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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.

Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2002, TFCE’s most recently completed second fiscal quarter, (based on the closing sale price of $1.75 of the registrant’s voting stock, as reported on the NASDAQ Stock Market on such date) was approximately $16,113,694.

The number of shares outstanding of the registrant’s Common Stock as of March 15, 2003 was 11,551,033

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 Rule 12b-2 of the Act).

TFC ENTERPRISES, INC.
2002 FORM 10-K

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TABLE OF CONTENTS

PART I

This report contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such acts.  Any statements contained in this Report that are not statements of historical fact are forward-looking statements.  Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks” and similar expressions are intended to identify forward-looking statements.  The important factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Disclosure and Risk Factors,” among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this report and those presented elsewhere by management from time to time.  Please refer to the cautionary statement that appears at the beginning of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

ITEM 1.      BUSINESS

The Company

We began operations in 1977 in Alexandria, Virginia, with the founding of The Finance Company by Robert S. Raley, Jr., our current Chairman of the Board and Chief Executive Officer.  Mr. Raley has spent his entire 43-year career exclusively within the consumer finance industry.  We now conduct operations primarily through The Finance Company, a wholly-owned subsidiary.

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Through The Finance Company, we purchase and service retail installment sales contracts originated by automobile and motorcycle dealers in the sale of vehicles, consisting of new and used automobiles, vans, light trucks, and motorcycles on an individual basis.  Retail installment sales contracts are acquired after we have reviewed and approved the vehicle purchaser’s credit application. The primary focus of our business is retail installment sales contracts originated by dealers with consumers who are United States enlisted military personnel, in the E-1 through E-4 pay grades and non-military consumers who do not have access to traditional sources of credit. To achieve an acceptable rate of return and provide for credit risks, contracts are purchased from dealers at a discount to the remaining principal balance.  The discount is held in a nonrefundable reserve against which credit losses are first applied. We are based in Norfolk, Virginia, with Contract Production Offices throughout the United States.

Our purchases provide us with the ability to direct the credit underwriting process at the initiation of the retail installment sales contract.  Participating dealers benefit by having a source of financing for a group of customers who typically find financing difficult to obtain.  This financing allows a dealer to increase the number of vehicles sold and improves dealer profitability.  Consumers also benefit because the financing we provide enables them to purchase a vehicle they otherwise might not be able to buy.  As of December 31, 2002, $200.8 million, or 99%, of our gross contract receivables represented point-of-sale purchases, compared to $227.8 million, or 91%, at December 31, 2001 and $202.5 million, or 75%, at December 31, 2000.

Although we underwrite and purchase contracts through the various contract production offices, the responsibility for servicing the accounts is centralized at our service center located in Norfolk, Virginia.

In the bulk purchase business, which ceased operations in March 2001, we had emphasized acquisitions of portfolios of seasoned retail installment sales contracts.  These contracts normally had a payment history of at least three months.  While the typical bulk purchase was approximately $250,000, we had, at times, purchased portfolios totaling more than $12 million.  As of December 31, 2002, $2.4 million, or 1%, of our gross contract receivables was attributable to bulk purchases, compared to $20.3 million, or 9%, at December 31, 2001, and $64.5 million, or 25%, at December 31, 2000.

Unless otherwise noted herein, disclosures in this Annual Report on Form 10-K relate only to our continuing operations. Our discontinued operations consist of the consumer finance segment, which was divested in November 2002.

TFC Enterprises, Inc. was incorporated under the laws of Delaware.  Our principal executive and administrative offices are located at 5425 Robin Hood Road, Suite 101B, Norfolk, Virginia 23513, and our telephone number is (757) 858-1400.  In this report, when we refer to “TFC Enterprises,” “Company,” “we” or “us” or make similar references, we mean TFC Enterprises, Inc. and its wholly owned subsidiaries.

Discontinued Operations

Asset Sale of First Community Finance

On October 1, 2002, the Board of Directors authorized the Company, as the sole shareholder of First Community Finance, to sell substantially all the assets of First Community Finance.  On November 4, 2002, the Company sold the majority of its consumer finance receivables to an unrelated third party “buyer” for approximately $21 million.  Pursuant to the terms of the transaction, the buyer offered employment to the majority of First Community Finance’s employees and assumed all of the leases relating to the branch locations.  Total net proceeds were paid on the closing date in cash. 

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Pursuant to the terms of the transaction, the Company has retained approximately $3.8 million in consumer finance receivables.  The Company has stopped originating loans through First Community Finance and is currently attempting to collect the remaining receivables.

Industry Overview

Commercial banks and captive finance companies of major automobile manufacturers tend to dominate most segments of the automotive finance industry.  Although consumer credit risk classifications are not standardized, institutions generally concentrate on consumers that could be characterized as being “low-risk” or “medium-risk” from a credit perspective.  Our target market involves consumers that are characterized as being “high-risk” from a credit perspective.

In 2001 and continuing in 2002, our management has directed TFC Enterprises toward those sectors of the market in which management believes pricing more closely reflects inherent risk.  Our focus is the automobile retail installment sales contract business which involve consumers whom have limited access to traditional sources of credit.

AUTOMOBILE FINANCE OPERATIONS

Dealer Selection and Program

Through its marketing efforts, The Finance Company has established relationships with automobile dealers that originate retail installment sales contracts which are then purchased by The Finance Company, through individual purchases.  We have relationships with both franchised and independent dealerships that are not affiliated with us.

To achieve an acceptable rate of return and provide for credit risks, we purchase contracts from dealers at a discount to the principal balance.  In automobile retail installment sales contract purchases, the discount is the difference between the purchase price we pay the dealer and the amount financed, net of the cost of ancillary products such as warranty, other loss protection products and physical damage insurance The amount of the discount at which contracts are purchased reflects, among other things, term and credit risk.  We purchase contracts in accordance with applicable underwriting criteria and pursuant to a Master Dealer Agreement, in the case of automobile retail installment sales contract purchases, or an Asset Purchase Agreement, in the case of the bulk purchases.

We believe that our marketing programs substantially benefit dealers.  The programs provide a source of financing for a group of customers which typically finds financing difficult to obtain.  Accordingly, dealers are able to sell more vehicles and improve their profitability.  In addition, we provide the following services to dealers:  (1) documentation designed to conform to applicable federal and state laws; (2) timely response to credit applications; (3) timely payment for approved installment contracts; and (4) access to a range of ancillary products.

Sales and Marketing

We market to both franchised and independent dealerships.  Prospective dealers are contacted initially by phone and by personal visits to dealer facilities by appropriate personnel.  In addition, we establish relationships with dealers through referrals from existing dealers.  We also distribute marketing brochures and run advertisements in trade journals and other industry publications directed to dealers.  Further, we participate at automobile dealers association meetings and conventions.

Competition

There are numerous providers of financing for the purchase of used vehicles. These financing sources include banks, savings and loan associations, consumer finance companies, credit unions and financing divisions of automobile manufacturers or automobile retailers.  Many of these providers of vehicle financing have significantly greater resources than The Finance Company and have relationships with established dealer networks.  We have focused on a segment of the market comprised of consumers who typically do not meet the more stringent credit requirements of the traditional sources of consumer financing.  As a result, the borrowing needs of these less credit-worthy

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consumers have historically not been consistently addressed by traditional financing sources.  If, however, the other providers of consumer financing were to assert a significantly greater effort to penetrate our targeted market segment, given their financial strength, The Finance Company could be materially and adversely affected by the increased competition.

Automobile Retail Installment Sales Contract Purchase Program

The Finance Company establishes relationships with dealers who meet its financial, organizational and compliance criteria.  We currently make purchases from dealers in approximately 30 states.

The Finance Company purchases contracts pursuant to a Master Dealer Agreement.  Upon entering into a Master Dealer Agreement, we provide the dealer with necessary documentation for originating retail installment sales contracts and training its personnel in the use of our documentation.  The Master Dealer Agreement contains representations and warranties by the dealer to The Finance Company on certain matters, including the security interest in the vehicle.  It also sets forth the general terms upon which retail installment contracts will be purchased by us.  The agreements are nonexclusive and do not obligate a dealer to sell, or The Finance Company to purchase, any particular contract or volume of contracts.  The Master Dealer Agreement may be terminated at any time by us or by the dealer (without, however, affecting either party’s obligations in respect of contracts purchased prior to termination).

Typically, a dealer will submit a customer’s credit application to more than one financing source for review.  Under our program, a dealer is required to provide us with a completed credit application that lists the applicant’s liabilities, income, credit and employment history, and other personal information bearing on the decision to extend credit.  The information from the application is then entered into our automated application processing system and an initial screening is performed to determine whether the applicant satisfied our threshold credit criteria.  If a credit investigation is warranted, the system will then automatically contact the credit bureau, include the information obtained in the applicant’s electronic file and identify any characteristics of the applicant that are outside the parameters of our credit guidelines.

The application and collected information are then analyzed by one of our credit analysts.  The credit analyst’s primary concern is the ability and likelihood of the applicant to make regular monthly payments. In addition, the analyst considers the value of the collateral securing the loan.  A credit analyst evaluates the applicant’s personal cash flow requirements and ability to make regular payments.  The credit analyst also considers other factors, including the size of the monthly payment in relation to the applicant’s monthly income and other monthly payment obligations, as well as the amount of money to be financed in relation to the purchase price and value of the vehicle.  We determine collateral value based upon the Kelley Blue Book.

In addition to our standard underwriting investigation procedures, for a military customer we require an employment letter which is a document from the applicant’s military command that details pay grade, enlistment date, time left in the service, recent advancements or demotions, and any disciplinary action.  Contracts generally will not be purchased if the applicant has had a reduction in rank or has had any serious disciplinary action while in the service.  The applicant’s time left in service is used to determine the maximum term of the loan.  The maximum loan and payment amounts are established by an applicant’s pay grade.   A budget margin is also calculated for each applicant and the margin generally cannot exceed preset limits.

Upon completion of the credit application review, a credit analyst will decide whether to approve the financing as submitted, decline the financing or conditionally approve the financing.  Applicants with characteristics outside the parameters of the credit guidelines require the approval of a senior credit analyst or above.  Conditional approval of the financing may involve amending the proposed terms of the contract to enable an applicant to qualify under our guidelines.  Typical matters which might require amendment include requiring a co-signer, changing the length of the

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term of payment, requiring a greater down payment, substantiating certain additional credit information and requiring proof of resolution of certain credit deficiencies as noted on the customer’s credit bureau reports.  Approved, declined or conditional purchase decisions are promptly communicated to the dealer.  Prior to our funding an approved purchase, another credit staff member completes a checklist which verifies that all required documentation has been obtained and is accurate.

Typically, retail installment contracts are purchased by and assigned to The Finance Company at a price that reflects a discount from the amount financed.  All of the discount is held in a non-refundable reserve against which credit losses are first applied.  Dealers are generally advanced 75 to 80% of the amount financed (less ancillary products) for their military customers with good credit and 90 to 95% for non-military customers. The assigning dealer makes certain warranties as to the validity of the contract and compliance with certain laws.  Also, the dealer generally agrees to indemnify us for any claim, defense or set-off against the dealer that may be asserted against us by reason of the assignment.  At the time of purchase, we require either physical damage insurance or a combination of GAP protection and total loss coverage on all automobiles covered by the retail installment sales contracts that we purchase.  To the extent that material terms of a contract prove to be inaccurate, we generally have the right under the Master Dealer Agreement to require the dealer to repurchase the contract.

Contract Duration

Contracts in The Finance Company’s point-of-sale portfolio have an initial duration normally ranging from 36 to 60 months, with an average original maturity of approximately 46 months.  Bulk purchase contracts generally had an average remaining maturity of 18 to 24 months at the time of purchase.

Contract Purchase Volume

The Finance Company’s contract purchase volume is discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below.

Ancillary Products

The Finance Company offers through its dealers warranty and other loss protection products as allowed by the state.  These products are provided and underwritten by third-party vendors.  Accordingly, liabilities under the ancillary

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products are not our obligation.  We offer these products to dealers so that they, in turn, may provide vehicle purchasers a more complete line of products and services.  By offering these products, we are able to generate supplementary revenue without incurring significant additional expenses.  During 2002, 2001 and 2000, The Finance Company generated gross revenues of approximately $0.6 million, $0.5 million, and $0.2 million, respectively, from the sale of ancillary products through its dealers.

Collections

The Finance Company receives payments on purchased contracts through a number of different means, including electronic transfer, personal check, payroll check endorsed to it, government check (such as Social Security, disability or income tax refund check that is endorsed to it), cashier’s check, traveler’s check, money order, Western Union Quick Collect Check, bank wire transfer and cash.  We monitor payments to maintain each customer’s current address and banking data.  In certain instances, a customer will make a payment at one of our contract production offices or our service center.

Our underwriting guidelines dictate that United States military enlisted personnel must, prior to their origination of a contract with a dealer, execute an authorized allotment form.  The form provides for the automatic electronic transfer of monthly payments to The Finance Company.  The process is managed by a third-party data processor, Military Assistance Corporation.  Salary allotments are effected monthly by the respective military branch’s disbursement center.  On the first day of each month immediately following a month in which allotments are effected, the amount of such allotment is deposited into a transaction account at Fort Knox National Bank established by Military Assistance Corporation in the name of the obligor.  The salary allotment is immediately transferred by Military Assistance Corporation first, from the obligor’s account to a Military Assistance Corporation custodial account at Fort Knox - National Bank, and, second, to the collection account.  The allotment system enables United States military personnel to effect timely payment of their obligations without regard to reassignment or temporary relocation characteristic of United States military enlisted personnel.  Although it is a purchase requirement to the dealer to require United States military enlisted personnel to initially authorize the allotment of their respective monthly payments to The Finance Company, the allotments are voluntary and may be withdrawn. The mere withdrawal of an allotment authorization does not constitute an event of default under a contract, but it could make it more difficult to effect collections on our delinquent receivables.

Monitoring the payment history of accounts and implementing appropriate remedial action is the responsibility of our Collections Department within the service center and the auto center branches.  At year-end 2002, a total of 89 employees, or 53% of The Finance Company’s total full-time equivalent employees, worked in Collections.

One of the primary responsibilities of Collections is to monitor customer accounts that are delinquent in payment.  Collections Department personnel work with customers to resolve payment problems and bring accounts to current status at the earliest possible stage of delinquency.  Collections Department employees are compensated, in part, through bonuses tied to their monthly collection performance.

When calling a customer with a delinquent account, Collections Department personnel utilize The Finance Company’s Collections Training Manual.  Developed by us, the manual specifies the procedures to follow in different circumstances in order to maximize the effectiveness of the call.  The specific action our employees take on a delinquent account will depend on the customer’s particular circumstances as well as the past payment history of the account.  However, in all cases, our primary focus is resolving the problem causing the delinquency, arranging a modified payment plan, or working out a settlement agreement.  Each Department employee is responsible for keeping records of all collections activity carried out on each account and for following up on “callback” and “broken promise” dates as appropriate.  In addition, Collections personnel are responsible for following up as necessary on bankruptcies and requesting repossession and legal action.

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When we have difficulty locating a customer, Collections personnel attempt to find the individual through skip tracing, which utilizes various sources of available information about a customer.  Military personnel have almost no ability to become a “skip” as long as they remain in the military.  In the event of transfer, they can be located through the military locator service, which provides current duty station addresses and phone numbers.  All communications with and efforts to locate the customer are reflected in our data files.

In certain situations, we will repossess a vehicle.  If a deficiency exists after we repossess and sell a vehicle, we may take action to obtain a judgment and garnishee a customer’s wages and assets.  From an accounting perspective, repossessed assets are carried at the lower of the unpaid loan balance or anticipated liquidation proceeds.

We generally charge off accounts at the end of the month in which they become 180 days past due based on the contract.  Additionally, in the month that a repossession occurs, the carrying value of the repossessed asset is reduced through charge-off to the lower of the unpaid contract balance or anticipated liquidation proceeds.  Once an account is charged off, it is transferred to the Recovery Unit, a separate group of collectors who continue collection activities.  The collection activities undertaken by the Recovery Unit are similar in many respects to those of the Collections personnel.  Customers are called as required and attempts are made to set up repayment plans or work out settlement agreements as appropriate to a customer’s circumstances.  Each Recovery Unit employee is responsible for keeping records of all collections activity carried out on Recovery Unit accounts and for following up on callback and broken promise dates as appropriate.  The Recovery Unit is also responsible for following up as necessary on bankruptcies and requesting repossession and legal action.

The Finance Company’s charge-off and delinquency experience is discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 below.

INFORMATION SYSTEMS

We process all data relating to our contract receivables and financial reporting through a distributed network of computers.  Our computer systems are networked together to provide information to management for analysis as well as automatic posting to the general ledger for financial reporting purposes.  The systems provide for complete contract processing from the purchase of the contract, payment to the dealer, posting of payments and all other collection activity from the inception date of the installment contract.  Our systems operate on software that has been adapted to the specific manner in which we operate our business.

We have invested in technology that enables us to electronically process credit applications.  This technology reduces processing time and improves standardization of credit underwriting without significant staff increases.  TFC’s loan servicing software systems interface with a predictive dialing system designed to enhance collection activity by increasing the number of customer contacts per collector hour.  The system dials multiple telephone numbers simultaneously based on parameters defined by the Collections Department.  Calls are connected automatically to a collector at the same time the customer’s account is displayed on the collector’s computer screen.  The process permits better control of calling patterns for more effective calling and improved customer contact rates.  By eliminating busy signals, no answers and answering machines, the system enables the collector to speak to more customers.  The system also reports collection performance by collector for improved supervision and results.  The company also utilizes an imaging system which eliminates all but essential paper files.

We have sufficient management information systems in place to meet our current and near-term future requirements.

Regulation

Our businesses are subject to regulation and licensing under various federal, state and local statutes and regulations. Certain states where we operate have adopted motor vehicle retail installment sales acts or variations, consumer finance acts and third party debt collections acts.  These laws regulate, among other things, the interest rates and terms and conditions of motor vehicle retail installment sales contracts.  These state laws also impose restrictions on direct consumer loan transactions, require disclosures in addition to the requirements under federal law and impose specific statutory liabilities upon creditors who fail to comply. 

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Numerous federal and state consumer protection laws and related regulations impose substantive disclosure requirements upon lenders and servicers involved in motor vehicle financing.  Some of the federal laws and regulations include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Motor Vehicle Information and Cost Savings Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board’s Regulations B and Z, the Graham-Leach-Bliley Act of 1999 and the Soldiers’ and Sailors’ Civil Relief Act.

In addition, the Federal Trade Commission has adopted the holder-in-due-course rule.  This rule has the effect of subjecting persons that finance retail installment credit transactions (and certain related lenders and their assignees) to all claims and defenses which the purchaser could assert against the seller of the goods and services.  A regulation which applies specifically to the sale of used automobiles is the Federal Trade Commission’s rule on Sale of Used Vehicles.  It requires all sellers of used vehicles to prepare, complete and display a buyer’s guide which explains the warranty coverage for these vehicles.  The Federal Trade Commission’s Credit Practices Rules impose additional restrictions on sales contract provisions and credit practices.

We believe that we are in compliance in all material respects with all applicable laws and regulations.

Employees

At December 31, 2002, we had 168 full-time equivalent employees.  No employees are currently covered by collective bargaining agreements.  We believe that our employee relations are excellent.

Executive Officers of the Company

The executive officers of the Company are as follows:

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Robert S. Raley, Jr. founded The Finance Company in 1977 and has served as Chairman of the Board from that time until April 1990 and again from May 1990 to the present.  Additionally, he served as President and Chief Executive Officer of The Finance Company from 1977 to April 1990, from May 1990 to December 1992 and from August 1996 to the present.  Mr. Raley has also served as Chairman of the Board of TFC Enterprises since its inception in 1984 until April 1990 and again from May 1990 to the present and as its President and Chief Executive Officer from 1984 until April 1990 and again from May 1990 through 1992 and from August 1996 to the present.  Mr. Raley initially entered the consumer finance industry in 1959.

Ronald G. Tray joined The Finance Company as a Vice President and director for Management Information Systems in 1989.  Mr. Tray was appointed Chief Operating Officer and Director of The Finance Company in 1996 and then appointed President in 2000.  Mr. Tray was appointed Vice President of TFC Enterprises in 1996 and then appointed President and Director in 2001.  Prior to joining The Finance Company, Mr. Tray was employed by MTech Corporation, a data processing service bureau for banks, located in Fairfax, Virginia, for approximately 20 years.  He served as President of Mtech’s Mid-Atlantic Division for the last 2 1/2 years.

Delma H. Ambrose joined The Finance Company in 1989 and has served in several capacities prior to becoming the General Manager of the Norfolk Service Center in 1996.  Prior to joining The Finance Company, she was employed by Beneficial Finance Corporation for 11 years.

Rick S. Lieberman joined The Finance Company in 1989 and has served in several capacities, including Vice President and General Manager of the Norfolk Regional Service Center until 1996 when he assumed his current position.  Prior to joining The Finance Company, he was employed by ITT Consumer Financial Corporation for 8 years.

Patricia Piccola joined The Finance Company in 1980 through an acquisition of another specialty finance company.  During her tenure, Ms. Piccola has been involved in nearly every function of The Finance Company’s corporate finance and administrative areas, most recently as Assistant to the Chief Operating Officer.  She assumed her current position in 2000.

Denise L. Newlon joined The Finance Company in 1996 and has served in several capacities, including Controller.  Prior to joining The Finance Company, she was employed by several banking institutions.  She assumed her current position in 2003. 

Financial Information About Segments

The business segments of TFC Enterprises, Inc. are discussed in Note 14 to the Consolidated Financial Statements of TFC Enterprises, Inc., presented in Item 8 below.

Item 2.   Properties

Our principal executive offices, service center and a contract production office, are located in Norfolk, Virginia.  The combined facilities consist of approximately 36,000 square feet of space pursuant to a lease expiring in 2006.

The Company has point-of-sale contract production offices which, on a combined basis, total approximately 7,567 square feet of space pursuant to leases expiring from March 2003 to April 2005. 

We believe that our facilities are adequate for our current and near-term future requirements.

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Item 3.   Legal Proceedings

We are a party to several legal actions that are ordinary, routine litigation incidental to our business. We believe that none of those actions, either individually or in the aggregate, will have a material adverse effect on our results of operations or financial position.

Item 4.   Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of TFC Enterprises, Inc. was held on November 19, 2002, to consider two matters of business.  The matters brought before the shareholders and the voting results were as follows:

Election of Directors

The following directors’ terms of office as a director continued after the meeting: Andrew M. Ockershausen,  Douglas E. Bywater and Linwood R. Watson.

Ratification of the Appointment of Auditors

* “ Broker non-votes” occur where a broker holding stock in street name does not vote those shares.

PART II

Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters

Since December 22, 1993, TFC Enterprises, Inc. Common Stock has traded on the Nasdaq National Market System under the symbol “TFCE.”  Share price information with respect to the Common Stock is set forth in the “Selected Quarterly Data” table included below. As of March 14 2003 there were approximately 1,737 holders of the Common Stock, including approximately 165 holders of record. The TFC Enterprises, Inc. Bylaws now allow the Board complete discretion in setting the annual meeting.  No cash dividends have been paid with respect to the Common Stock since issuance.  We have no current plans to pay any cash dividends relating to the Common Stock in the foreseeable future. Any dividends on the Common Stock will be at the sole discretion of our Board of Directors and will depend upon our profitability and financial condition, capital requirements, statutory restrictions, requirements of our lenders, future prospects and other factors deemed relevant by our Board of Directors.  If any dividends are paid to the holders of Common Stock, all holders will share equally on a per share basis.

We have not issued any of our authorized preferred stock.

The following table sets forth the quarterly range of high and low sales price per share of the Company’s Common Stock for 2001 and 2002 as reported by the NASDAQ Stock Market.

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Item 6.   Selected Financial Data

The following table contains certain consolidated financial and operating data and is qualified by the more detailed Consolidated Financial Statements and Notes thereto included elsewhere in this Report.  The Consolidated Statements of Income Data as of December 31, 1998, 1999, 2000, 2001 and 2002 for the years then ended were derived from the Company’s Consolidated Financial Statements and Notes thereto and have been restated to present the Company’s subsidiary, First Community Finance, as discontinued operations.  The Operating Data has been derived from the unaudited internal records of the Company.  The consolidated financial data shown below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report.

Five-Year Summary of Selected Financial Data

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Information

Forward-looking and Cautionary Statements

We caution you that this report and other written and oral information presented by our management from time to time, including but not limited to reports to shareholders, quarterly shareholder letters, filings with the Securities and Exchange Commission, news releases, discussions with analysts and investor presentations, include “forward-looking statements” within the meaning of Section 27A of the Securities of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those acts.  Among other things, these statements relate to our financial condition, results of operation and business.  More specifically, these forward-looking statements address our business strategies, market potential, potential for future point-of-sale and bulk purchases, future financial performance and other matters that reflect management’s expectations as of the date the statements are made. These forward-looking statements are generally identified by the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” and similar expressions which are intended to identify forward-looking statements.  These forward-looking statements are based upon management’s knowledge at the time of the statements and assumptions about future events and involve certain risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements.  These factors include, without limitation: our ability to close the recently announced merger with Consumer Portfolio Services, Inc. (“CPS”), our dependence on our lines of credit; our ability to continue to obtain adequate funding under similar terms to purchase contracts; intense competition within our markets: the fluctuating interest rates associated with our line of credit, our reliance on estimates of future recoveries, based on historical recoveries, from prior and future years charge-offs and the impact of retail installment contract defaults.  Please refer to a discussion of these and other factors in this report and our other filings with the Securities and Exchange Commission.

We caution you that the foregoing list of important factors is not exclusive.  We do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf.

You should review this section in conjunction with the five-year Summary of Selected Financial Data included in Item 6 above and the Consolidated Financial Statements of TFC Enterprises, Inc., including the notes thereto included in Item 8 below.

General

We began operations in 1977 in Alexandria, Virginia, with the founding of The Finance Company by Robert S. Raley, Jr., our current Chairman of the Board and Chief Executive Officer.  Mr. Raley has spent his entire 43-year career exclusively within the consumer finance industry.  We now conduct operations primarily through The Finance Company, a wholly-owned subsidiary.

Through The Finance Company, we purchase and service retail installment sales contracts originated by automobile and motorcycle dealers in the sale of vehicles, consisting of new and used automobiles, vans, light trucks, and motorcycles on an individual basis.  Retail installment sales contracts are acquired on an individual basis after we have reviewed and approved the vehicle purchaser’s credit application. The primary focus of our business is retail installment sales contracts originated by dealers with consumers who are United States enlisted military personnel, in the E-1 through E-4 pay grades and non-military consumers who do not have access to traditional sources of credit.

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To achieve an acceptable rate of return and provide for credit risks, contracts are purchased from dealers at a discount to the remaining principal balance.  The discount is held in a nonrefundable reserve against which credit losses are first applied. We are based in Norfolk, Virginia, with Contract Production Offices throughout the United States.

Our purchases provide us with the ability to direct the credit underwriting process at the initiation of the retail installment sales contract.  Participating dealers benefit by having a source of financing for a group of customers who typically find financing difficult to obtain.  This financing allows a dealer to increase the number of vehicles sold and improves dealer profitability.  Consumers also benefit because the financing we provide enables them to purchase a vehicle they otherwise might not be able to buy.  As of December 31, 2002, $200.8 million, or 99%, of our gross contract receivables represented point-of-sale purchases, compared to $227.8 million, or 91%, at December 31, 2001 and $202.5 million, or 75%, at December 31, 2000.

In the bulk purchase business, we had emphasized acquisitions of portfolios of seasoned retail installment sales contracts.  These contracts normally had a payment history of at least three months.  While the typical bulk purchase was approximately $250,000, we had, at times, purchased portfolios totaling more than $12 million.  As of December 31, 2002, $2.4 million, or 1%, of our gross contract receivables was attributable to bulk purchases, compared to $20.3 million, or 9%, at December 31, 2001, and $64.5 million, or 25%, at December 31, 2000.

Although we underwrite and purchase contracts through the various contract production offices, the responsibility for servicing the accounts is centralized at our service center located in Norfolk, Virginia. 

On October 1, 2002, the Board of Directors authorized the Company, as the sole shareholder of First Community Finance, to sell substantially all the assets of First Community Finance.  On November 4, 2002, the Company sold the majority of its consumer finance receivables to an unrelated third party “buyer” for approximately $21 million.  Pursuant to the terms of the transaction, the buyer offered employment to the majority of First Community Finance’s employees and assumed all of the leases relating to the branch locations.  Total net proceeds were paid on the closing date in cash. 

Pursuant to the terms of the transaction, the Company has retained approximately $3.8 million in consumer finance receivables.  The Company has stopped originating loans through First Community Finance and is currently attempting to collect the remaining receivables.

Results of Operations

Results of Operations

Net income and earnings per basic common share

Effective January 1, 2002, the Company adopted FASB Statement Number 142, Goodwill and Other Intangible Assets. The Company has determined the impairment of goodwill is $6.8 million and as required by FAS 142 is recorded as a change in accounting principle.  We reported income from continuing operations of  $2.9 million, or $0.25 per basic common share, in 2002, compared to income from continuing operations of $4.6 million, or $0.40 per basic common share in 2001 and income from continuing operations of $3.8 million, or $0.33 per basic common share in 2000. We reported net income (loss) of $(4.0) million, or $(0.35) per basic common share, in 2002, compared to net income of $5.1 million, or $0.44 per basic common share in 2001 and net income of $4.1 million, or $0.36 per basic common share in 2000. The decrease in net income and earnings per share in 2002 compared to 2001 was primarily due to two items-decrease yield on interest-earning assets as well as a decrease in the asset base.  The increase in net income and earnings per share in 2001 compared to 2000 was primarily due to two items-lower cost of borrowed funds and lower operating expenses.

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Volume

Gross contracts purchased or originated in 2002 totaled $113.9 million, compared to $185.4 million in 2001 and $231.4 million in 2000. The decrease in 2002 volume compared to 2001 was attributable to a number of factors, our point of sale contract purchases volume was lower as a result of increased competition for the military contract purchases, there are fewer stateside military members due to increased overseas deployments, and we continue our more selective buying program in the company’s military and non-military purchases.  The decrease in 2001 volume compared to 2000 was attributable to the phasing out of the Bulk business from “Buy Here Pay Here” automobile dealers starting in March 2001. 

Gross contracts purchased or originated were as follows:

At year end 2002, we were purchasing automobile retail installment contracts through Contract Production Offices (“CPO’s”) located in Norfolk, Virginia; Killeen, Texas; Jacksonville, Florida; San Diego, California; Tacoma, Washington and Wichita Falls, Texas.

Net interest revenue

Net interest revenue was $20.6 million in 2002 compared to $27.6 million in 2001 and $29.5 million in 2000. The decline in net interest revenue in 2002 compared to 2001 and 2001 compared to 2000 was primarily due to lower yields on our earning assets resulting from the implementation of a more competitive program offered to the dealers and to a decrease in the amount of contract discount accreted to interest revenue as a yield enhancement because of the uncertain economic conditions of the economy.

The yield on interest earning assets was 18.31% for 2002 compared to 20.15% and 22.17% for the years of 2001 and 2000. The decrease in yield in 2002 compared to 2001 and 2001 compared to 2000 reflects a more competitive program offered to the dealers, a decrease in the amount of contract discount accreted to interest revenue as a yield enhancement because of uncertain economic conditions, and the dramatic decline in the Bulk portfolio which carried a higher yield.

The cost of interest bearing liabilities was 8.80% for 2002, compared to 9.93% and 10.47%, for 2001 and 2000.  The decrease in 2002 compared to 2001 reflects a lower overall one-month LIBOR rate for 2002 as well as the company’s successful access to the securitization market at not only lower rates, but on a fixed term as well.  The decrease in 2001 compared to 2000 reflects a lower overall one-month LIBOR rate for 2001.

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Net interest revenue

Other revenue

Other revenue was $1.1 million in 2002 compared to $1.5 million in 2001 and $1.7 million in 2000. The decrease in 2002 compared to 2001 reflects lower revenue related to restricted cash as well as lower other revenue related to the bulk business line.  The decrease in 2001 compared to 2000 reflects lower fee income by Recoveries Inc., which ceased operations in 2001. 

Operating expense

Operating expense was $16.1 million in 2002 compared to $20.3 million in 2001 and $24.5 million in 2000.  The $4.2 million decrease in 2002 compared to 2001 reflected the overall downsizing of the Company in relation to the reduction of receivables.   The $4.2 million decrease in 2001 compared to 2000 reflected the downsizing of the Bulk division and two small subsidiaries 

Operating expenses as a percent of interest earning assets decreased to 8.84% for 2002 from 9.06% and 11.83% in 2001 and 2000. The decrease in the operating expense ratio in 2001 over 2000 resulted from the downsizing of the Bulk division and two small subsidiaries. 

Provision for income taxes

We recorded a $1.8 million tax provision for 2002 compared to a $3.4 million tax provision in 2001 and a $2.9 million tax provision in 2000. The effective tax rate in 2002 of 39.0% and in 2001 of 42.7% is higher than the expected combined federal and state tax rates due primarily to goodwill amortization that is not deductible for tax purposes.

In 1993, contingent interest on our convertible notes was considered deductible for Federal income tax purposes but was treated as non-deductible for income tax expense in our financial statements.  We are continuing to negotiate with the IRS regarding the deductibility of the contingent interest.

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Financial Condition

Assets

Total assets decreased by $65.2 million, or 26%, to $181.6 million at December 31, 2002, from $246.8 million at December 31, 2001.  The decrease was primarily attributable to a decrease in point of sale contract purchases volume as a result of increased competition for the military contract purchases, fewer stateside military due to increased overseas deployments, and a more selective buying program in the company’s military and non-military purchases, a decrease in the bulk contract receivables and the write-down of $6.8 million related to goodwill.

Net contract receivables

Net contract receivables were $150.2 million, or 83% of total assets at December 31, 2002, compared to $182.9 million, or 74% of total assets at December 31, 2001. 

          Net contract receivables

Liabilities

Total liabilities were $134.5 million at December 31, 2002, a decrease of $61.2 million, or 31%, from $195.7 million at December 31, 2001.  The decrease in liabilities in 2002 reflected decreased borrowings as the result of the decrease in net contract receivables. Liabilities represented 74% of total liabilities and equity at December 31, 2002 compared to 79% at December 31, 2001.

Credit Quality and Reserves

Net charge-off of auto finance contract receivables

Net charge-off  (net of recoveries) to the allowance for credit losses and nonrefundable reserve were $25.5 million in 2002, or 13.99% of average net contract receivables, compared to $37.6 million, or 16.79%, in 2001, and $33.9 million, or 16.41% in 2000.

Provision for credit losses on auto finance contract receivables

Our primary business involves purchasing installment sales contracts at a discount from the principal balance.  A portion of this discount represents anticipated credit loss and based upon projected loss experience, is held in a nonrefundable reserve against which future credit losses will first be applied.  The remaining portion of the discount, if any, is recorded as unearned discount and accreted to income using the interest method over the contractual life of

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the related receivables.  Additional amounts necessary to cover estimated future credit losses are first reclassified from unearned discount to nonrefundable reserve then, if necessary, an amount is charged to income sufficient to maintain the combined allowance for credit losses and nonrefundable reserve at an amount considered by management to be adequate to absorb estimated future credit losses on the outstanding contract receivables.

Provision for credit losses is dependent on a number of factors, including, but not limited to, the level and trend of delinquencies and net charge-off, the amount of nonrefundable and refundable dealer reserves and the overall economic conditions in the markets in which we operate.  Due to the inherent uncertainty involved in predicting the future performance of these factors, there can be no assurance regarding the future level of provision for credit losses.

Reserves on auto finance contract receivables

The static pool reserve methodology is used to analyze and reserve for our credit losses. This methodology allows us to stratify our portfolio into separate and identifiable annual pools. The loss performance of these annual pools is analyzed monthly to determine the adequacy of the reserves. The loss performance to date combined with estimated future losses by pool year establishes the estimated loss for each pool year. These combined estimated losses are reduced by estimated future recoveries that are based on historical recovery performance to establish the estimated required reserve for credit losses. Estimates are reviewed regularly and if necessary, will be revised to reflect historical experience if it deviates materially from the estimates.  Included in the allocation for credit losses is $2.7 million, $0.7 million and  $2.2 million for 2002, 2001 and 2000 respectively that was reclassified from unearned discount to non-refundable reserves to absorb charge-offs.  These reclassifications reduce the amount of unearned discount and net service fees to be accreted to income over the contractual life of the related receivables, which impacts future interest revenue.

At December 31, 2002, the combination of allowance for credit losses, nonrefundable reserve and unearned discount totaled $10.0 million, or 6.1%, of gross auto finance contract receivables, net of unearned interest revenue compared to $16.7 million, or 8.4% at December 31, 2001. The decrease in the percentage of reserves to contract receivables in 2002 compared to 2001 and 2001 compared to 2000 is the result of the phase-out of the bulk purchases which historically has carried a higher charge-off percentage. 

The reserves as a percentage of gross auto finance contract receivables net of unearned interest at December 31, 2002, of 6.1% are less than net charge-off as a percentage of average net contracts receivable for 2002, of 13.99%. This difference exists primarily because the reserves include an estimate of future recoveries on prior year charge-off and future recoveries on current year charge-off that are not reflected in the current year charge-off percentage.  These estimated future recoveries are based on historical recovery performance and this estimate is an integral part of the evaluation of the adequacy of the reserves performed by management quarterly.  In addition, we have increased our penetration of ancillary products such as warranty and other products that minimize the loss incurred because of the difference between the debtors insurance coverage and the contract balance that occurs when the collateral is a total loss or is stolen.  Finally the ratio is lower due to an increase in the portion of the portfolio with lower expected loss because of the credit profile of the debtor. 

Our refundable dealer reserve decreased to $0.3 million at December 31, 2002 compared with $0.7 million at December 31, 2001.  Under certain of our bulk programs, contracts from dealers were purchased under a refundable, rather than nonrefundable reserve relationship.  Under certain circumstances, we may have to remit some or all of the refundable reserve back to the dealer.  No such liability exists under a nonrefundable reserve relationship.  Accordingly, the refundable reserve is carried as a liability on our Consolidated Balance Sheet and is not included in the calculation of our reserve ratio.

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Consolidated allowance and reserves for contract receivables

Net charge-off by line of business:

Delinquencies

Gross auto finance contract receivables that were 60 days or more past due totaled $11.9 million, or 5.87% of gross auto finance contract receivables at December 31, 2002, compared to $15.2 million, or 6.12%, at December 31, 2001.

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Gross auto finance contract receivables that were 30 days or more past due totaled $16.4 million, or 8.07% of gross auto finance contract receivables at December 31, 2002, compared to $22.5 million, or 9.09%, at December 31, 2001. 

Consistent with standard industry practice, we measure delinquency at each month end by classifying a contract that is unpaid for two monthly payments as 30 days delinquent and a contract that is unpaid for three monthly payments as 60 days delinquent. The Company has a policy to extend a loan under certain conditions.

Consolidated Delinquency

Liquidity and Capital Resources

Cash Flows

As shown on the Consolidated Statements of Cash Flows, cash and cash equivalents decreased by $0.1 million in 2002, to $0.3 million at December 31, 2002.  The decrease reflected $38.6 million of net cash used in financing activities which was offset by $3.3 million in net cash provided by operating activities and by $32.2 million of net cash provided by investing activities.  Net cash provided by investing activities principally reflected $31.8 million in net repayments of contract receivables.  Net cash used in financing activities reflected $77.8 million of net payments on our revolving lines of credit, $41.7 million net borrowings received under the receivable backed notes, $1.2 million of new subordinated debt, and $3.8 million paid on outstanding subordinated debt. Cash and cash equivalents decreased by $0.8 million in 2001, to $0.4 million at December 31, 2001.  The decrease reflected $12.2 million of net cash used in financing activities which was offset by $7.5 million in net cash provided by operating activities and by $4.0 million of net cash provided by investing activities.  Net cash provided by investing activities principally reflected $9.8 million in net repayments of contract receivables and a $5.5 million increase in restricted cash related to the receivable backed notes.  Net cash used in financing activities reflected $13.4 million of net borrowings on our revolving lines of credit, $23.5 million net payments received under the receivable backed notes, $1.8 million of new subordinated debt, and $3.9 million paid on outstanding subordinated debt.

Liquidity Management

Currently, TFC’s sources of liquidity are external financing which includes (i) a revolving line of credit (the “GE Facility“) in the maximum amount of $50 million until July 1, 2002 when it was reduced to $40 million, guaranteed by TFC’s parent company, TFC Enterprises, Inc., with General Electric Capital Corporation (“GE Capital”), (ii) a revolving line of credit (the “Westside Facility“) in the maximum amount of $40 million, with Westside Funding Corporation, a special purpose funding vehicle administered by WestLB, (iii) automobile receivables-backed notes and (iv) subordinated notes and other term debt.

GE Facility.  The GE Facility is scheduled to terminate on April 1, 2003.    As of the date of this report, TFC has not replaced the GE Facility and has no material prospects available to replace the facility.  In no event will TFC be able to replace the GE facility by April 1, 2003.  Accordingly, absent the CPS Merger transaction announced on the date of this Report, which is discussed below, TFC would be required to seek alternative financing sources and repay its

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outstanding balance of the GE Facility (the “CPS Merger”).  No assurance can be given that alternative financing sources in addition to the Westside Facility would be available in such event. 

Warehouse facility.  TFC entered into the Westside Facility in June 2001 due to a reduction in the maximum amount of the GE Facility and to facilitate future securitizations.  Warehouse facility transactions are conducted through TFC Warehouse Corporation I, a wholly-owned bankruptcy remote subsidiary of TFC.  The Westside Facility is scheduled to expire on July 1, 2003.    The Westside Facility requires TFC to have in place a $40 million revolving credit facility at all times.  In addition, the Westside Facility also provides for default in the event the Company receives a “going concern” explanatory paragraph in the audit report of its auditors.  The Company’s credit agreements, among other things, require compliance with monthly and quarterly financial maintenance tests and restrict the Company’s ability to create liens, incur additional indebtedness, sell or merge assets and make investments. 

Automobile receivables-backed notes.  Historically, the Company has used automobile receivables-backed notes as a primary source of term funding.  Between automobile receivables-backed notes transactions, the Company relies primarily on the revolving warehouse credit facility to fund ongoing receivable acquisitions.  The Company continues to evaluate market conditions and available liquidity and could decide to alter the timing of its automobile receivables-backed notes in the future depending on the Company’s cash position and available short-term funding.

Subordinated notes and other term debt.  The Company’s subordinated notes and other term debt consists of  Senior Subordinated Notes and Demand Notes.  In August 2000, the Company issued $5.0 million of unsecured subordinated notes.  The interest rate is 13.25% and interest is payable monthly. The notes may be prepaid subject to a prepayment penalty.  Principal payments of $0.1 million are due monthly beginning June 2002 with the final payment due June 2005.  In December 2001, based on the prepayment penalty, the Company was required to start making the monthly principal payments.  Therefore, the final payment will be November 2004.   In March 2002, the Company amended the agreement and principal payments of $0.2 million are due monthly beginning January 2003 with the final payment due June 2005.  The principal balance as of December 31, 2002 and 2001 was $5.0 million and $4.9 million, respectively.  From July 1998 to December 2002, the Company issued $2.3 million of unsecured subordinated debt due three years from origination.  These notes were offered pursuant to a private placement to a limited number of prospective investors, including but not limited to, the Board of Directors, officers and certain existing shareholders of the Company.  The unsecured notes bear interest at 15% per year.  Members of the Board of Directors, Executive Officers, and certain relatives have purchased $0.9 million of these notes.  The principal balance as of December 31, 2002 and 2001 was $1.0 million and $2.2 million, respectively.  From July 2000 to December 2002, the Company issued $1.7 million of unsecured subordinated debt due six months from origination. These notes were offered pursuant to a private placement to a limited number of prospective investors, including but not limited to, the Board of Directors, officers and certain existing shareholders of the Company. The unsecured notes bear interest at 12% per year.  Members of the Board of Directors and Executive Officers have purchased $1.7 million of these notes.  The principal balance as of December 31, 2002 and 2001 was $1.6 million and $1.0 million, respectively.  Interest payable on the 15% and 12% demand notes can be rolled into a 10% demand note.  The principal balance as of December 31, 2002 and 2001 was $0.3 million and $0.2 million, respectively.

In addition to receivable acquisition funding, the Company also requires substantial capital on an ongoing basis to fund automobile receivables-backed notes costs, servicing obligations and other cash requirements previously described.  The Company’s ability to borrow under the revolving warehouse credit facility is dependent upon its compliance with the terms and conditions thereof.  The Company’s ability to obtain successor facilities or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing business and the Company’s financial condition and results of operations.  Moreover, the Company’s growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities, or if it is unable to satisfy the conditions of borrowing under the revolving

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warehouse credit facility.  The Company consistently assesses its long-term receivable funding arrangements with a view of optimizing cash flows and reducing costs.

The Company’s automobile receivables-backed notes are originated through securitizations.  The Company’s securitization agreements require compliance with monthly, quarterly and cumulative tests.  If certain events or “triggers” occur, certain of the Company’s future cash flows may be negatively impacted.  These triggering events include, but are not limited to, greater than expected loss experience, negative changes in the Company’s credit ratings and non-compliance with certain financial covenants within the securitization.  Hitting these triggers may result in a significant restriction on the receipt of future servicing cash flows from the securitizations.  In addition, the Company may also lose its rights to be the servicer of the securitizations along with the associated servicing fee income.  The Company has hit certain of these triggers from time to time which have the affect of increasing credit enhancement requirements in the securitizations.

As discussed above, TFC’s principal sources of borrowing are (i) the GE Facility and (ii) the Westside Facility.  As of the date of this report, TFC has not replaced the GE Facility and has no material prospects available to replace the facility.  Because of the uncertainties resulting in the Company not having replaced its GE Facility with a facility that complies with the terms of the Westside Facility, the Company has received a “going concern” explanatory paragraph in the audit report of its auditors, which is an additional default provision that would cause the Company to be in default under the Westside Facility.  This default would cause the Company’s three securitization subsidiaries and the GE Facility to go into default under their terms as well.  Accordingly, absent the waivers discussed in the next paragraph, the GE Facility, the Westside Funding Facility, and the three securitization facilities would be in default on April 1, 2003. 

In connection with entering into the CPS Merger, the Company has obtained waivers of these defaults from GE, Westside, and the insurers on the three securitizations. In addition to waiving this default, GE also extended its facility until the earlier of the closing of the CPS Merger, the termination date of the CPS Merger, if applicable, and May 31, 2003.  Each of these waivers and the GE extension are tied to a closing of the CPS Merger.  If the Merger is not approved by shareholders or does not close for other reasons, each of these waivers will no longer apply.  In that circumstance, the Company would be forced to assess its options to protect its shareholders, including the possibility of filing for protection under federal and state bankruptcy laws.

Dividends

We did not declare dividends on our common stock during the years ended December 31, 2002, 2001 and 2000, nor do we anticipate paying cash dividends in the foreseeable future.  If and when we decide to declare cash dividends, the amount would be limited by certain provisions of our various credit agreements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, bad debts, investments, intangible assets, income taxes, financing operations, warranty obligations, restructuring, and contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for

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making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Contract Receivables

Contract receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-off or valuation accounts and net of any unamortized loan costs and unamortized discounts on purchased loans.

Credit losses

The Company’s primary business involves purchasing installment sales contracts at a discount from the remaining principal balance on both a bulk and point-of-sale basis.  A portion of this discount represents anticipated credit loss and based upon projected loss experience, is held in a nonrefundable reserve against which future credit losses will first be applied.  The remaining portion, if any, of the discount is recorded as unearned discount and accreted to income as discussed below. Additional amounts necessary to cover estimated future credit losses, if any, are first reclassified from unearned discount to nonrefundable reserve then, if necessary, an amount is charged to income sufficient to maintain the combined allowance for credit losses and nonrefundable reserve at an amount considered by management to be adequate to absorb estimated future credit losses on the outstanding contract receivables.

Management evaluates the reasonableness of the assumptions used in projecting the loss experience by reviewing historical credit loss experience, delinquencies, repossession and other recovery trends, the size of the finance contract portfolio and general economic conditions and trends.  Historical credit loss experience is monitored on a static pool basis.  Contract originations, subsequent charge-off and recoveries are assigned to annual pools and the pool performance is monitored separately.  Projected recoveries are considered in reserves anticipated for credit losses based on undiscounted amounts.  If necessary, any assumptions used will be changed in the future to reflect historical experience to the extent it deviates materially from that which was assumed.

It is generally the Company’s policy, related to the installment sales contracts purchased by TFC, to charge its nonrefundable reserve and then the allowance for credit losses for all contract receivables which are 180 days past due.  Any amounts collected subsequent to being charged off are restored to the nonrefundable reserve.

The carrying value of repossessed assets is reduced, through charge-off, to the lower of the unpaid contract balance or anticipated liquidation proceeds.

Goodwill Accounting Change

Effective January 1, 2002, the Company adopted FASB Statement Number 142, Goodwill and Other Intangible Assets. The Company has determined the impairment of goodwill is $6.8 million and has recorded the impairmentas a change in accounting principle.  Among the provisions of FASB Statement Number 142 is a requirement to disclose what reported net income would have been in all periods presented exclusive of amortization expense (net of related income tax effects) recognized in those periods related to goodwill, intangible assets no longer being amortized, and changes in amortization periods for intangible assets that will continue to be amortized together with related per share amounts.  Per FAS 142, no amortization expense was recognized in relation to goodwill for the year ended December 31, 2002 compared to $0.8 million for the year ended December 31,  2001.  Additionally,  net income for the year ended December 31, 2002 has been restated to reflect the cumulative effect of change in accounting principle.  The effect of this change in accounting principle for the year ended December 31, 2002

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resulted in an increase in accumulated deficit and a decrease in net income of $4.0 million, to a net loss of $5.8 million.

Intangible assets