of DEPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on earnings.
34
The
following tables reconcile BEPS and DEPS and the related weighted average number of shares
outstanding for the years ended December 31, 2006, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, 2006 |
|
| |
|
Numerator |
|
|
Denominator |
|
|
Per Share |
|
| |
|
(Income) |
|
|
(Shares) |
|
|
Amount |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
|
17,898 |
|
|
|
41,039 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants |
|
|
— |
|
|
|
1,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
17,898 |
|
|
|
42,058 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, 2005 |
|
| |
|
Numerator |
|
|
Denominator |
|
|
Per Share |
|
| |
|
(Income) |
|
|
(Shares) |
|
|
Amount |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,185 |
|
|
|
|
|
|
|
|
|
Less: convertible preferred stock dividends |
|
|
(137 |
) |
|
|
|
|
|
|
|
|
Less: amortization of convertible preferred stock
issuance costs and beneficial conversion feature |
|
|
(587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
|
6,461 |
|
|
|
23,210 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants |
|
|
— |
|
|
|
3,105 |
|
|
|
|
|
| |
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
6,461 |
|
|
|
26,315 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, 2004 |
|
| |
|
Numerator |
|
|
Denominator |
|
|
Per Share |
|
| |
|
(Income) |
|
|
(Shares) |
|
|
Amount |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,563 |
|
|
|
|
|
|
|
|
|
Less: convertible preferred stock dividends |
|
|
(159 |
) |
|
|
|
|
|
|
|
|
Less: amortization of convertible preferred stock
issuance costs and beneficial conversion feature |
|
|
(640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
|
1,764 |
|
|
|
16,393 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants |
|
|
— |
|
|
|
799 |
|
|
|
|
|
| |
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
1,764 |
|
|
|
17,192 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) finalized and issued Interpretation
No. 48, (“FIN 48”), entitled Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, which defines the threshold for recognizing the benefits of tax return
positions as well as guidance regarding the measurement of the resulting tax benefits. FIN 48
35
requires a company to recognize for financial statement purposes the impact of a tax position if
that position is “more likely than not” to prevail (defined as a likelihood of more than fifty
percent of being sustained upon audit, based on the technical merits of the tax position). FIN 48
will be effective as of the beginning of the Company’s fiscal year ending December 31, 2007, with
the cumulative effect of the change in accounting principle recorded as an adjustment to retained
earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial
statements.
In September 2006, the SEC Staff issued SAB No. 108 to require registrants to quantify financial
statement misstatements that have been accumulating in their financial statements for years and to
correct them, if material, without restating. Under the provisions of SAB No. 108, financial
statement misstatements are to be quantified and evaluated for materiality using both balance sheet
and income statement approaches. SAB No. 108 is effective for fiscal years ending after November
15, 2006. The adoption of this pronouncement did not have a material impact on the Company’s
result of operations or financial condition.
In
September 2006, the FASB issued SFAS No. 157, entitled
Fair Value Measurements, to
define fair value, establish a framework for measuring fair value and expand disclosures about fair
value measurements. This statement provides guidance related to the definition of fair value, the
methods used to measure fair value and disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating the impact of
adopting SFAS No. 157 on its financial statements.
NOTE 2
– PROPERTY AND EQUIPMENT
Property
and equipment is summarized as follows at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005: |
|
Machinery
and equipment |
|
$ |
3,781 |
|
|
$ |
1,577 |
|
Automobile
and truck |
|
|
2,521 |
|
|
|
1,386 |
|
Land and
building |
|
|
900 |
|
|
|
— |
|
Computer
equipment |
|
|
398 |
|
|
|
120 |
|
Office
equipment, furniture and leasehold improvements |
|
|
961 |
|
|
|
348 |
|
| |
|
|
Total |
|
|
8,561 |
|
|
|
3,431 |
|
Less:
accumulated depreciation and amortization |
|
|
(2,432 |
) |
|
|
(965 |
) |
| |
|
|
Property and
equipment, net |
|
$ |
6,129 |
|
|
$ |
2,466 |
|
| |
|
|
Depreciation
and amortization expense for property and equipment for the years
ended December 31, 2006 and 2005 was $854 and $568,
respectively.
NOTE 3 – ACQUISITIONS AND DISPOSALS
Associated Contractors, LLC Acquisition
On
October 26, 2006, HSR of Louisiana acquired certain net assets of Associated, a Louisiana limited liability company
engaged in providing construction and rebuilding services to commercial and residential properties.
The acquisition closed on October 26, 2006, and was effective on October 1, 2006.
Consideration paid or to be paid to the prior owners of Associated in connection with the merger
includes the following: (i) up to $9,000 in cash to be paid from accounts receivable of the
Associated division of HSR of Louisiana (the “Associated Division”) collected in the two-year
period following the closing; (ii) 1,500 shares of Home Solutions’ restricted common stock, issued
at the closing; and (iii) additional shares of common stock not to exceed $9,001 in value and in
any event, not to exceed 900 shares, to be issued if and when necessary to cause the aggregate fair
market value at the date of acquisition of the common stock issued to the prior owners of Associated to exceed by one dollar,
the cash consideration paid to the prior owners of Associated under
clause (i) above. The Company has recorded $9,855 as “amounts due
to Seller” in the accompanying consolidated balance sheets. In addition,
the Company issued warrants to the prior owners of Associated exercisable for up to 2,000
additional shares of common stock at an exercise price of $0.01 per share, that vest and become
exercisable in increments of 100 shares for every $2,500 in earnings before interest, taxes,
depreciation and amortization (“EBITDA”) in excess of $9,000 in EBITDA earned by the Associated
Division in the two-year period following the closing. The Company also agreed to pay the prior
owners of Associated 5% of the net profits earned and collected by the Associated Division related
to a specified future accounts receivable.
The Merger Agreement contains various customary representations, warranties, covenants and
agreements of the parties. The Company also agreed to indemnify the prior owners of Associated
from personal guarantees entered into in connection with the business of Associated prior to the
merger and to use commercially reasonable efforts to remove such persons from the personal
guarantees after the closing. The prior owners of Associated agreed not to compete with the
Associated Division for two years after the closing.
36
The purchase price was comprised of the following:
| |
|
|
|
|
Estimated value of common stock issued to seller |
|
$ |
8,145 |
|
Amounts due
to seller |
|
|
9,855 |
|
Estimated legal, accounting and financing costs |
|
|
62 |
|
|
|
|
|
|
|
$ |
18,062 |
|
|
|
|
|
The purchase price was tentatively allocated as follows:
| |
|
|
|
|
Current assets |
|
|
7,149 |
|
Property and equipment |
|
|
17 |
|
Current liabilities |
|
|
(10,776 |
) |
|
|
|
|
Estimated fair value of tangible net liabilities acquired |
|
|
(3,610 |
) |
Goodwill |
|
|
21,672 |
|
|
|
|
|
|
|
$ |
18,062 |
|
|
|
|
|
The Company has tentatively classified the excess of the purchase price over the estimated fair
value of the tangible net assets acquired as goodwill as of December 31, 2006 in the accompanying
consolidated balance sheet. The Company is in the process of analyzing the components of the
intangible assets and will have an appraisal completed by a third party during 2007 to assist the
Company in determining its final purchase price allocation.
Fireline Restoration, Inc.
On
July 31, 2006, the Company consummated the acquisition of all of
the common stock of Fireline, a privately held provider of
recovery and restoration services throughout Florida, Louisiana and Mississippi, pursuant to a
purchase agreement entered into among Fireline, the owner of Fireline and the Company, which was
effective July 1, 2006.
The purchase price was comprised of the following:
| |
|
|
|
|
Cash paid to the seller in July 2006 |
|
$ |
11,500 |
|
Note payable to seller (see Note 5 – Debt) |
|
|
21,650 |
|
Estimated value of common stock issued to seller |
|
|
22,148 |
|
Estimated legal, accounting and other costs |
|
|
2,211 |
|
|
|
|
|
|
|
$ |
57,509 |
|
|
|
|
|
The purchase price was tentatively allocated as follows:
| |
|
|
|
|
Current assets |
|
|
25,104 |
|
Property and equipment |
|
|
1,578 |
|
Other assets |
|
|
75 |
|
Current liabilities |
|
|
(25,992 |
) |
Long-term liabilities |
|
|
(443 |
) |
|
|
|
|
Estimated fair value of tangible net assets acquired |
|
|
322 |
|
Goodwill |
|
|
57,186 |
|
|
|
|
|
|
|
$ |
57,508 |
|
|
|
|
|
The Company has tentatively classified the excess of the purchase price over the estimated fair
value of the tangible net assets acquired as goodwill as of December 31, 2006 in the accompanying
consolidated balance sheet. The Company is in the process of analyzing the components of the
intangible assets and will have an appraisal completed by a third party during 2007 to assist the
Company in determining its final purchase price allocation.
The following proforma information presents the results of operations for the years ended December
31, 2006 and 2005, as though the Fireline and Associated acquisitions had occurred on January 1,
2005.
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
|
(unaudited) |
|
(unaudited) |
Revenues |
|
$ |
141,902 |
|
|
$ |
120,979 |
|
Net Income |
|
|
13,446 |
|
|
|
8,677 |
|
Shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
45,076 |
|
|
|
29,210 |
|
Diluted |
|
|
46,095 |
|
|
|
32,315 |
|
Basic earnings per share |
|
|
0.30 |
|
|
|
0.30 |
|
Diluted earnings per share |
|
|
0.29 |
|
|
|
0.25 |
|
37
Cornerstone Building and Remodeling Division
During the fourth quarter of 2005, the Company’s management committed to a plan to dispose of
certain assets and liabilities of its building and remodeling division, which was acquired in April
2005.
On March 24, 2006, the Company entered into an asset purchase agreement to sell certain assets and
liabilities used in connection with the operation of the building and remodeling division of
Cornerstone. The sales price included $500 in
cash paid at closing and $3,000 as a note receivable. The Company does not consider the
disposition to be significant to the Company’s operations, and does not consider the agreements
entered into in connection with the disposition to be material to the Company. During 2006, the
note receivable was paid in full through the receipt of cash of $875 and transferring inventory to
the Company valued at $2,125.
In accordance with SFAS No. 144, Accounting for the Impairment of Disposal of Long Lived Assets,
the assets and liabilities related to this transaction have been segregated from continuing
operations and are reported as assets and liabilities of discontinued operations held for sale in
the accompanying balance sheets, all of which were liquidated as of December 31, 2006. In
addition, operations associated with these assets and liabilities and the gain on the sale have
been classified as income (loss) from discontinued operations in the accompanying consolidated
statements of income.
Discontinued operations’ results were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Results of discontinued operations: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
514 |
|
|
$ |
4,213 |
|
| |
|
|
Loss before income taxes |
|
|
(478 |
) |
|
|
(2,190 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations: |
|
|
|
|
|
|
|
|
Sales price |
|
|
3,500 |
|
|
|
— |
|
Net assets sold |
|
|
(323 |
) |
|
|
— |
|
| |
|
|
Gain on sale |
|
|
3,177 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
before income taxes |
|
|
2,699 |
|
|
|
(2,190 |
) |
Income taxes |
|
|
(958 |
) |
|
|
745 |
|
| |
|
|
Income (loss) from discontinued operations |
|
$ |
1,741 |
|
|
$ |
(1,445 |
) |
| |
|
|
Other Acquisitions
During
2006, the Company consummated three additional acquisitions. The acquisitions were accounted
for as purchases. The combined purchase price was $1,290, payable in promissory notes of $745 and
cash of $545. The excess of the purchase price over the tangible net assets acquired of $1,413 was
assigned to goodwill at December 31, 2006 in the accompanying consolidated balance sheet. Proforma
disclosure information is not presented because the operations acquired are not considered
significant to the Company.
NOTE 4 – NOTES RECEIVABLE
As of December 31, 2006, the Company has a note receivable with a balance of $750. The note
receivable, as amended, required payments to the Company of $150 paid in March 2006, to be followed
by semi-annual payments of $188 commencing on June 30, 2006 and a final payment on December 31,
2007. The note receivable is personally guaranteed by a third party. The Company
recorded this note receivable with an implicit rate of 4.55%. The
Company received a principal payment of
$260 in March 2007. The Company’s management does not believe a reserve is necessary at this time.
On May 24, 2006, the Company entered into an exclusive agreement with a modular housing sales agent
to provide installation services for modular housing in New Orleans and surrounding areas. In
connection with the agreement, the Company agreed to advance the sales agent up to $800 under a
promissory note. The note required one balloon installment of all accrued but unpaid interest and
all outstanding principal on August 17, 2006. In August 2006, the note was restructured to change
the maturity date to February 2007, for the debtor to provide security for the indebtedness
evidenced by the Note, to require a portion of proceeds from sales of modular houses to be used to
pay down the note, and to provide for certain other additional terms and conditions. The note is
38
secured by real estate and modular home units and bears interest at the prime rate of interest plus
2% on a per annum basis. At December 31, 2006,
the note receivable balance was $703 and accrued interest payable of $33. In February 2007, the
Company received a $100 principal payment on the receivable. The note is in the process of being
extended to June 30, 2007.
NOTE 5 – DEBT
On November 1, 2006, the Company obtained a $60,000 credit facility from a group of lenders led by
a national bank as the administrative agent. The new credit facility, which replaces the Company’s
previous $10,000 line of credit, was obtained to support the Company’s working capital requirements
and reduces the overall borrowing costs of the Company.
The credit facility provides for a $15,000 term loan (the “Term Loan”) and a line of credit of up
to $45,000 (the “Line of Credit”). The credit facility was established under a Credit Agreement
entered into among the Company and the lenders dated November 1, 2006 (the “Credit Agreement”).
The proceeds of the Term Loan were used to refinance outstanding debt of Fireline, a wholly-owned
subsidiary of the Company. The proceeds of the Line of Credit will be used primarily for working
capital purposes. Each lender’s commitment to fund its share of the Term Loan and the Line of
Credit is evidenced by a promissory note executed by the Company in favor of such lender.
The Company can borrow, repay and reborrow principal under the Line of Credit from time to time
during its term. Revolving credit advances require a minimum draw of $1,000. The amount of
principal available to be drawn under the Line of Credit may not exceed the borrowing base, less
the sum of (a) outstanding principal drawn under the Line of Credit, plus (b) the outstanding
principal amount of the Term Loan, plus (c) the aggregate amount of all outstanding letters of
credit. For purposes of the Credit Agreement, the “borrowing base” is defined for each period of
determination as the sum of (a) 80% of the value of eligible accounts receivable, plus (b) 50% of
the value of certain designated receivables through June 30, 2007, plus (c) the lesser of (i)
$5,000 and (ii) 50% of the value of eligible inventory. Eligible accounts receivable includes
accounts receivable generated in the ordinary course of business that satisfy the Agent’s
conditions, and excludes certain unacceptable accounts receivable, such as accounts more than 180
days past due. Eligible inventory includes granite materials held for sale in the ordinary course
of business, valued at the lower of cost or fair market value, excluding inventory that does not
meet the Agent’s standards.
The annual interest rate on the Term Loan and the Line of Credit is equal to the higher of (a) the
prime rate of interest as quoted in the Wall Street Journal, less 25 basis points (0.25%) for
periods prior to June 30, 2007, and less 50 basis points (0.50%) for periods after June 30, 2007,
or (b) the federal funds rate, as published by the Federal Reserve Bank of New York, plus 25 basis
points (0.25%) for periods prior to June 30, 2007. Accrued interest payments on the outstanding
principal balance of the Line of Credit are due quarterly. Principal under the Line of Credit is
due at maturity, or November 1, 2009. Payments on the Term Loan, consisting of $1,250 in principal
and accrued interest, are due quarterly beginning January 1, 2007. The credit facility expires,
and all outstanding obligations under the Line of Credit and the Term Loan must be repaid to the
lenders, on the maturity date of November 1, 2009.
In
consideration of the lenders originating the credit facility, the Company paid the Lenders an
origination fee in the amount of $300. The Company is also obligated to pay an unused facility fee
on the daily average unused amount of the Line of Credit equal to fifty basis points (0.50%) per
annum, calculated and payable quarterly in arrears.
The lenders agreed to issue letters of credit under the Line of Credit to fund bonding required for
certain reconstruction projects in an amount not to exceed $7,500 in the aggregate, subject to the
sum of (a) cash advanced under the Line of Credit, plus (b) amounts outstanding under the Term
Note, plus (c) the aggregate amount of all outstanding letters of credit, not being in excess of
the borrowing base. Pursuant to the terms of the Credit Agreement, for each letter of credit
issued by the lenders, the Company agrees to pay an annual letter of credit fee equal to 2.0% of
the face amount of the letter of credit, but not less than $5, plus other fees charged
under the lenders’ then-current policies.
The Line of Credit and Term Loan are secured by substantially all of the assets of the Company and
its subsidiaries and the capital stock of such subsidiaries pursuant to a Pledge and Security
Agreement (the “Security Agreement”). The Line of Credit and Term Loan are guaranteed by the
subsidiaries of Home Solutions pursuant to a Guaranty Agreement (the “Guaranty Agreement”).
The Credit Agreement contains covenants, including financial covenants, with which Home Solutions
and its subsidiaries must comply. The financial covenants include a current assets to current
liabilities ratio, a debt service coverage ratio, a maximum leverage amount, and a limit on annual
capital expenditures. With certain exceptions, the Company is prohibited under the Credit
Agreement from incurring or permitting its subsidiaries to incur any debt or permitting any liens
to be placed on its assets or the assets of its subsidiaries. The Company also agreed, with
certain exceptions, not to take or permit its subsidiaries to take certain actions without the
consent of a supermajority of the lenders, including becoming a party to a merger or consolidation,
acquiring assets, and issuing securities.
39
If a default occurs under the Credit Agreement for Home Solutions’ failure to pay any amount when
due, Home Solutions’ breach of the Credit Agreement or another
event of default, the lenders may
declare the credit facility to be due and payable immediately. In
such event, the lenders may
exercise any rights or remedies it may have, including foreclosure of
the Company’s assets or the
capital stock of Home Solutions’ subsidiaries, under the Security Agreement or enforcement of its
rights under the Guaranty Agreement. Any such event may materially impair the Company’s ability to
conduct its business.
Brian Marshall, a director of the Company and the President of Fireline, agreed to subordinate the
indebtedness owed to him by Home Solutions under an outstanding promissory note in the principal
amount of $21,650 to the Lenders, pursuant to a subordination agreement entered into by him in
favor of the Lenders.
Debt consists of the following at December 31, 2006:
| |
|
|
|
|
Lines of Credit |
|
|
|
|
Revolving credit note payable to bank, interest of prime less
..25% and matures on November, 2009. At December 31, 2006 the
interest rate was 8.00%. |
|
$ |
13,111 |
|
|
|
|
|
| |
Notes Payable |
|
|
|
|
Note payable to bank, interest of prime less .25%. Interest and
principal payable quarterly beginning January 1, 2007. The note
payable matures November 2009. At December 31, 2006 the interest
rate was 8%. In January 2007 the Company paid $1,649 in
principal and accrued interest payable on the note. |
|
$ |
15,000 |
|
| |
Note payable, non-interest bearing, payable in $5 monthly
installments until paid in full to the seller of Fiber Seal
Systems of Los Angeles (“FSSLA”). |
|
|
160 |
|
|
|
|
|
|
Note payable
to Brian Marshall, interest at prime (8.25% at
December 31, 2006) until November 17, 2006 and if the maturity
date extends to January 31, 2007 the interest rate will be 12%.
Accrued interest on the outstanding principal balance is due
monthly. The seller agrees to pay the Company interest on
certain accounts receivable beginning January 31, 2007 and if the
accounts receivable are uncollected as of June 30, 2007, the
seller will pay the Company the outstanding balance. As of
November 1, 2006, the note is subordinated to the Company’s new
credit facility. As of March 16, 2007 the note payable is
outstanding and the certain accounts receivable are uncollected. The
Company is negotiating with Mr. Marshall to extend the maturity
date. |
|
|
21,650 |
|
|
|
|
|
|
Notes and leases payable to various financial institutions,
collateralized by various equipment and automobiles, bearing
interest at various annual interest rates ranging from prime plus
0.75% to 13.21% principal and interest payable in monthly
installments ranging from $0.4 to $1 through March 2011. |
|
|
307 |
|
|
|
|
|
|
Term loans with various financial institutions with interest at
various annual interest rates ranging from 7.5% to 9.25%, payable
in monthly installments ranging from $.5 to $2, due through
September 2009, secured by accounts receivable and equipment. |
|
|
147 |
|
|
|
|
|
Total notes payable |
|
|
37,264 |
|
Less current portion of notes payable |
|
|
(26,816 |
) |
|
|
|
|
Non-current portion of notes payable |
|
$ |
10,448 |
|
|
|
|
|
Future
minimum principal payments pursuant to the above long term debt
agreements are as follows:
| |
|
|
|
|
Year
ending, December 31, |
|
|
|
|
2007 |
|
$ |
26,816 |
|
2008 |
|
|
5,175 |
|
2009 |
|
|
18,267 |
|
2010 |
|
|
81 |
|
2011 |
|
|
36 |
|
|
|
|
|
Total |
|
|
50,375 |
|
|
|
|
|
Debt consisted of the following at December 31, 2005: |
|
|
|
|
Note payable to SE seller, interest at 2% in excess of one-month
LIBOR rate (adjusted on the first day of each calendar quarter beginning January 1, 2004, totaling 6.39% at
December 31, 2005), principal and interest payments due quarterly beginning July 1, 2004. The payments shall
be 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 March 31, 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 SE Tops of Florida, Inc. and a first lien on 50% of the stock of SouthernStone Cabinets, Inc. and is subordinated
to the Laurus Notes. |
|
$ |
2,159 |
|
| |
Revolving credit note payable to bank, interest at the higher of the prime
rate or the federal funds rate plus 0.5% of 1%, interest only payments paid monthly, paid January 2006, guaranteed by the Company and
collaterized by the assets of the Company. At December 31, 2005 the interest rate was 7.25%. |
|
|
1,321 |
|
| |
Convertible minimum borrowing note payable to Laurus Master Fund, Ltd., interest at
prime plus 2.5%, but not less than 6.5% (totaling 9.50% at December 31, 2005) interest due in monthly installments with principal paid
January 2006, secured by all the assets of the Company. The Convertible Note can be converted into shares of common stock at a fixed
conversion price of $1.88 per share. The note contains certain financial and non-financial covenants, with which the Company is in
compliance at December 31, 2005. |
|
|
895 |
|
Acstar Judgment payable, secured by note receivable, non-interest bearing, payable
$15 weekly until paid in full, implicit interest rate of 6.5%. |
|
|
129 |
|
| |
Notes
payable to financial institution, bearing interest at 5.375%, principal and
interest payable in monthly installments of $15 through January 26, 2006, secured by a first lien position in the assets of SouthernStone
Cabinets, Inc. and guaranteed by the former owners of SE paid January 2006. The note was paid in January 2006. |
|
|
15 |
|
| |
Note payable to various financial institutions, collateralized by various equipment
and automobiles, bearing interest at various annual interest rates ranging from prime plus 0.75% to 7.66%, principal and interest payable
in monthly installments ranging from $0.4 to $1.7 through March 28, 2009. |
|
|
226 |
|
|
|
|
|
Total |
|
|
4,745 |
|
Less current portion |
|
|
(3,382 |
) |
|
|
|
|
Non-current portion |
|
$ |
1,363 |
|
|
|
|
|
NOTE 6 – LEASES
Operating Leases
The Company leases its facilities under non-cancelable operating lease agreements. The leases
expire on various dates through January 2011 and provide for monthly rents ranging from
approximately $1 to $11. Rent expense for the years ended December 31, 2006, 2005 and 2004 was
approximately $1,425, $553 and $259, respectively.
Capital Leases
The Company leases certain equipment under capital lease agreements, which expire at various dates
through September 2012. The leases are payable in monthly installments ranging from approximately
$0.3 to $5 at effective interest rates ranging from 7.8% to 23.58%. The assets and liabilities
under capital leases are recorded at lease inception at the lower of the present value of the
minimum lease payments or the fair market value of the related assets.
40
Future minimum lease payments under non-cancelable leases are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Capital Leases |
|
|
Operating Leases |
|
|
Total |
|
| |
|
|
Years Ending December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
345 |
|
|
$ |
848 |
|
|
$ |
1,193 |
|
2008 |
|
|
340 |
|
|
|
364 |
|
|
|
704 |
|
2009 |
|
|
275 |
|
|
|
147 |
|
|
|
422 |
|
2010 |
|
|
197 |
|
|
|
117 |
|
|
|
314 |
|
2011 |
|
|
181 |
|
|
|
86 |
|
|
|
267 |
|
Thereafter |
|
|
96 |
|
|
|
3 |
|
|
|
99 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
1,434 |
|
|
$ |
1,565 |
|
|
$ |
2,999 |
|
| |
|
|
|
|
|
|
Less: amount representing interest |
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of future minimum lease payments |
|
|
1,183 |
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is an analysis of the equipment under capital lease, which is included in property
and equipment as of December 31, 2006:
| |
|
|
|
|
Automobiles and trucks |
|
$ |
467 |
|
Equipment |
|
|
998 |
|
|
|
|
|
Total |
|
|
1,465 |
|
Less: accumulated depreciation |
|
|
(248 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,217 |
|
|
|
|
|
NOTE 7 – EQUITY
Preferred Stock
During the year ended December 31, 2004, the Company raised $2,000 in a private placement of 0.08
shares of Series A Preferred Stock, $0.001 par value per share (“Series A Preferred Stock”).
Dividends on the Series A Preferred Stock are payable semi-annually at a rate of 8% per annum, in
cash or common stock, at the option of the Company. The Series A Preferred Stock converts into
common stock at a conversion rate of $1.25 for each share of common stock at the option of the
holder or automatically after two years. Purchasers of the Series A Preferred Stock received Series
A Warrants to purchase 1,600 shares of common stock at an exercise price of $1.75 per share, which
expired on July 1, 2004, and Series B Warrants to purchase 1,600 shares of common stock at an
exercise price of $2.22 per share, as adjusted and subject to future adjustments, expiring March
2009. In the event of a liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to
receive, out of the assets of the Company available for distribution to its stockholders, an amount
equal to $25 per share of the Series A Preferred Stock plus any accrued and unpaid dividends before
any payment is made or any assets distributed to the holders of the common stock. Related to this
financing, the Company also issued 480 warrants to purchase common shares in the Company to
consultants. The costs of this transaction of $1,480 ($122 cash, $1,358 non cash) were amortized
as additional dividends. The $1,358 of non-cash issuance costs relate to the relative fair value
of the warrants issued and the effective Beneficial Conversion Feature (“BCF”). For the years
ended December 31, 2005 and 2004, the Company recorded $80 and $122, respectively, in dividends
payable and $587 and $640, respectively, in amortization of issuance, warrant and BCF costs.
During 2005 and 2004, the Company at its option issued 102 and 60 shares, respectively, of common
stock in lieu of cash payment for $128 and $75, respectively, of the accrued dividends.
During the year ended December 31, 2005 and 2004, 0.012 and 0.068 shares, respectively, of Series A
Preferred Stock were converted to 1,360 and 240 shares, respectively, of common stock at a
conversion price of $1.25.
During the year ended December 31, 2004, the Company raised $1,000 in a private placement of 0.04
shares of Series B Preferred
Stock, $0.001 par value per share (“Series B Preferred Stock”). Dividends on the Series B
Preferred Stock are payable semi-annually at a rate of 8% per annum, in cash or common stock, at
the option of the Company. The Series B Preferred Stock converts into common stock at a conversion
rate of $1.50 for each share of common stock at the option of the holder or automatically after two
years. In the event of a liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, the holders of the Series B Preferred Stock are entitled to
receive, out of the assets of the Company available for distribution to its stockholders, an amount
equal to $25 per share of the Series B Preferred Stock plus any accrued and unpaid dividends before
any payment is made or any assets distributed to the holders of the common stock. For the years
ended December 31, 2005 and 2004, the Company recorded $57 and $37, respectively, in dividends
payable. During 2005, the Company at its option issued 54 shares, of common stock in lieu of cash
payment for $81 of the accrued dividends.
41
During the year ended December 31, 2005 0.04 of Series B Preferred Stock was converted to 667
shares of common stock at a conversion price of $1.50.
Common Stock
During the year ended December 31, 2006, the Company issued:
| • |
|
3,651 shares of common stock for $6,256 in connection with the exercise of options; |
| • |
|
8 shares of common stock in connection with the cashless exercise of stock options; |
| • |
|
58 shares of common stock in connection with the cashless exercise of warrants; |
| • |
|
25 shares of common stock valued at $108 in connection with consulting services to the Company: |
| • |
|
480 shares of common stock in connection with the conversion
of $903 of convertible debt and accrued interest payable; |
| • |
|
1,850 shares of common stock for $1,879 in connection with the exercise of warrants; |
• 95 shares of common stock to the Company’s board of directors under its Stock Plans, in
consideration of services provided from January 1, 2005 to April 30, 2006. During the year ended
December 31, 2006 and 2005, the Company expensed approximately
$86 and $256, respectively, in the accompanying consolidated
statements of income;
• 4,000 shares of common stock with an estimated value of $22,148 in partial consideration
for the acquisition of Fireline. The Company and the seller of Fireline entered into an escrow
agreement for 400 of the Company’s issued shares, to be issued in 50% increments on the first and
second anniversaries of the closing date.
•
1,500 shares of common stock with an estimated value of $8,144 in partial consideration
related to the merger of Associated with HSRLA.
Pursuant to the Board Compensation Plan adopted by the board of directors in July 2006, each board
member and one former board member was granted immediately exercisable stock purchase rights
exercisable for 40 shares of restricted stock on July 26, 2006. Each stock purchase right
represents the right to receive one share of restricted common stock at a price of $-0- per share.
The stock purchase rights were exercised immediately upon grant. The restricted shares of common
stock have the same voting and dividend rights as the Company’s other outstanding shares of common
stock. A total of 240 shares of restricted common stock were granted to current and former
directors and will vest over a period of 23 months commensurate with service as a board member over
the same period. The restricted shares of common stock are subject to a lock-up agreement pursuant
to which 50% are released from lock-up on December 31, 2006, and
the remaining 25% are released
from lock-up on December 31, 2007 and the remaining 25% on
December 31, 2008. However, for the current directors the vesting of such shares
is subject to continuing service as a board member. Unearned stock-based compensation related to
the restricted shares is determined based on the fair value of the Company’s stock on the date of
grant, which was approximately $1,524 and will be amortized to expense on a straight-line basis
over the vesting period, of which approximately $398 was recognized during the year ended December
31, 2006.
Two newly
appointed board of directors were granted 28 shares of
restricted common stock for their services from their appointment to
the board of directors in August and October 2006, respectively,
until May 31, 2007. The restricted shares of common stock are
subject to a lock-up agreement pursuant to which 50% are released six
months from the date of grant and the remaining 50% are released from
lock-up on December 31, 2007.
In May and June 2006, our President and CEO engaged in separate transactions resulting in
disgorgement of profits to the Company within the meaning of the provisions of Section 16(a) of the
Securities Exchange Act of 1934. Under that provision, profits made by officers, directors and
certain shareholders on transactions within a six month period of a matching transaction inure to
the benefit of and may be recovered by the Company. Our President and CEO each informed the
Company of their intent to engage in a matchable transaction in advance, and the profits relating
to such sales were paid to the Company concurrently with such transactions. These officers paid,
and we accepted, an aggregate of approximately $245 as disgorgement of profits on the transactions.
The profit disgorgement has been recorded as an increase to stockholders’ equity in the second
quarter of 2006.
42
Warrants
From time to time, the Company issues warrants pursuant to various consulting and third party
agreements.
During the year ended December 31, 2005 as part of a $7,000 debt financing, the Company issued
warrants to purchase 933 shares of the Company’s common stock with a relative fair value of $1,294
under SFAS No. 123 and recorded such amount as a debt discount. (see Note 7). These warrants
vested upon grant, have an exercise price of $0.01 and expire in March 2010.
In connection with a private placement (“Offering”) in 2005, The Company issued purchase warrants
exercisable for 970 shares of common stock, which expire in 2010 and have an exercise price of
$5.50 per share.
During the year ended December 31, 2005, the Company issued warrants to purchase 125 shares of the
Company’s common stock to consultants in connection with the Offering. The warrants expire
November 2010 and have an exercise price of $5.50 per share.
During the year ended December 31, 2005, the Company issued to FERS, a warrant exercisable for
1,054 shares of the Company’s common stock, at an exercise price of $0.001 per share with an
estimated fair value of $4,719. The warrants were earned as FERS met required revenue requirements
and expire December 31, 2006. The warrants were exercised in 2006.
During the year ended December 31, 2004 the Company issued warrants to purchase 559 shares of the
Company’s common stock to consultants relating to the acquisition of SE, valued at $342 under SFAS
No. 123 and recorded as part of the purchase price. These warrants vested upon grant, have an
exercise price of $1.88 and expire January 2009.
During the year ended December 31, 2004 as part of a $4,000 senior debt financing, the Company
issued warrants to purchase 476 shares of the Company’s common stock (420 warrants to investors and
56 warrants to consultants), with a relative fair value of $94 under SFAS No.123 and recorded as a
debt discount. These warrants vested upon grant, have exercise prices ranging from $2.10 — $2.90
and expire on various dates through November 2011.
During the year ended December 31, 2004 as part of a $2,000 preferred stock financing, the Company
issued 3,680 warrants to purchase common shares in the Company (3,200 warrants to investors and 480
warrants to consultants), with a relative fair value of $509 under SFAS No. 123 and will be
amortized as a preferred stock dividend over the life of the preferred stock. All of the warrants
vested upon grant and 1,840 have an exercise price of $1.75 and 1,800 have an exercise price of
$2.22, as adjusted, and expire through March 2009. At December 31, 2004, warrants to purchase 840
shares of the Company’s common stock at $1.75 per share expired unexercised.
During the year ended December 31, 2004 the Company issued 667 in Series C warrants and 667 in
Series D warrants to purchase shares of the Company’s common stock to consultants providing
financial advisory services in the proposed acquisition of a specialty residential services
company. The Series C Warrants entitled the holder to purchase 667 shares of common stock at an
exercise price of $1.75 per share, which expired in July 2004. The Series D Warrants entitle the
holder to purchase 667 shares of common stock at an exercise price of $1.75 per share, expiring
July 2009. The warrants are valued at $500 under SFAS
No. 123 and have been recorded as capitalized acquisition costs.
The following summarizes the Company’s
warrant transactions for the years ended December 31, 2006, 2005
and 2004:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
|
| |
|
Number of |
|
|
Exercise Price |
|
| |
|
Warrants |
|
|
Per Share |
|
Outstanding, January 1, 2004 |
|
|
1,922 |
|
|
$ |
1.10 |
|
Granted |
|
|
6,048 |
|
|
|
1.86 |
|
Exercised |
|
|
(293 |
) |
|
|
0.01 |
|
Cancelled or Expired |
|
|
(2,296 |
) |
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, December 31, 2004 |
|
|
5,381 |
|
|
$ |
1.74 |
|
Granted |
|
|
3,082 |
|
|
|
1.96 |
|
Exercised |
|
|
(5,323 |
) |
|
|
1.45 |
|
Cancelled or Expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, December 31, 2005 |
|
|
3,140 |
|
|
$ |
2.49 |
|
Granted |
|
|
2,000 |
|
|
|
0.01 |
|
Exercised |
|
|
(1,975 |
) |
|
|
1.30 |
|
Cancelled or Expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006 |
|
|
3,165 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
Exercisable, December 31, 2006 |
|
|
1,165 |
|
|
$ |
4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted: |
|
|
|
|
|
|
|
|
2004 |
|
$ |
1.76 |
|
|
|
|
|
2005 |
|
$ |
3.01 |
|
|
|
|
|
2006 |
|
$ |
5.42 |
|
|
|
|
|
43
The following table summarizes information about warrants outstanding as of December 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Warrants Outstanding and Exercisable |
| |
|
|
|
|
|
Weighted Average |
|
|
| Range of |
|
|
|
|
|
Remaining |
|
Weighted Average |
| Exercise Prices |
|
Number |
|
Contractual Life |
|
Exercise Price |
$0.01 |
|
|
2,000 |
(1) |
|
2.8 years |
|
$ |
0.01 |
|
$2.00 - $2.90 |
|
|
325 |
|
|
2.2 years |
|
$ |
2.07 |
|
$5.50 |
|
|
840 |
|
|
3.9 years |
|
$ |
5.50 |
|
(1) At
December 31, 2006, these warrants were not exercisable.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Litigation
The nature and scope of the Company’s business operations bring it into regular contact with the
general public, a variety of businesses and government agencies. These activities inherently
subject the Company to potential litigation, which are defended in the normal course of business.
On June 20, 2006, a class action lawsuit was filed in the United States District Court for the
Northern District of Texas. Home Solutions and the Chief Executive Officer, President and Chief
Financial Officer of Home Solutions are named as defendants in that action. The complaint alleges
claims against Home Solutions and such officers for violations of the Securities Act of 1934. The
complaint alleges that the defendants disseminated false and misleading information to the public
which misrepresented the accuracy of the Company’s financial condition and future revenue
prospects. The complaint further alleges that the effect of the purported fraud was to manipulate
Home Solution’s stock price so that the defendants could profit from the manipulation. The action
seeks damages in an unspecified amount. The Company intends to vigorously defend the action.
On June 27, 2006 and on July 6, 2006, two additional class action lawsuits were filed in the United
States District Court for the Northern District of Texas. Home Solutions and its directors are
named as defendants in those actions. The allegations in these two additional class action
lawsuits are substantially similar to those in the first lawsuit. The actions seek damages in an
unspecified amount. The Company intends to vigorously defend the actions.
Home Solutions is occasionally involved in other litigation matters relating to claims arising out
of the ordinary course of business. Other than the class action lawsuits described above, the
Company’s management believes that there are no claims or actions pending or threatened against the
Company, the ultimate disposition of which would have a material adverse effect on our business,
results of operations and financial condition. However, if a court or jury rules against us and
the ruling is ultimately sustained on appeal and damages are awarded against us, such ruling could
have a material and adverse effect on our business, results of operations and financial condition.
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be required to make
payments to a guaranteed or indemnified party, in relation to certain transactions. The Company
indemnifies its directors, officers, employees and agents to the maximum extent permitted under the
laws of the State of Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In connection with certain
of its debt, stock purchase and other agreements, the Company has indemnified lenders, sellers, and
various other parties for certain claims arising from the Company’s breach of representations,
warranties and other provisions contained in the agreements. Historically, the Company has not
been obligated to make any payments for these obligations and no liabilities have been recorded for
these indemnities and guarantees in the accompanying consolidated balance sheets.
44
Pursuant to the purchase agreement for the acquisition by HSR of Louisiana of substantially all of
the assets of FERS, FERS is entitled to receive an amount (in cash or restricted common stock, at
the Company’s option) equal to ten percent (10%) of the excess of the HSR of Louisiana’s earnings
before interest, taxes, depreciation and amortization with respect to the acquired assets related
to the business, if any, that exceed $15,000 in each of fiscal years 2006 and 2007, subject to the
terms and provisions of the purchase agreement. As of December 31, 2006, no amounts had been
earned or paid out under this provision.
HSR of Louisiana acquired Associated pursuant to a plan and agreement of merger entered into and
closed on October 26, 2006. The owners of Associated may earn cash of up to $9,000, based on
collections of acquired accounts receivable, up to 2,000 in common stock (upon the exercise of a
warrant at an exercise price of $.01 per share) and additional cash equal to 5% of net profits on a
specified contract, pursuant to the terms of the merger agreement among HSR of Louisiana,
Associated, the owners of Associated and the Company. The Company also agreed to indemnify the
prior owners of Associated from personal guarantees entered into in connection with the business of
Associated prior to the merger and to use commercially reasonable efforts to remove such persons
from the personal guarantees after the closing. As of
December 31, 2006, no amounts had been earned or paid out under
this provision.
Employment Agreements
The Company has employment contracts with the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer. The contracts provide for an annual salary of $350, $250 and $190 and
expire 2007, 2006 and 2007, respectively. The agreements contain certain severance payments, upon
termination of employment (except for cause), as defined.
Consulting Agreements
The Company has entered into a variety of consulting agreements for services to be provided to the
Company in the ordinary course of business. These agreements call for option grants and/or common
share issuances and various payments upon performance of services and/or termination of the
agreements (except for cause).
NOTE 9 – SEGMENT REPORTING
The Company reports its business segments based on industry classification, which are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and Construction Services |
|
$ |
88,754 |
|
|
$ |
37,142 |
|
|
$ |
16,566 |
|
Interior Services |
|
|
38,466 |
|
|
|
30,993 |
|
|
|
14,555 |
|
| |
|
|
Total segment net sales |
|
$ |
127,220 |
|
|
$ |
68,135 |
|
|
$ |
31,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and Construction Services |
|
$ |
32,282 |
|
|
$ |
11,861 |
|
|
$ |
2,532 |
|
Interior Services |
|
|
5,593 |
|
|
|
5,883 |
|
|
|
3,634 |
|
Corporate |
|
|
(7,261 |
) |
|
|
(4,466 |
) |
|
|
(2,119 |
) |
| |
|
|
Total segment operating income |
|
$ |
30,614 |
|
|
$ |
13,278 |
|
|
$ |
4,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included in operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and Construction Services |
|
$ |
860 |
|
|
$ |
519 |
|
|
$ |
513 |
|
Interior Services |
|
|
732 |
|
|
|
582 |
|
|
|
89 |
|
Corporate |
|
|
170 |
|
|
|
130 |
|
|
|
237 |
|
| |
|
|
Total segment depreciation and amortization |
|
$ |
1,762 |
|
|
$ |
1,231 |
|
|
$ |
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Restoration and Construction Services |
|
$ |
176,098 |
|
|
$ |
47,290 |
|
|
$ |
17,509 |
|
Interior Services |
|
|
37,867 |
|
|
|
34,372 |
|
|
|
13,083 |
|
Corporate |
|
|
8,760 |
|
|
|
7,005 |
|
|
|
3,083 |
|
| |
|
|
Total segment identifiable assets |
|
$ |
222,725 |
|
|
$ |
88,667 |
|
|
$ |
33,675 |
|
There were no intersegment sales. Operating income is defined as third party sales less operating
expenses. All of the Company’s business activities are conducted within the United States
geographic boundaries.
45
NOTE 10 — RELATED PARTY TRANSACTIONS
For the period ended December 31, 2006, the Company leased a warehouse facility from a related
party under a non-cancelable lease. The lease term is one year through July 2007 for $15 monthly.
The Company also leases warehouse and administrative spaces from a related party under
cancellable leases. The Company can vacate the spaces with 60 days notice to the related party.
For the fiscal year ended December 31, 2006, officers and directors exercised 3,126 stock options
of the Company’s common stock for $5,319 at exercise prices ranges from $1.25 to $2.53 per share.
The Company leases an aircraft from a related party pursuant to a one year operating lease entered
into on June 30, 2006. The lease requires monthly payments of $70 and is cancellable with 30 days
notice. The Company currently leases land and building from a related entity for a monthly rental
amount of $6 pursuant to a five year cancellable lease.
On August 15, 2006, Mr. Marshall furnished $4,985 in cash to a financial institution to fund a
letter of credit in the same amount, to support the issuance of a construction bond for the benefit
of Home Solutions. The bond is required in connection with a project to be performed by a
subsidiary of Home Solutions in the New Orleans, Louisiana area. In consideration of the issuance
of the letter of credit, Home Solutions agreed to pay Mr. Marshall the following fees: (i) $50 for
each 60-day period during which the letter of credit is outstanding, and (ii) a monthly fee equal
to $42 for each month that the letter of credit is outstanding. Furthermore, Home Solutions agreed
to indemnify Mr. Marshall for any amounts drawn under the letter of credit and for certain fees and
expenses related to the agreement and the letter of credit. In 2006 the Company paid Mr. Marshall
$274 in bond fees and interest. The bond was cancelled in October 2006 when the Company secured a
bond from an insurer of construction bonds
Amounts due to related parties at December 31, 2006 totaled $1,983. Amounts paid to related
parties for various services totaled $1,869 for the year ended December 31, 2006.
In March 2003, the Company borrowed $250 from an affiliate of a stockholder of the Company. In
March 2004, the Company paid $125 in principal and $21 in accrued and unpaid interest. In July 2004
the Company paid $125 in principal and $4 in accrued and unpaid interest. The Company recorded $0
and $7 of interest expense related to the borrowings for the year ended December 31, 2005 and 2004,
respectively.
On June 30, 2004, the Company borrowed $175 from an affiliate of a stockholder of the Company for
short term working capital needs. The note accrued interest at 12% with repayment required at the
earliest of the funding of a preferred financing, the funding of an acquisition financing or
September 30, 2004. The Company paid the note, loan fees and accrued interest in July 2004 for a
total of $179.
The Company had a note payable to a related party for the purchase of the land and building for
the Company’s corporate headquarters. The note was secured by a deed of trust, accrued interest
at 12% per annum, payable monthly. The note and accrued interest was paid in December 2005.
Interest expense on the note was $90 and $90 for the years ended December 31, 2005 and 2004,
respectively.
During the year ended December 31, 2002, an advance of $80 was made to an officer of one of the
Company’s subsidiaries. The advance is non-interest bearing and are due on demand. The
outstanding balance at December 31, 2005 and 2004 was $7 and $20, respectively.
During the year ended December 31, 2004, the Company recognized $129 in other income from the
forgiveness of debt from a former stockholder.
In September 2004, the Company issued 85 shares valued at $113, and $50 cash, to Mr. Frank
Fradella, the Company’s CEO, as part of a special bonus.
NOTE 11 — INCOME TAXES
The provision for income taxes in the accompanying consolidated financial statements consists of
the following for the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,009 |
|
|
$ |
2,152 |
|
|
$ |
39 |
|
State |
|
|
2,016 |
|
|
|
769 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,025 |
|
|
|
2,921 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
7,712 |
|
|
|
(2,453 |
) |
|
|
— |
|
State |
|
|
65 |
|
|
|
(22 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,777 |
|
|
|
(2,475 |
) |
|
|
— |
|
|
|
$ |
11,802 |
|
|
$ |
446 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
46
The reconciliation of the effective income tax rate to the Federal statutory rate is as follows for
the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Federal income tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State and local income tax rate, net of
Federal effect |
|
|
6.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Decrease in valuation allowance and other |
|
|
1.1 |
% |
|
|
(34.5 |
)% |
|
|
(31.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
41.1 |
% |
|
|
4.5 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the
carrying amount of asset and liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company’s deferred tax assets are as follows as
of December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss carryforwards |
|
$ |
2,552 |
|
|
$ |
2,748 |
|
|
$ |
3,379 |
|
Reserves and accruals |
|
|
1,337 |
|
|
|
(100 |
) |
|
|
31 |
|
Depreciation and amortization |
|
|
(3,442 |
) |
|
|
(1,855 |
) |
|
|
(165 |
) |
Less: valuation allowance |
|
|
— |
|
|
|
— |
|
|
|
(3,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
447 |
|
|
$ |
793 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance decreased by $0, $3,245 and $1,473 during the years ended December 31,
2006, 2005 and 2004, respectively.
At December 31, 2006, the Company had Federal net operating loss carryforwards of approximately
$7,500. Net operating loss carryforwards expire starting in 2016 through 2023. Per year
availability may be subject to change of ownership limitations under Internal Revenue Code Section
382.
NOTE 12 – SUBSEQUENT EVENTS (Unaudited)
In January 2007, the Company issued 5 shares related to the cashless exercise of stock options.
In February 2007, the Company issued 20 shares for $30 related to the exercise of stock options.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to
the controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within required time periods. Our
management, with the participation of the Chief Executive Officer and Chief Financial Officer, have
evaluated the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2006, such controls and procedures were
ineffective.
In making this evaluation, management considered, among other matters, the material
weaknesses in our internal control over financial reporting that we
or our external auditor, KMJ Corbin
& Company, have identified. A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected. See “Management’s
Report on Internal Control Over Financial Reporting” in
Item 9A.
Each of the control deficiencies described in the Management Report on Internal Controls Over
Financial Reporting could result in a misstatement of the aforementioned accounts or disclosures
that would result in a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Management has determined that each of the
control deficiencies constitutes a material weakness.
In light of this conclusion and as part of the preparation of this report, we have applied
compensating procedures and processes as necessary to ensure the reliability of our financial
reporting. Accordingly, management believes, based on its knowledge, that (1) this report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made not misleading with respect to the period covered by this report, and (2) the
financial statements, and other financial information included in this report, fairly present in
all material respects our financial condition, results of operations and cash flows as of December,
31, 2006 and for the period then ended.
Based on the fact numerous material weaknesses are present, we will institute control
improvements that we believe will reduce the likelihood of errors:
• We plan to devote more resources to developing and communicating an anti-fraud program, code of conduct policies
and human resource polices to our employees and management. The program may include the hiring of outside
or in-house counsel to be dedicated to the development and enforcement of compliance programs. Background
checks will be performed on personnel being placed into positions of material responsibility. The compliance
program also will include a communication project to set the right tone from the top. Additionally, we also plan
to put more resources to following up on addressing control deficiencies identified in the previous audits;
47
• The Company intends to develop additional policies and procedures to further strengthen its reporting, including
the areas of, sales and expense cut-off and sales returns, financial reporting and disclosure procedures. In addition,
we plan to evaluate hiring additional resources to perform the internal audit function;
• The Company is evaluating the implementation of an ERP Suite to address certain of the material
weaknesses listed in the Management Report on Internal Controls Over Financial Reporting,
including the effective control over period-end financial close and reporting and the effective
control over certain accounting functions. The ERP implementation should facilitate the appropriate
review and approval over the recording of journal entries to ensure the accuracy and completeness of the
journal entries recorded. Additionally, the Company will make changes to its corporate accounting
staff, including the hiring or contracting of additional personnel;
• Additional segregation of duties and appropriate review, approval, and supporting documentation
will be installed in 2007 to maintain effective controls over the disbursement function. We are developing
policies for proper documentation, review and approval related to subsidiary operations, compensation, expense
reimbursements;
• Additional segregation of duties and appropriate review, approval, and supporting documentation will be
implemented in 2007 to maintain effective controls over the fixed asset and payroll functions;
• With the implementation of an ERP the financial reporting package, we should be able to
further restrict access to the inventory detail schedule used to support the general ledger
balances. With additional implementation of ERP applications, we plan to eventually
replace the current periodic inventory system, relying on monthly inventory counts using
physical inventory count sheets, with a perpetual inventory system. Meanwhile, more
procedures will be installed for review of inventory count documentation; and
• Additional processes will be instituted to timely resolve identified accounting and legal issues
so that period-end financial statements and reporting can be timely completed.
Furthermore, certain of these remediation efforts, primarily associated with our information
technology infrastructure and related controls, will require significant ongoing effort and
investment. Our management, with the oversight of our audit committee, will continue to identify
and take steps to remedy known material weaknesses as expeditiously as possible and enhance the
overall design and capability of our control environment. We intend to further expand our staff,
accounting policy and controls capabilities by attracting additional talent and enhancing training
in such matters. We believe that the foregoing actions will continue to improve our internal
control over financial reporting, as well as our disclosure controls and procedures.
If the remedial policies and procedures we plan to implement, are insufficient to address the
material weakness or if additional significant deficiencies or other conditions relating to our
internal controls are discovered in the future, we may fail to meet our future reporting
obligations, our financial statements may contain material misstatements and our operating results
may be adversely affected. Any such failure could also adversely affect the results of the periodic
future management evaluations and annual auditor attestation reports regarding the effectiveness of
our internal controls over financial reporting, Internal control deficiencies could also cause
investors to lose confidence in our reported financial information. Although we believe that we
have addressed, or will address in the near future, our material weakness in internal controls, we
cannot guarantee that the measures we have taken to date or any future measures will remediate the
material weakness identified or that any additional material weakness or significant deficiencies
will not arise in the future due to a failure to implement and maintain adequate internal controls
over financial reporting.
Changes in internal controls
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f))
refers to the process of a company that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any
changes in our internal control over financial reporting that occurred during the most recent
fiscal quarter, and they have concluded that there were no changes to our internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
48
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting, and for performing an assessment of the effectiveness of internal control
over financial reporting as of December 31, 2006. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Our system of internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of our management and directors;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on our financial
statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that our degree of compliance with the policies or procedures may deteriorate.
Our management performed an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006, based upon criteria in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, our management determined that our internal control over financial
reporting was ineffective as of December 31, 2006, based on the criteria in Internal Control —
Integrated Framework issued by COSO.
Management noted the following significant deficiencies that we believe to be material
weaknesses:
Management did not maintain effective controls over management review of user accounts at any
location within the Company because of a lack of segregation of duties within each application
The Company did not maintain effective control environment because (1) lacked the appropriate
communication of the code of conduct, employee handbook and fraud policy (2) lacked the appropriate
documentation related to personnel responsibilities, performance (3) appropriate human resource
policies regarding personnel matters and (4) lack of an internal audit function.
Management did not maintain effective controls over stock/options. A reconciliation of the
company’s outstanding shares against the stock transfer agent’s records is not performed. Also,
journal entries to record compensation expense and option exercises are not reviewed and approved
by the CFO. Finally, the auditors noted during the financial statement audit that Board of
Director Compensation expense was erroneously recorded as prepaid expenses ($254,000) in the second
quarter.
The Company did not maintain effective internal controls over income taxes because documentation of
the review and approval of the income tax returns, quarterly tax estimates, and tax journal entries
were not present.
The Company did not maintain effective controls over the Accounts Payable and Expenditures cycle
because (1) Vendor maintenance request forms were incomplete and were completed after all additions
had already been entered into the system. (2) Vendor Maintenance Request were not approved. (3) No
purchases journal is maintained by the AP Clerk and not all purchase orders match the invoices (and
there was support for variances). (4) Managers were not signing all invoices when the
product/service is received to ensure that the product/service is acceptable prior to payment. (5)
Not all invoices contained documentation of the approval and GL coding provided by the Controller.
(6) Expense reports were not reviewed and approved prior to payment. (7) Wire transfers were not
approved and one person has the ability to initiate and perform a wire transfer. (8) Goods and
services received but not invoiced are not tracked to ensure timely recording of all expenditures.
(9) Accounts
49
Payable system doesn’t prevent entry of duplicate invoices. (10) No indication that
review of check registers tested had occurred. (11) For invoices that did not match the amount paid
per the check stub, there was no explanation provided on the invoice explaining or reconciling the
variance (12) lack of segregation of duties. (13) Check registers were not reviewed and approved
(14) The auditor noted several adjustments related to the AP cycle and the fact that a vendor
statement did not agree to the general ledger.
At three locations, Management did not maintain effective controls over Accounts Receivables and
Sales because:
(1) Masterfile changes are not approved, and the masterfile is not reviewed for
validity, accuracy, completeness and timely recording of changes. (2) Individual contracts are not
approved. (3) Copies of lean waivers and copies of invoices were not provided as support for
several sales. (4) There is no evidence of a reviewed and approval of invoices. (5) Cash receipts
were not reviewed and approved. (6) Posted cash receipt entries were not reviewed. (7) The
appropriate accounts receivable and sales are not reviewed and approved. (8) Lack of access and
segregation of duties (9) Management noted during the financial statement audit that some sales
were recorded twice. (10) The appropriate approval of contracts were not documented. (11) Invoices
to accounts receivable subledger reconciliation is not independently reviewed (12) Account
receivable subledger to general ledger reconciliation is not independently reviewed (13) Cash
receipts record (log) is not reviewed and no one verifies that cash receipts are posted to the
correct account.
At one location, management did not maintain effective controls over the inventory function because
(1) An inventory tracking system (subledger) is not maintained therefore, no reconciliation to the
general ledger can be performed. (2) An Inventory Master list is not being maintained. (3) Matching
of the receipts with the purchase order and billing of lading is not performed and the quality
inspection is not performed. (4) The entries to record the receipt of inventory in the general
ledger are not reviewed/approved. (5) A review of the inventory records to ensure that all
issuances were properly approved is not performed. (6) Lack of segregation of duties and access
authorization (7) Quarter inventory adjustments are not reviewed (8) lack of appropriate
documentation for the inventory count (9) Finally, during the financial statement audit the auditor
an adjustment to inventory.
At three locations, the Company did not maintain effective internal controls over Financial Closing
and Reporting because (1) Not all journal entries have adequate support, nor are all journal
entries approved. (2) All required elements were not included in the Controller’s Monthly
binder(s), (e.g. bank reconciliations, bank statements, and the reconciliation for intercompany
accounts). (3) No supporting inventory documentation was submitted as a part of the financial
package. (4) No sales and expenses cutoff review was performed and (5) Lack of access controls to
the chart of accounts and the rights within the accounting software (6) No approval for changes to
the chart of accounts (7) No review and approval of the financial reporting packages to the
supporting general ledgers (7) Management does not use a generally accepted accounting
principles(GAAP) disclosure checklist in preparing and reviewing draft financial statements to
ensure accuracy, completeness and consistency of required disclosures. Each financial-statement
disclosure is not independently reviewed and validated for appropriate assumptions, methodology,
and presentation of all relevant information in accordance with generally accepted accounting
principles.
At one location, management did not maintain effective controls over the Fixed Asset cycle because
(1) A Fixed Asset policy exists but there is no evidence of review and approval and the Fixed Asset
policy has not been distributed to the person who codes and records all purchases, including fixed
asset purchases to the GL (AP clerk). (2) Capital Expenditure Forms were not completed for all
fixed asset acquisitions. One asset was purchased using the Expense Reimbursement process and not
recorded. (3) Reconciliation of fixed assets and accumulated depreciation is not performed and
reviewed. (4) Management does not review the fixed asset ledger at least quarterly to ensure
compliance. (5) Fixed Asset inventory review, documentation and approval are not performed, any
required impairment adjustments are not recorded (6) The monthly depreciation expense journal entry
prepared is not reviewed as part of the monthly closing and journal entry review processes. (7) No
documentation of the approval of the disposal of assets.(8) Management does not review the
purchase journal and invoices to ensure that fixed assets are recorded in the proper period. The
journal entry and support is not put into a monthly binder and reviewed quarterly by the Corporate
Controller.
At one location, management did not maintain effective controls over the payroll function because
(1) no authorization for hiring employees (2) no review of the employee master file (3) no review
and approval of timekeeping (4) no reconciliation prepared and no documented review of the comparison of timesheets
to paychecks. (5) no control over the distribution of paychecks.
Our management’s assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2006, has been audited by KMJ Corbin & Company LLP, an independent
registered public accounting firm, as stated in their report which appears herein.
Dated: March 16, 2007
| |
|
|
| Frank Fradella
|
|
Jeffery Mattich |
| Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer |
50