Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NUMBER 0-18291

U.S. HOME SYSTEMS, INC.

(Name of Issuer Specified in Its Charter)

(214) 488-6300

(Issuer’s Telephone Number, Including Area Code)

Securities registered under Section 12 (b) of the Exchange Act:

None

Securities registered under Section 12 (g) of the Exchange Act:

$.001 Par Value Common Stock

(Title of Class)

Indicate by check mark whether the issuer (1) has 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  x    No  ¨

As of March 13, 2003, 6,453,371 shares of the Issuer’s $.001 par value common stock were outstanding and the aggregate market value of the shares held by non-affiliates was approximately $28,368,359 based upon a closing sales price of $6.09 per share of Common Stock on the Nasdaq SmallCap Market.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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.    x 

Indicate by check mark whether the registrant is an “accelerated filer” (as defined in Exchange Act Rule 12-b2).    Yes  ¨    No  x

The Issuer’s revenue for its most recent fiscal year was $50,275,683.

The following documents are incorporated by reference: Certain portions of the Issuer’s Definitive Proxy Statement (“Proxy Statement”) for the Annual Meeting of Stockholders which will be filed with the Commission no later than 120 days after the close of the fiscal year ended December 31, 2002 are incorporated in this Form 10-K in Part III-Items 10,11 12 and 13.

Table of Contents

TABLE OF CONTENTS

-i-

Table of Contents

-ii-

Table of Contents

PART I

ITEM 1. BUSINESS

General

U.S. Home Systems, Inc. (the “Company” or “U.S. Home”) is engaged in the manufacture, design, sale and installation of custom quality specialty home improvement products, and providing consumer financing services to the home improvement and remodeling industry. The Company’s principal offices are located at 750 State Highway 121 Bypass, Suite 170, Lewisville, Texas 75067, and its telephone number is (214) 488-6300. As used herein, the term “Company” includes U.S. Home Systems, Inc. and its subsidiaries. The Company’s common stock is traded on the Nasdaq Small Cap Market under its symbol “USHS”.

On February 13, 2001 U.S. Home Systems, Inc., formerly known as U.S. Pawn, Inc. (“U.S. Pawn”) completed a merger (the “Merger”) of a newly created subsidiary of the Company with and into U.S. Remodelers, Inc. (“U.S. Remodelers”) a Delaware corporation, with U.S. Remodelers surviving as a wholly owned subsidiary of the Company. U.S. Remodelers has been engaged in the manufacture, design, sale and installation of quality specialty home improvement products since 1997. The Merger was subject to, among other conditions, the prior sale of U.S. Pawn’s pawnshop operations and the settlement of all its liabilities, which was completed on February 1, 2001. In connection with the Merger, U.S. Pawn reincorporated in Delaware and changed its name to U.S. Home Systems, Inc. Following the Merger, the Company succeeded to the business of U.S. Remodelers.

The Company’s objective is to become an industry leader as a specialty-product home improvement business. Management plans to accomplish this objective through a combination of acquisitions and organic growth, deeper market penetration through expansion of its product offering, increasing its channels of distribution, and directly providing financing to the Company’s customers, as well as providing financing to third party contractors engaged in the home improvement business.

Except for the historical information contained herein, certain matters set forth in this report are forward-looking statements that reflect management’s current views, which can be identified by the use of terms such as “believes”, “estimates”, “plans”, “expects”, “anticipates”, and “intends” or by discussions of strategy, future operating results or events. These forward-looking statements are subject to risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from historical results or those anticipated. Many of the risks and uncertainties are beyond the control of the Company, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results, performance or achievements to differ materially from those anticipated.

Recent Acquisitions

In July 2001, the Company acquired certain assets of Cabinet Clad, L.L.C. Cabinet Clad is a Detroit, Michigan based specialty product home improvement business specializing in kitchen remodeling, including replacement kitchen cabinetry, kitchen cabinet refacing, countertops and replacement windows.

In October 2001, the Company acquired all of the outstanding capital stock of First Consumer Credit, Inc. (“FCC”), a Dallas-based consumer finance company specializing in the home improvement and remodeling industry. In connection with the acquisition, a newly created subsidiary of the Company was merged with and into FCC, with FCC surviving as a wholly owned subsidiary of the Company.

On May 31, 2002, the Company completed an acquisition of certain assets of Reface, Inc. Reface is a Norfolk, Virginia-based home improvement business specializing in kitchen and bath remodeling.

On November 30, 2002, the Company acquired all of the outstanding capital stock of Deck America, Inc., (“DAI”) a privately-held Woodbridge, Virginia based home improvement specialist providing patented solutions for the fabrication, sale and installation of decks and deck enclosures. In connection with the acquisition, the Company also acquired DAI’s manufacturing, warehousing and office facilities from an affiliate of DAI. The DAI acquisition was consummated by merging DAI into USA Deck, Inc. (formerly known as Remodelers Credit Corporation), a wholly owned Delaware subsidiary of the Company, with USA Deck as the surviving corporation.

-1-

Table of Contents

Segments

The following should be read in conjunction with the 2002 financial results of each reporting segment as detailed in Note 3, “Information About Segments” in the Company’s Consolidated Financial Statements included elsewhere herein.

The Company is engaged in two lines of business, the specialty product home improvement business and the consumer finance business. Accordingly, the Company’s reportable segments have been determined based on the nature of the products offered to consumers.

Home Improvement Segment

General Information

The Company is engaged, through direct consumer marketing, in the manufacture, design, sale and installation of custom quality specialty home improvement products. The Company’s home improvement product lines include replacement kitchen cabinetry, kitchen cabinet refacing and countertop products utilized in kitchen remodeling, bathroom refacing and related products utilized in bathroom remodeling, wood decks, deck enclosures and replacement windows. The Company operates sales and installation centers in 15 major metropolitan areas in the United States. The Company manufactures its own cabinet refacing, custom countertops, and bathroom cabinetry products in its Virginia-based manufacturing facility, and has a wood treatment and deck fabrication facility in Woodbridge, VA.

Kitchen cabinet refacing is a remodeling technique in which existing cabinetry framework is retained but all exposed surfaces are changed. Under the Company’s cabinet refacing system, doors, drawers, drawer fronts and drawer boxes are replaced, and all exposed cabinet surfaces are covered with matching laminate. In addition, laminate and solid surface countertops, matching valances, molding, replacement sinks, faucets, cabinet drawer boxes, add-on or replacement cabinets, space organizers, lazy susans and slide-out shelving can be provided by the Company. The Company’s bathroom remodeling products include acrylic tub liners and wall surrounds, vanity cabinetry refacing and replacement vanity cabinets, bowls, faucets, commodes and shower doors. The Company purchases replacement windows and bathroom shower doors, acrylic tub liners and wall surround products from unaffiliated suppliers. The Company’s wood decks and deck enclosures consist of non-arsenic high pressure treated wood. The non-arsenic treated wood contains no chromate copper arsenate (C.C.A.), a chemical which is used to treat wood and in which the EPA has required to be phased out by the end of next year. The Company’s patented system for the fabrication and installation of high quality decks include “Invisinail”, a unique fastening system in which deck modules are nailed from underneath to prevent the checking and cracks that often mar top-nailed decks.

Direct Marketing and Sales

The Company’s products are marketed under nationally recognized brands such as Century 21 Home Improvements, Renewal By Andersen and Home Depot “At Home Services”, as well as the Company’s own brands, “Facelifters^SM”, “Cabinet Clad^SM” and “USA Deck”. The Company has a license agreement with TM Acquisition Corp. (TM) and HFS Licensing Inc. (HFS) pursuant to a master license agreement between Century 21 Real Estate Corporation and each of TM and HFS (collectively, the “Licensor”). The license agreement provides for the Company to market, sell and install kitchen and bathroom remodeling products and replacement windows in specific geographic territories using the service marks and trademarks “CENTURY21^™ Cabinet Refacing” and “CENTURY 21^™ Home Improvements”. The license agreement is for a period of 10 years ending in 2007. The license agreement may be terminated by the Company upon 90 days written notice. The license agreement may be terminated by the Licensor if the Company is negligent in the performance of its services, becomes insolvent or bankrupt, or fails to comply with any material provisions of the license agreement. In the event the Licensor were to cancel the license agreement, the Company believes that these products could be independently marketed by the Company in these territories; however, the cancellation of the license agreement could have an adverse effect on the business of the Company.

The Company also has an agreement with Renewal by Andersen (RbA), a wholly-owned subsidiary of the Andersen Corporation. The Andersen agreement provides for the Company to be the exclusive window replacement retailer on an installed basis for RbA in the greater Los Angeles area, including the counties of

-2-

Table of Contents

Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara and Ventura. The agreement is for a period of five years and provides the Company with the option to renew the agreement for an additional five years. In February 2002, the Company began operating in the southern California market under its agreement with RbA.

The Company markets its deck and deck enclosure products in the Washington, D.C. metropolitan area, including Baltimore, Maryland, and northern Virginia. On October 17, 2002, USA Deck entered into an agreement with The Home Depot^® to sell, furnish and install pre-engineered Designer Deck^® systems to Home Depot’s retail customers in certain markets, including the metropolitan areas of Washington D.C., Baltimore, Maryland, Richmond and Norfolk, Virginia. Under the agreement, the Company’s subsidiary, USA Deck, will provide several pre-designed deck models under the Home Depot “At Home Services” brand to approximately 70 Home Depot stores.

The Company’s principal marketing activities are conducted through a variety of sources including television, direct mail, marriage mail, magazines, newspaper inserts, home shows, canvassing and telemarketing. The Company maintains a call-center in Boca Raton, Florida at which it receives in-bound calls in response to its media advertising for kitchen, bathroom and replacement window products, and makes outbound calls to selected prospects. The Company’s call-center personnel follow prepared scripts and schedule in-home sales presentations. Outbound calls are made to homeowners whose demographic profile fall within certain criteria, including age and income of the homeowner, home value, age of home and length of residency.

To maintain the efficiency of its marketing, the Company uses it’s internally developed computer software to monitor responses and sales. Sales representatives utilize the Company’s in-home sales presentation and sales kit, which includes a presentation book, photos, video materials, sample products and other sales materials. Results of in-home presentations are tabulated on a daily basis. Such information provides data upon which the Company evaluates each direct sales representative’s performance in such areas as sales as a percentage of in-home presentations, cancellation rates and average dollar amounts of sales.

Manufacturing, Purchasing, Material and Installation

Kitchen and Bathroom Remodeling, and Replacement Windows. The Company manufactures cabinet fronts, countertops, and cabinets that are faced with high-pressure laminate or thermo foil in its manufacturing facility in Charles City, Virginia. The Company has acquired “state-of-the-art” equipment enabling the Company to manufacture thermo foil cabinet doors and drawer fronts. Raw materials used in the manufacturing and installation process, including solid surface countertops, are purchased from several suppliers at prices that are negotiated periodically. Management believes such materials are available from numerous suppliers at competitive prices.

The Company purchases replacement kitchen cabinetry, replacement windows, bathroom shower doors, acrylic tub liners and wall surround products from unaffiliated suppliers. The Company negotiates purchase prices periodically. Management believes such materials are available from numerous suppliers at competitive prices. The Company’s replacement windows sold under the Renewal By Andersen brand are purchased directly from RbA.

Except for some warranty and other service work, contractors who meet the Company’s qualifications perform substantially all of the Company’s installations. Contractors employ their own personnel and are required to maintain their own vehicles, equipment, tools, licenses, workers compensation coverage and general liability insurance. Contractors assume full financial risk in their performance of an installation and enter into a written agreement with the Company. Contractors obtain a work order, which specifies all work to be performed pursuant to the sales agreement, and materials at the Company’s branch office. Installations are generally completed within 55 days after a sales agreement is signed, and three to five workdays from commencement of the installation. Upon completion, the contractor obtains a certificate of completion from the customer and returns all documentation and excess materials to the Company. The contractor is paid by the Company upon presentation of an invoice to the Company and satisfactory completion of each job. Fees paid by the Company to the contractor for an installation are based upon an amount negotiated between the Company and the contractor. When new construction and remodeling are on the rise, engaging a sufficient number of contractors becomes more challenging, however, the Company believes that there are an adequate number of qualified contractors available to the Company in the areas it does business.

-3-

Table of Contents

Deck and Deck Enclosures. The Company provides its own non-arsenic high pressure treated wood in its state-of-the-art wood treatment facility which is conveniently located adjacent to its deck fabrication facility. Raw materials utilized in the fabrication of decks and deck enclosures are purchased from unaffiliated suppliers. Management believes such materials are available from numerous suppliers at competitive prices.

Installation of decks and deck enclosures is performed by the Company’s highly trained employees. Installations are generally completed within 60 days after a sales agreement is signed. Installation is generally completed within two days once installation has commenced. The Company provides all the necessary materials, equipment and tools to complete installations. Employee installers are paid on a specified rate scale. The Company believes it is competitive in its wage rates and considers its relationship with its employees to be good.

Competition

The remodeling industry is highly fragmented. Management believes that there are more than 200,000 companies registered as remodeling businesses nationwide. According to Qualified Remodeler, a leading industry publication, there are approximately 60 remodeling companies in the industry that generate annual revenues in excess of $10 million, and only 4 companies that generate annual revenues in excess of $100 million.

Although the Company believes it is one of the largest enterprises engaged in the direct marketing of in-home sales and installation of kitchen cabinet, bathroom refacing products, wood deck and deck enclosures, the Company competes with numerous contractors in each of its 17 geographic territories, with reputation, price, workmanship and services being the principal competitive factors. The Company provides its customers with a full range of services, including in-home design, professional installation, financing and post-sale service. The market is primarily served by small home improvement contractors who typically do not offer in-home design or have access to financing, or large home center retailers, including Sears, Home Depot and Lowes, some of which offer similar products and services directly to consumers or through licensees, or recommend other contractors to complete installations.

Seasonality

The Company’s business is subject to seasonal fluctuations and extreme winter weather conditions. In addition, recruiting of contractors to perform the Company’s installation becomes more difficult when new construction and remodeling is on the rise.

Warranties

The Company provides each customer with a limited warranty covering defective materials and workmanship. The Company requires its contractors to correct defective workmanship for a 12-month period. To date, the Company has not experienced significant warranty claims.

Customer Payment

The Company’s customers pay for their home improvement products and services upon completion of the work. Payments are made in cash, by personal check, on MasterCard, Visa or Discovery cards, or by financing arranged by the Company.

Employees

At December 31, 2002, the Company either employed or had representing its products, on a full or part-time basis, approximately 558 associates, including 160 employees engaged in marketing activities, 169 sales representatives, 175 manufacturing and installation employees, and 54 management and administrative personnel. In addition, the Company has working arrangements with over 150 independent contracting companies. The Company believes that labor relations with its employees have been good in the past and does not expect this relationship to change.

-4-

Table of Contents

Government Regulations

Generally, the Company’s activities and the activities of its sales representatives and contractors are subject to various federal and state laws and regulations and municipal ordinances relating to, among other things, in-home sales, consumer financing, advertising, the licensing of home improvement contractors, zoning regulations, environmental protection, safety and health. The Company’s operations are also subject to a Federal Trade Commission rule, which provides for a “cooling off” period for in-home sales. This rule requires an in-home seller to inform the buyer of his right to cancel the transaction at any time prior to midnight of the third business day after the date of the sales transaction. All states have a similar version of this rule. Many states have (but the states in which the Company currently conducts retail business have not) supplemented this rule by extending the time period in which the buyer may cancel. The Company’s call-center operations are also subject to various laws related to telemarketing. The Company has procedures designed to comply with such laws and regulations. The Company does not anticipate any difficulty in complying with applicable federal, state or local laws and regulations relating to it business operations.

Consumer Finance Segment

General Information

The Company is engaged, through its wholly owned subsidiary, First Consumer Credit, Inc., in providing consumer financing to the home improvement and remodeling industry. FCC enables qualified contractors to originate a broad range of credit products that are not otherwise available to contractors utilizing only traditional sources for home improvement financing.

FCC purchases retail installment obligations (“RIO’s”) from select remodeling contractors, including RIO’s originated by the Company’s home improvement operations. Prior to entering into the Credit Facility on February 11, 2003 (as discussed below), once FCC had accumulated a portfolio of RIO’s, FCC sold these portfolios to banks and insurance companies under negotiated purchase commitments, and received a one-time premium upon each sale. In most cases, FCC retained the collection and servicing of these accounts on behalf of the purchaser and receives a monthly servicing fee from the purchaser. FCC currently provides servicing on nearly 4,400 of these accounts, operating in 36 states within the continental United States. Prior to February 11, 2003, FCC sold all of its RIO portfolios to two purchasers, a financial institution and an insurance company. The Company believes that multiple sources exist for the sale of retail installment obligation portfolios.

FCC has limited credit risks associated with certain of its portfolio sales to a financial institution. In this respect, if credit losses exceed certain thresholds over specified periods of time, FCC must reimburse the financial institution for the excess credit losses, up to a specified maximum, and conversely, if credit losses are less than specified thresholds over certain periods of time, the financial institution is required to reimburse FCC for credit losses less than the specified thresholds, up to a specified maximum.

2003 Credit Facility

In February 2003, FCC entered into a $75 million credit facility agreement with Autobahn Funding Company LLC (“Autobahn”), as the lender and DZ Bank AG Deutsche Zentral-Genossenschafsbank, Frankfurt AM Main (“DZ Bank”), as the Agent (the “Credit Facility”). FCC Acceptance Corporation (“FCCA”), a wholly owned subsidiary of FCC, is the borrower under the Credit Facility and FCCA will purchase RIO portfolios from FCC. The Credit Facility will provide financing for 90% of the amount of eligible RIO’s purchased, and FCC will provide the remaining 10%. The credit facility is secured by the RIO’s.

Under the Credit Facility, FCC will finance RIO’s purchased from contractors providing FCC with earnings from finance charges for the life of the RIO, as opposed to a lesser, one-time premium it previously earned upon sale of the portfolios. Additionally, the Credit Facility will allow FCC to reach a greater number of contractors, as well as provide its contractor customers, including the Company, with additional credit programs, thereby creating substantial growth opportunity for FCC.

However, the change in the FCC’s business model, from selling to financing portfolios of RIO’s, will adversely affect FCC’s profitability in the short term. In this respect, FCC will forgo the initial one-time

-5-

Table of Contents

premium it earned upon selling a portfolio, and FCC will earn finance charges over the life of the portfolio, typically a three to five year period. Finance charges are expected to be significantly higher than the one-time premium previously earned. Consequently, until FCC has accumulated a sufficient amount of financed RIO’s, and finance charges earned on the RIO portfolios reach a sufficient level, FCC’s earnings will be adversely affected. As a result, the Company may be required to seek additional financing to fund FCC’s operations. Although the Company has no agreements or commitments for additional financing, management believes that the Company will be able to secure the financing, if needed, through the issuance of equity securities or debt obligations. However, there can be no assurance that additional financing will be available, or if available, that such financing will be on favorable terms. The failure of the Company to secure additional financing, if needed, could impair FCC’s ability to fully utilize the available funds under the Credit Facility, as well as restrict FCC’s ability to purchase RIO’s, which would have an adverse impact on FCC’s results of operations. The Company believes FCC can reach profitability in the first quarter of 2004.

Line of Credit

FCC has a revolving line of credit with a financial institution that allows borrowings up to $5,000,000. The proceeds from the line of credit are utilized to purchase RIO’s. FCC typically holds RIO’s a minimal period of time before portfolios are accumulated and sold. Upon sale of the portfolio, the line of credit is repaid. Borrowings and required payments under the revolving line of credit are based upon an asset formula involving the outstanding principal balance of RIO’s. The revolving line of credit is not affected by the Credit Facility as portfolios of RIO’s will be sold to FCCA under the Credit Facility. The Company believes that the existing line of credit is sufficient for FCC’s operations. The revolving line of credit, as amended, matures April 1, 2003, however the Company plans to renew the line upon its maturity.

Marketing and Sales

FCC’s principal marketing and sales activities are conducted by sales representatives. FCC calls upon prospective contractors, participates in several industry trade shows and places a limited amount of advertising, typically through related trade publications.

Competition

FCC operates in a niche segment of the home improvement consumer finance industry. FCC competes with numerous financial institutions, including local and regional banks, and other financial lending sources such as Key Funding and Mill Creek Bank (formerly known an Conseco), most of which are much larger and have significantly more resources than the Company.

Employees

At December 31, 2002, FCC employed approximately 28 associates. The Company believes that labor relations with its employees have been good in the past and does not expect this relationship to change.

Government Regulations

Generally, FCC’s activities are subject to various federal and state credit and lending regulations governing installment sales and credit transactions, including the Truth In Lending Act, Real Estate Settlement Procedures Act and the Home Owners Equity Protection Act. The Company has procedures designed to comply with such laws and regulations. The Company does not anticipate any difficulty in complying with applicable federal, state or local laws and regulations relating to it business operations.

-6-

Table of Contents

ITEM 2. PROPERTIES

Except for USA Deck’s facilities, all of the other Company’s facilities are leased, and in most cases, management expects that leases currently in effect will be renewed or replaced by other leases of a similar nature and term. The Company’s manufacturing facility at Charles City, Virginia is under a capital lease with a 15-year lease term and an option to purchase the property at the end of the lease term for nominal consideration. All of the Company’s leases, other than the Charles City, Virginia facility, are for terms of five years or less. The following describes the location of the Company’s facilities:

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s stockholders during the fourth quarter of the fiscal year covered by this report.

-7-

Table of Contents

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s Common Stock was traded on the Nasdaq SmallCap Market (“NASDAQ”) under the symbol “USPN” from May 10, 1989 until February 14, 2001. On February 15, 2001, in connection with the Merger, the Company effected a one share for four shares reverse split of its common stock and changed its symbol to “USHS”. On March 13, 2003, the closing sales price for the Company’s Common Stock was $6.09 per share.

The following table sets forth for the quarters indicated, the range of closing high and low sales prices of the Company’s Common Stock as reported by NASDAQ and are adjusted for the one share for four share reverse stock split of February 15, 2001.

As of March 8, 2003, the Company had approximately 200 stockholders of record. The Company has not declared any dividends on its Common Stock to date. The Company has not paid any cash dividends on its common stock in 2002, 2001 and 2000. The Company intends to retain all of its earnings to its operations and does not anticipate paying cash dividends for the foreseeable future. Any decision made by the Board of Directors to declare dividends on its common stock in the future will depend on its future earnings, capital requirements, financial condition and other factors deemed relevant by the Board.

Transfer Agent and Registrar

The Transfer Agent for our common stock is Corporate Stock Transfer, Denver, Colorado.

-8-

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data of the Company are derived from information contained in the Company’s consolidated financial statements. The selected consolidated financial and operating data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and notes thereto included elsewhere in this report. For additional information about business combinations, see Note 4 and Note 5 to the Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Management’s Discussion and Analysis

Except for the historical information contained herein, certain matters set forth in this report are forward-looking statements that reflect management’s current views, which can be identified by the use of terms such as “believes”, “estimates”, “plans”, “expects”, “anticipates”, and “intends” or by discussions of strategy, future operating results or events. These forward-looking statements are subject to risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from historical results or those anticipated. Many of the risks and uncertainties are beyond the control of the Company, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results, performance or achievements to differ materially from those anticipated.

General

U.S. Home Systems, Inc. is engaged in the manufacture, design, sale and installation of custom quality specialty home improvement products, and providing consumer financing services to the home improvement and remodeling industry.

The Company’s objective is to become an industry leader as a specialty-product home improvement business. Management plans to accomplish this objective through a combination of acquisitions and organic growth, deeper market penetration through expansion of its product offering, increasing its channels of distribution, and directly providing financing to the Company’s customers, as well as providing financing to third party contractors engaged in the home improvement business.

In July 2001, the Company acquired certain assets of Cabinet Clad, L.L.C. Cabinet Clad is a Detroit, MI based specialty product home improvement business specializing in kitchen remodeling, including replacement kitchen cabinetry, kitchen cabinet refacing, countertops and replacement windows.

In October 2001, the Company acquired all of the outstanding capital stock of First Consumer Credit, Inc. (“FCC”), a Dallas-based consumer finance company specializing in the home improvement and

-9-

Table of Contents

remodeling industry. In connection with the acquisition, a newly created subsidiary of the Company was merged with and into FCC, with FCC surviving as a wholly owned subsidiary of the Company.

On May 31, 2002, the Company completed an acquisition of certain assets of Reface, Inc. Reface is a Norfolk, Virginia-based home improvement business specializing in kitchen and bath remodeling.

On November 30, 2002, the Company acquired all of the outstanding capital stock of Deck America, Inc., (“DAI”) a privately-held Woodbridge, Virginia based home improvement specialist providing patented solutions for the fabrication, sale and installation of decks and deck enclosures. In connection with the acquisition, the Company also acquired DAI’s manufacturing, warehousing and office facilities from an affiliate of DAI. The DAI acquisition was consummated by merging DAI into USA Deck, Inc. (formerly known as Remodelers Credit Corporation), a wholly owned Delaware subsidiary of the Company, with USA Deck as the surviving corporation.

Operations of the acquired business are included in the accompanying consolidated financial statements from their respective dates of acquisition.

The following should be read in conjunction with the Company’s audited financial statements for year ended December 31, 2002, 2001 and 2000, and the notes to the financial statements included therein.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 to the Consolidated Financial Statements included elsewhere herein includes a summary of the significant accounting policies and methods used by the Company in the preparation of its financial statements. The Company believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.

Allowance for Doubtful Accounts.

The Company provides an allowance for doubtful accounts receivable based upon specific identification of problem accounts, expected future default rates and historical default rates. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment in their ability to make payments, additional allowances may be required.

Inventory

Inventory (consisting of raw materials and work-in-process) is carried at the lower of cost (determined by the first-in, first-out method) or market. The Company provides a reserve for lower of cost or market and excess, obsolete and slow moving inventory based on specific identification of problem inventory products, expected sales volume, historical sales volume and trends in pricing. If any estimates were to change, additional reserves may be required.

Finance Receivables Held for Sale

Finance receivables held for sale are carried at the lower of cost or market. The carrying amounts of finance receivables held for sale typically approximate fair value due to the short period of time they are held by the Company (i.e. three months or less). However, if the Company’s ability to sell finance receivables at favorable terms was to deteriorate, a lower of cost or market reserve may be required.

Goodwill

The purchase price allocations related to the Company’s acquisitions were performed in accordance with Financial Accounting Standards Board Statement No. 141, “Business Combinations” and Statement No. 142, “Goodwill and Other Intangibles”. In accordance with these statements, goodwill is not amortized to expense, however the Company is required to analyze goodwill for impairment on a periodic basis.

-10-

Table of Contents

Credit Loss Reserves

The Company has several agreements with a certain financial institution for the purchase of consumer retail installment obligation (“RIO”) portfolios. Each agreement represents a separate commitment from the financial institution as to the aggregate amount of RIO’s that may be purchased under that agreement, as well as the terms of any credit loss risk to each of the parties. In certain of these agreements, if credit losses exceed certain thresholds over specified periods of time, the Company must reimburse the financial institution for the excess credit losses, up to a specified maximum as defined in the agreement, and conversely, if credit losses are less than specified thresholds over certain periods of time, the financial institution is required to reimburse the Company for credit losses less than the specified thresholds, up to a specified maximum. The Company routinely reviews the credit loss experience underlying these agreements with the financial institution. The Company has estimated that at December 31, 2002, the maximum liability for credit losses under these agreements is $300,000. However, based on current estimates of expected losses, the Company has established an accrual for credit losses of approximately $104,000 at December 31, 2002. If credit losses were to exceed current estimates, additional reserves may be required.

Results of Operations

To assist in understanding the Company’s consolidated operating results, the following table indicates the percentage relationship of various income and expense items included in the Statement of Operations for the years ended December 31, 2002, 2001 and 2000 respectively. The table includes a summary of the Company’s financial results by segment.

Comparison of year ended December 31, 2002 to the year ended December 31, 2001.

Summary:

Consolidated revenues were $50,276,000 in the year ended December 31, 2002 as compared to $40,487,000 in the year ended December 31, 2001. Net income was $1,036,000 in the year ended December 31, 2002 as compared to $1,727,000 in the prior year period. The decline in net income from the prior year period occurred in the Company’s home improvement segment and resulted from a combination of factors,

-11-

Table of Contents

including; (i) increases in operating costs and start-up losses in the Company’s new operations, including the start-up of the Company’s operations in southern California under its agreement with Renewal by Andersen; (ii) a decline in the home improvement business gross profit margin principally resulting from the mix of products sold; and (iii) the Company’s operating cycle in which marketing costs are expensed and revenues are recognized.

Increased operating expenses and start-up losses:  In October 2001 the Company entered into an agreement with Renewal by Andersen (RbA), a wholly owned subsidiary of the Andersen Corporation. The agreement provides for the Company to be the exclusive window replacement retailer on an installed basis for RbA in the greater southern California area. Andersen Corporation, the parent of RbA, is the most recognized and used brand in the window and patio door industry. In February 2002 the Company commenced operations in the southern California market under its agreement with RbA, and on June 1, 2002, although three months behind schedule, the Company opened its first RbA showroom in Torrance, California. During the first quarter ended March 31, 2002, in connection with its RbA operations, the Company incurred approximately $325,000 in costs, including advertising, sales and management personnel expenses, and general operating expenses. The Company had no revenues in the first quarter period to offset its start up costs. Subsequent to the first quarter, the Company experienced a number of start-up issues with the RbA operations, including delays in completing customer orders due to longer lead times to acquire the necessary materials, engaging a sufficient number of qualified installers, and delays in completing the Company’s showroom facility. As a result, the RbA operations incurred an operating loss of $812,000 in the year ended December 31, 2002.

In May 2002, the Company began operating in the Milwaukee, Wisconsin market, and in June 2002, the Company acquired the operations of Reface, Inc, a home improvement company operating in the Richmond and Virginia Beach markets. The Company characterizes these operations as start-up operations. During the year ended December 31, 2002, the Company incurred an operating loss of approximately $50,000 from these operations.

Decline in home improvement gross profit margins:  The Company’s strategy is to provide consumers a variety of home improvement products and accordingly increase not only its market share, but also its “share of the customer”. In this respect, the Company has expanded its product offering within existing product lines, such as solid surface countertops in its kitchen remodeling line, as well as the addition of new product lines. Based on the sales prices established by the Company for these products, gross profit margins can vary significantly by product. In the year ended December 31, 2001, replacement window and bathroom remodeling revenues accounted for approximately 14% of home improvement revenues, as compared to approximately 23% of revenues in the year ended December 31, 2002. In addition, consumer demand for solid surface countertops has increased sharply as compared to the prior year. These products generally have lower margins than other products offered by the Company. As a result of the mix of products sold, the Company’s gross profit margin has declined. The Company has increased its selling prices of certain products in January 2003. Management does not believe that the price increases will adversely effect the Company’s revenue growth plans.

Growth and operating cycle:  The Company recognizes revenue upon completion of each sales order. In its normal operating cycle, the Company completes new sales orders within 55 to 60 days from the date an order is received. The operating cycle is slightly longer in the Company’s replacement window product line.

Under current generally accepted accounting principles, marketing costs are expensed as incurred. As a result of the Company’s operating cycle, marketing expenses can precede the completion of sales orders by up to three months. Consequently, in periods in which the Company’s backlog of uncompleted orders increases due to the growth of its operations, or as a result of newly started operations, net income is adversely effected.

In the year ended December 31, 2002, the Company’ home improvement business expanded its operations through initiatives in the Milwaukee, Richmond, Virginia Beach and Westchester markets, and in southern California under its agreement with RbA. In the year ended December 31, 2002, and excluding the Company’s deck operations which were acquired on November 30, 2002, new sales orders were $47,541,000, an increase of 23% from $38,610,000 in the year ended December 31, 2001. Backlog of sales orders to be

-12-

Table of Contents

installed for these operations increased $2,524,000 to $7,161,000 at December 31, 2002 as compared to $4,637,000 at December 31, 2001.

Accordingly, as a result of the Company’s growth initiatives and the associated operating cycle and timing of marketing expenses, net income in the year ended December 31, 2002 was adversely effected.

Detailed Review:

Revenues from the Company’s home improvement segment were $46,068,000 in the year ended December 31, 2002, an increase of approximately 16% from $39,694,000 in the prior year period. The increase in home improvement revenues reflects $5,028,000 from new operations and an increase of $1,346,000 in the same operations as the prior year. Revenue increases principally resulted from increased new sales order volume in the Company’s bathroom refacing and replacement windows products and higher average selling prices. Excluding the Company’s deck operations which were acquired on November 30, 2002, the number of unit installations completed increased 17.0% over the prior year.

Revenues from the consumer finance segment were $4,208,000 for the year ended December 31, 2002, including $3,187,000 from portfolio sales and $1,021,000 from servicing fees and interest income earned on finance receivables. Revenues in the prior year period were $793,000. The Company’s consumer finance business was established in October 2001 when the Company acquired all of the outstanding capital stock of First Consumer Credit, Inc.

Gross profit for the home improvement segment was $24,776,000, or 53.8% of related segment revenues for the year ended December 31, 2002, as compared to $22,392,000, or 56.4% of revenues in the prior year period. The decrease in home improvement gross profit margin as a percentage of revenues is primarily due to a higher mix of lower margin products sold, and an increase in operating costs related to start up and production management overhead related to the Company’s RbA operations.

All expenses associated with acquiring, servicing and selling RIO portfolios of the consumer finance segment are included in operating expenses and consequently gross profit from consumer financing operations is equal to its revenues.

Consolidated operating expenses were approximately $27,098,000, or 53.9% of consolidated revenues for the year ended December 31, 2002, as compared to $20,370,000, or 50.3% of revenues in the prior year period. Operating expenses consist of branch operating expenses, sales and marketing expenses, license fees and general and administrative expenses.

Branch operating expense includes costs associated with each of the Company’s local home improvement branch facilities including rent, telecommunications, branch administration salaries and supplies. Branch operating expenses were $1,995,000, or 4.3% of segment revenues, as compared to $1,478,000, or 3.7% of segment revenues for the year ended December 31, 2002 and 2001, respectively. The increase in branch operating expenses principally reflects the Company’s increased operations from acquisitions, entry into new markets and RbA.

The Company’s home improvement operations are characterized by the need to continuously generate prospective customer leads, and in this respect, marketing and selling expenses constitute a substantial portion of the overall operating expense. Principal marketing activities related to home improvement operations are conducted through a variety of media sources including television, direct mail, marriage mail, magazines, newspaper inserts, canvassing, home shows and telemarketing. Marketing expenses for home improvement operations were approximately $9,311,000, or 20.2% of segment revenues in the year ended December 31, 2002, as compared to $7,582,000, or 19.1% of revenues for the prior year period. In its normal operating cycle, marketing costs, which are expensed as incurred, can precede the completion of sales orders by up to three months. In this respect, since revenues are recognized upon completion of each sales order, marketing expenses as a percentage of revenues will generally be higher in periods of increasing production backlog of uncompleted sales orders. However, marketing expenditures are generally concurrent with the securing of sales orders. Marketing expenses were 19.3% of new sales orders in the year ended December 31, 2002 as compared to 19.6% in the prior year.

-13-

Table of Contents

The increase of marketing expense as a percentage of segment revenues is principally due to the Company’s operating cycle and timing in which marketing costs are expensed and revenues are recognized. Notwithstanding, the Company has reduced its telemarketing activities and increased its utilization of other media sources to generate prospective customer leads. The media sources utilized by the Company are generally more costly than its telemarketing activities resulting in an increase in the cost to acquire a new customer. However, these media sources also generally result in higher sales efficiencies than telemarketing. Consequently, for the year ended December 31, 2002, marketing costs as a percentage of new sales orders declined as compared to the prior year. The Company is continuing to change and refine its marketing mix to higher cost media sources resulting from increased legislation and restrictions on telemarketing. If consumer response to the Company’s media advertising were to decline, or if the Company’s sales efficiencies were to decline, the Company’s earnings could be adversely affected.

Sales expenses, which consist primarily of sales commissions, sales manager salaries, travel and recruiting expenses associated with the home improvement segment, were $8,376,000, or 18.2% of segment revenues for the year ended December 31, 2002, as compared to $6,293,000, or 15.9% of revenues in the prior year period. The increase in sales expenses in dollar terms is principally the result of the sales commissions on higher revenues, and growth in the Company’s operations, including recent acquisitions. The increase in sales expenses as a percentage of segment revenues is principally due to sales personnel costs and increased sales management salaries.

License fees were $826,000, or 1.8% of home improvement segment revenues for the year ended December 31, 2002, as compared to $875,000, or 2.2% of revenues in the prior year. The decrease in license fees is due to a lower amount of the Company’s business sold under the Century 21-license agreement.

General and administrative expenses were approximately $6,579,000, or 13.0% of consolidated revenues for the year ended December 31, 2002, as compared to $4,131,000, or 10.1% of revenues in the prior year period. The increase in general and administrative expenses reflects an increase of $1,950,000 related to the Company’s consumer finance segment which commenced operations in October 2001. In addition to new operations, the Company incurred increased costs related to insurance, benefits, travel and investor relations expenses.

Other income (expense) consists primarily of interest expense offset by interest income. Interest expense increased from the prior year period principally resulting from borrowing under a line of credit utilized by the finance segment to purchase RIO portfolios.

Comparison of year ended December 31, 2001 to the year ended December 31, 2000.

Consolidated revenues increased approximately $2,833,000, or 7.5%, to $40,487,000 for the year ended December 31, 2001 as compared to $37,654,000 for the year ended December 31, 2000. Income before income taxes was approximately $2,837,000 for the year ended December 31, 2001, an increase of 12.4% from $2,524,000 for the year ended December 31, 2000. Net income was $1,727,000 as compared with $2,084,000, respectively. Management believes that income before income taxes is a better comparison of Company operations because of a lower effective income tax rate in the prior year period resulting from a tax-net operating loss carryforward.

Contract revenues and fee income from home improvement sales were $39,694,000 for the year ended December 31, 2001 as compared to $37,654,000 for the year ended December 31, 2000. The increase in revenues reflects a combination of increased new sales order volume in the Company’s bathroom refacing and replacement windows products, higher average selling prices resulting from an increase in general price levels, and reduction in the cycle time to complete installation of sales orders. New sales orders were $38,610,000 for the year ended December 31, 2001 as compared to $37,669,000 in the prior year. Following the tragedy of the September 11, 2001 attack on the World Trade Center, new sales orders were initially adversely effected, however, except for the New York metropolitan area, the generation of new sales orders have substantially returned to their prior levels. The Company’s installation cycle of new sales orders, from the date of sale to completion of installation, has been reduced to approximately 55 days and resulted from manufacturing and installation process enhancements. The number of unit installations completed increased 6.8% over the prior year. Fee income was $247,000 and $265,000 for the years ended December 31, 2001 and 2000, respectively. Backlog of sales orders to be installed was $4,637,000 at December 31, 2001 as compared to $5,474,000 at December 31, 2000.

-14-

Table of Contents

Revenues from the consumer finance segment were $793,000 for the period ended December 31, 2001, including $580,000 from portfolio sales and $213,000 from servicing fees and interest income earned on finance receivables.

Gross profit for the home improvement segment was $22,392,000, or 56.4% of related segment revenues for the year ended December 31, 2001 as compared to $20,585,000, or 54.7% of revenues in the prior year period. The increase in home improvement gross profit margin as a percentage of revenues is primarily due to process enhancements and material yields in the Company’s manufacturing and installations operations, as well as higher average selling prices resulting from an increase in general price levels.

All expenses associated with acquiring, servicing and selling installment sales contract portfolios of the consumer finance segment are included in operating expenses and consequently gross profit from consumer financing operations is equal to its revenues.

Consolidated operating expenses were approximately $20,370,000, or 50.3% of consolidated revenues for the year ended December 31, 2001 as compared to $17,967,000, or 47.7% of revenues in the prior year period. Operating expenses consist of branch operating expenses, sales and marketing expenses, license fees and general and administrative expenses.

Branch operating expense includes costs associated with each of the Company’s local home improvement branch facilities including rent, telecommunications, branch administration salaries and supplies. Branch operating expenses were $1,478,000, or 3.7% of segment revenues as compared to $1,424,000, or 3.8% of segment revenues for the year ended December 31, 2001 and 2000, respectively.

The Company’s home improvement operations are characterized by the need to continuously generate prospective customer leads, and in this respect, marketing and selling expenses constitute a substantial portion of the overall operating expense. Principal marketing activities related to home improvement operations are conducted through a variety of media sources including television, direct mail, marriage mail, magazines, newspaper inserts and telemarketing. In its normal operating cycle, marketing costs, which are expensed as incurred, can precede the completion of sales orders by up to three months. However, the securing of sales orders is generally concurrent with marketing expenditures. In this respect, marketing expenses for home improvement operations were approximately $7,582,000, or 19.1% of segment revenues for the year ended December 31, 2001 as compared to $6,731,000, or 17.9% of revenues for the prior year, and were 19.1% and 17.9% of new sales orders respectively. The increase of marketing expense as a percentage of segment revenues and new sales orders is principally due to lower sales efficiencies combined with a higher cost to acquire a new customer appointment as compared to the prior year.

Sales expenses, which consist primarily of sales commissions, sales manager salaries, travel and recruiting expenses associated with the home improvement segment, were $6,293,000, or 15.9% of segment revenues for the year ended December 31, 2001 as compared to $6,111,000, or 16.2% of revenues in the prior year. The increase in the dollar amount of sales expenses reflects increased sales commissions on higher revenues, as well as increased sales management salaries.

License fees were $875,000, or 2.2% of home improvement segment revenues for the year ended December 31, 2001 as compared to $772,000, or 2.0% of revenues in the prior year. The increase in license fees is due to the mix of the Company’s business sold under the Century 21-license agreement as compared to that sold under the Facelifters and Cabinet Clad brand names.

General and administrative expenses were approximately $4,131,000, or 10.1% of consolidated revenues for the year ended December 31, 2001 as compared to $2,930,000 or 7.8% of revenues in the prior year. The increase in general and administrative expenses reflects increases in employee related expenses, including salaries, bonuses and health benefits, as well as higher expenses associated with a public entity consisting primarily of insurance, legal and accounting fees. General and administrative expenses related to the Company’s consumer finance segment were approximately $583,000 for the period ended December 31, 2001.

Other income (expense) consists primarily of interest expense offset by interest income. Interest expense declined approximately $101,000 from the prior year resulting from lower interest rates under the Company’s credit facilities and the retirement of certain debt in the year ended December 31, 2000.

-15-

Table of Contents

Income taxes were $1,110,000 for the year ended December 31, 2001 as compared to $440,000 for the year ended December 31, 2000. Income taxes in 2000 included a tax benefit associated with the realization of the Company’s net operating loss carryforward.

Liquidity and Capital Resources of The Company

The Company has historically financed its liquidity needs through a variety of sources including proceeds from the sale of common and preferred stock, borrowing under bank credit agreements, and cash flows from operations. At December 31, 2002, the Company had $3,673,000 in cash.

Cash generated from operations was $1,752,000, $1,829,000, and $2,292,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

During the year ended December 31, 2002, the Company completed the acquisitions of Reface, Inc. and Deck America. In the aggregate, the Company utilized approximately $2,409,000 of cash to complete the transactions. Including these transactions, the Company utilized approximately $2,779,000 of cash for investing activities of which $416,000 was for capital expenditures consisting primarily of computer hardware and software. The Company utilized approximately $244,000 of cash in financing activities, inclusive of $160,000 for the redemption of 16,000 shares of the redeemable preferred stock and dividends of $28,000 on such securities.

During the year ended December 31, 2001, the Company completed the Merger, the acquisition of Cabinet Clad, and the acquisition of FCC. In the aggregate, the Company utilized approximately $674,000 of cash to complete the transactions. The Company utilized approximately $2,951,000 of cash for investing activities of which $379,000 was for capital expenditures consisting primarily of computer hardware and software. The Company received approximately $3,695,000 of cash in financing activities, inclusive of proceeds from the Company’s credit facilities and $1,537,000 of cash in the Merger. In 2001, the Company paid $160,000 for the redemption of 16,000 shares of the redeemable preferred stock, and paid dividends of $174,000 on such securities.

During the year ended December 31, 2000, the Company utilized $1,090,000 to prepay loans to certain stockholders some of whom are also directors, $321,000 for the redemption of 24,000 shares of the redeemable preferred stock, and dividends on such securities pursuant to the terms of the redeemable preferred stock, and approximately $534,000 for the payment of other financing obligations. Capital expenditures, consisting primarily of manufacturing and computer equipment, were $57,000 for the year ended December 31, 2000.

In April 2000, the Company entered into an agreement with a financial institution (the “Loan Agreement”) consisting of a $516,666 secured term note (the “Term Note”) and a revolving credit facility that allows borrowings up to $600,000 (the “Revolving Credit Facility”). Proceeds from the Term Note were used to retire an existing term loan. Concurrent with this refinancing, the Company utilized $315,000 of internally generated funds to retire an existing revolving credit facility.

In connection with the Company’s refinancing of a certain term loan and revolving credit facility in April 2000, the Company entered into the Term Note and the Revolving Credit Facility. Interest on the Term Note, as amended, is payable monthly at the Prime Rate. Borrowings and required payments under the Revolving Credit Facility are based upon an asset formula involving accounts receivable and inventory. The Revolving Credit Facility, as amended, matures April 1, 2003. Interest on the Revolving Credit Facility is payable monthly at LIBOR plus 2.6%. At December 31, 2002 and 2001, the Company had no outstanding borrowings under the Revolving Credit Facility and, based upon the terms of the agreement, had a borrowing capacity of $600,000. The Loan Agreement is secured by substantially all of the assets of U.S. Remodelers, and the Company is guarantor.

In connection with the acquisition of Deck America (“DAI”), the Company’s subsidiary USA Deck, Inc. purchased DAI’s warehousing, manufacturing and office facilities. USA Deck obtained a mortgage in the amount of $2,125,000 from GE Capital Business Asset Funding. The mortgage is secured by the property. Among other provisions, (i) interest on the mortgage is 7.25%, (ii) the mortgage is subject to a prepayment premium, and (iii) the mortgage is guaranteed by the Company.

-16-

Table of Contents

Also in connection with the acquisition of DAI, USA Deck assumed DAI’s secured term loan obligations. Interest on the term loans range from 8.0% to 9.0%. At December 31, 2002, the outstanding balance of the term loans was $125,903. In addition, USA Deck has a revolving line of credit with a financial institution that allows borrowings up to $500,000. Borrowings and required payments under the revolving credit line are based on an asset formula involving USA Deck’s accounts receivable and inventory. Interest under the revolving credit line is payable monthly at the prime rate plus 1.0%, which was 5.25% at December 31, 2002. The revolving credit line matures May 31, 2003 at which time any outstanding principal and accrued interest is due and payable. The line of credit is secured by substantially all of the assets of USA Deck, and the Company is guarantor. At December 31, 2002, USA Deck had no outstanding borrowings under the revolving credit line and, based upon the terms of the agreement, had a borrowing capacity of approximately $375,000.

The Company’s consumer finance subsidiary, FCC, has a revolving line of credit that allows borrowings up to $5,000,000. The proceeds from the line of credit are utilized to purchase RIO’s from remodeling contractors. Borrowings and required payments under the revolving line of credit are based upon an asset formula involving the outstanding principal balance of RIO’s. FCC is required to pay down the line of credit upon the sale of RIO’s, or if the borrowing base is less than the outstanding principal balance of eligible RIO’s. FCC typically holds a portfolio of RIO’s a minimal period of time before portfolios are accumulated and sold. The Company believes that the existing line of credit is sufficient for FCC’s operations. The line of credit is not affected by the Credit Facility as described below. Interest on the line of credit is payable monthly at LIBOR plus 2.6%. At December 31, 2002, the interest rate was 4.0%. The line of credit, as amended, matures April 1, 2003 at which time any outstanding principal and accrued interest is due and payable. The Company plans to renew the credit facility in March 2003. The line of credit is secured by substantially all of the assets of FCC and the Company is guarantor. At December 31, 2002 and 2001, the Company had outstanding borrowings under the line of credit of $2,720,662 and $2,506,536, respectively.

The Company’s credit facilities contain covenants, which among other matters, (i) limit the Company’s ability to incur indebtedness, merge, consolidate and sell assets; (ii) require the Company to satisfy certain ratios related to net worth, debt to cash flows and interest coverage, and (iii) limit the payment of cash dividends on common stock.

The Company’s consumer financing business has several agreements with a certain financial institution for the purchase of RIO portfolios. Each agreement represents a separate commitment from the financial institution as to the aggregate amount of RIO’s that may be purchased under that agreement, as well as the terms of any credit loss risk to each of the parties. In certain of these agreements, the Company deposits a portion of the proceeds of the portfolio sale, usually 0.5% of the principal balance of RIO’s purchased, into a restricted bank account, to offset the institutions credit risk in its purchased portfolio (the “Hold Back Reserve”). If credit losses exceed certain thresholds over specified periods of time, the Company must reimburse the financial institution for the excess credit losses, up to a specified maximum as defined in the agreement, and conversely, if credit losses are less than specified thresholds over certain periods of time, the financial institution releases the Hold Back Reserve to the Company, and is required to reimburse the Company for credit losses less than the specified thresholds, up to a specified maximum. The Company periodically reviews the credit loss experience underlying these agreements with the financial institution. During the year ended December 31, 2002, approximately $40,000 of credit losses were charged against the reserve. The Company has estimated that at December 31, 2002, the maximum liability for credit losses under these agreements is $300,000. However, based on current estimates of expected losses, the Company has established an accrual for credit losses of approximately $104,000 at December 31, 2002.

On February 11, 2003, First Consumer Credit, Inc. entered into a $75 million credit facility agreement (the “Credit Facility”) with Autobahn as the lender, and DZ Bank as the Agent. FCCA, a wholly owned, single purpose subsidiary of FCC, is the borrower under the Credit Facility and FCCA will purchase RIO portfolios from FCC. The Credit Facility is a five-year program funded out of DZ-Banks’ conduit, Autobahn, pursuant to which Autobahn will fund loans made to FCCA through the issuance of commercial paper. DZ Bank will provide a standby liquidity facility necessary for Autobahn to issue the commercial paper. The Credit Facility is restricted to the purchase and financing of RIO’s, and is secured by the RIO’s purchased under the Credit Facility. FCC is the servicer under the Credit Facility. The Company has guaranteed to FCCA, the lender and Agent the performance by FCC of its obligations and duties under the Credit Facility in the event of fraud, intentional misrepresentation or intentional failure to act by FCC. Among other provisions, and providing that no event of default has occurred and is continuing, the Credit Facility provides that (i) subject to the $75

-17-

Table of Contents

million credit limit, the maximum advance under the Credit Facility is 90% of the amount of eligible RIO’s (ii) in the event that an RIO ceases to be an eligible RIO, FCCA is required to pay down the line of credit in an amount by which the outstanding borrowings do not exceed the maximum advance rate applied to the outstanding balance of the eligible RIO’s, (iii) each advance under the facility will be an amount not less than $250,000 and will be funded by the issuance of commercial paper at various terms with interest payable at the rate of the Agent’s then current commercial paper rate plus 2.5%, (iv) if the Excess Spread, as that term is defined in the Credit Facility, is less than a specified level, FCCA is required to deposit funds into a sinking fund account, or purchase specified rate caps or other interest rate hedging instruments, to hedge to the extent possible the interest rate exposure of the lender, and (v) FCCA shall pay Agent’s fees and expenses, including a structuring fee in the amount $375,000. The Credit Facility contains representations, warranties and covenants as is customary in a commercial transaction of this nature.

FCC purchases RIO’s from select remodeling contractors, including RIO’s generated by the Company’s home improvement operations. Prior to entering into the Credit Facility, once FCC had accumulated a portfolio of RIO’s, FCC sold these portfolios to banks and insurance companies under negotiated purchase commitments, earning a one-time premium upon each sale. In most cases, FCC has retained the collection and servicing of these accounts on behalf of the investor and FCC earns a servicing fee from the investor. The Credit Facility provides FCC the ability to finance RIO’s purchased from remodeling contractors, and earn continuing finance charges over the life of the RIO’s as opposed to a lesser, one-time premium it previously earned. However, the change in the FCC’s business model, from selling to financing portfolios of RIO’s, will adversely affect FCC’s profitability and cash flow in the short term. In this respect, FCC will forgo the initial one-time premium it earned upon selling a portfolio, but FCC will earn finance charges over the life of the portfolio, typically a three to five year period. Consequently, until FCC has accumulated a sufficient amount of financed RIO’s, and finance charges earned on the RIO portfolios reach a sufficient level, FCC’s earnings will be adversely affected. Management believes that FCC will return to profitability in the first quarter of 2004, and that FCC’s long-term profitability will improve due to the continuing income stream from the greater amount of finance charges earned.

Additionally, since the maximum advance under the Credit Facility is 90% of the amount of eligible RIO’s, and because of the expected adverse impact on FCC’s short-term earnings, the Company may be required to seek additional financing to fund FCC’s operations. The Company is currently reviewing alternatives for the additional financing, including the Company’s available borrowing capacity under its existing revolving credit facility with a financial institution. Although the Company has no agreements or commitments for additional financing, management believes that the Company will be able to secure the financing, if needed, through the issuance of equity securities or debt obligations. However, there can be no assurance that additional financing will be available, or if available, that such financing will be on favorable terms. The failure of the Company to secure additional financing, if needed, could impair FCC’s ability to fully utilize the available funds under the Credit Facility, as well as restrict FCC’s ability to purchase RIO’s, which would have an adverse impact on FCC’s results of operations.

Although the Company believes that it will have sufficient cash and borrowing capacity under its credit facilities to meet its anticipated working capital needs for the next twelve months, the Company believes that it will need additional financing to fund its growth strategy, including acquisitions. There can be no assurance that additional financing will be available, or if available, that such financing will be on favorable terms. Any such failure to secure additional financing, if needed, could impair the Company’s ability to achieve its growth strategy. There can be no assurance that the Company will have sufficient funds or successfully achieve its plans to a level that will have a positive effect on its results of operations or financial condition. The ability of the Company to execute its growth strategy is contingent upon sufficient capital as well as other factors, including its ability to further increase consumer awareness of its products by advertising, its ability to consummate acquisitions of complimentary businesses, general economic and industry conditions, its ability to recruit, train and retain a qualified sales staff, and other factors, many of which are beyond the control of the Company. Even if the Company’s revenues and earnings grow rapidly, such growth may significantly strain the Company’s management and its operational and technical resources. If the Company is successful in obtaining greater market penetration with its products, the Company will be required to deliver increasing volumes of its products to its customers on a timely basis at a reasonable cost to the Company. No assurance can be given that the Company can meet increased product demand or that the Company will be able to satisfy increased production demands on a timely and cost- effective basis. There can be no assurance that the Company’s growth strategy will be successful, and if one or more of the component parts of the

-18-

Table of Contents

Company’s growth strategy is unsuccessful, there can be no assurance that such lack of success will not have a material adverse effect on the Company’s financial condition.

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002, and SFAS No. 146, Accounting for Costs Associated with Exit on Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002. There was no effect on the financial statements related to this adoption.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to a minimal amount of financial market risks from changes in short-term interest rates as a portion of the Company’s debt contains interest rates which vary with interest rate changes in the prime rate or LIBOR. Based on our current aggregate variable debt level, we believe that these rates would have to increase significantly for the resulting adverse impact on our interest expense to be material to our results of operations.

However, in February 2003, the Company’s finance subsidiary entered into a $75 million credit facility to finance the purchase of RIO’s. The Credit Facility requires each advance under the facility will be an amount not less than $250,000 and will be funded by the issuance of commercial paper at various terms with interest payable at the rate of the Agent’s then current commercial paper rate plus 2.5%. Consequently, in the future, the Company’s exposure to these market risks will increase with the anticipated increase in the level of our variable rate debt. The RIO’s underlying the Credit Facility contain fixed-rate interest terms. If the Excess Spread, as that term is defined in the Credit Facility, is less than a specified level, the Company is required to deposit funds into a sinking fund account, or purchase specified rate caps or other interest rate hedging instruments, to hedge to the extent possible the interest rate exposure of the lender.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Schedule II – Valuation and Qualifying Accounts. Reference is made to page F-1 herein for the Index to the Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

-19-

Table of Contents

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The Company will file with the Securities and Exchange Commission a definitive Proxy Statement (the “Proxy Statement”) not later than 120 days after the close of the fiscal year ended December 31, 2002. The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Certain of the information required by this item is incorporated herein by reference to the Proxy Statement.

Equity Compensation Plan—The following table provides information as of December 31, 2002 with respect to the Company’s common shares issuable under equity compensation plans:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the Proxy Statement.

-20-

Table of Contents

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in the Company’s periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)(2) Financial Statements and Schedules. Reference is made to page F-1 herein for the Index to the Consolidated Financial Statements. Reference is made to pages S-1 and S-2 for the Report of Independent Auditors and Schedule II – Valuation and Qualifying Accounts.

-21-

Table of Contents

-22-

Table of Contents

-23-

Table of Contents

During the last quarter of 2002, the Company filed two reports on Form 8-K. On October 17, 2002, the Company reported entering into an agreement to acquire Deck America, Inc., a privately-held Woodridge, Virginia based home improvement specialist. On December 12, 2002, the Company reported the completion of the acquisition of Deck America, Inc.

-24-

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on March 19, 2003 on its behalf by the undersigned, thereto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 19, 2003.

Certifications

The undersigned, Murray H. Gross, President and Chief Executive Officer of U.S. Home Systems, Inc. (the “Company”), certify that:

1. I have reviewed this annual report on Form 10-K of U.S. Home Systems, Inc.;

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

-25-

Table of Contents

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

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

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

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

6. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other facts that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  March 19, 2003

The undersigned, Robert A. DeFronzo, Secretary/Treasurer and Chief Financial Officer of U.S. Home Systems, Inc. (the “Company”), certify that:

1. I have reviewed this annual report on Form 10-K of U.S. Home Systems, Inc.;

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

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

-26-

Table of Contents

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

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

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other facts that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  March 19, 2003

-27-

Table of Contents

U.S. HOME SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

F-1

Table of Contents

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

U.S. Home Systems, Inc.

We have audited the accompanying consolidated balance sheets of U.S. Home Systems, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Home Systems, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets.

Ernst & Young LLP

Fort Worth, Texas

March 12, 2003

F-2

Table of Contents

U.S. Home Systems, Inc.

Consolidated Balance Sheets

See accompanying notes.

F-3

Table of Contents

U.S. Home Systems, Inc.

Consolidated Statements of Operations

See accompanying notes.

F-4

Table of Contents

U.S. Home Systems, Inc.

Consolidated Statements of Stockholders’ Equity