(1) Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Significant Accounting Policies [Text Block]

(1) Summary of Significant Accounting Policies

Description of Business

  We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories, low incomes or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of vehicle purchase money loans.  In this report, we refer to all of such contracts and loans as "automobile contracts."

Basis of Presentation

  Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 8 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature.  In addition, certain items in prior period financial statements may have been reclassified for comparability to current period presentation. Results for the three-month period ended March 31, 2012 are not necessarily indicative of the operating results to be expected for the full year.

  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Specifically, a number of estimates were made in connection with determining an appropriate allowance for finance credit losses, valuing finance receivables measured at fair value and the related debt, valuing residual interest in securitizations, accreting net acquisition fees, amortizing deferred costs, valuing warrants issued, and recording deferred tax assets and reserves for uncertain tax positions. These are material estimates that could be susceptible to changes in the near term and, accordingly, actual results could differ from those estimates.

Other Income

  The following table presents the primary components of Other Income:

	March 31,		March 31,
	2012		2011
	(In thousands)
Direct mail revenues	$	1,619	$	1,168
Convenience fee revenue		832		714
Recoveries on previously charged-off contracts		97		187
Sales tax refunds		72		149
Other		486		178
Other income for the period	$	3,106	$	2,396

Stock-based Compensation

  We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of  ASC 718 “Accounting for Stock Based Compensation”.

  For the three months ended March 31, 2012 and 2011, we recorded stock-based compensation costs in the amount of $293,000 and $371,000, respectively.  As of March 31, 2012, unrecognized stock-based compensation costs to be recognized over future periods equaled $1.7 million. This amount will be recognized as expense over a weighted-average period of 2.5 years.

  The following represents stock option activity for the three months ended March 31, 2012:

				Weighted
	Number of	Weighted		Average
	Shares	Average		Remaining
	(in thousands)	Exercise Price		Contractual Term
Options outstanding at the beginning of period…………	8,431	$	1.53		N/A
Granted………………………………………………	-		-		N/A
Exercised……………………...………………………	(15)		0.77		N/A
Forfeited…………………………………………….	(245)		1.39		N/A
Options outstanding at the end of period……………..…	8,171	$	1.54		5.86 years
Options exercisable at the end of period…………..……	5,037	$	1.72		4.17 years

  At March 31, 2012, the aggregate intrinsic value of options outstanding and exercisable was $876,000 and $309,000, respectively. There were 15,000 shares exercised for the three months ended March 31, 2012 compared to 3,000 for the comparable period in 2011.  There were 823,000 shares available for future stock option grants under existing plans as of March 31, 2012.

Purchases of Company Stock

  During the three-month periods ended March 31, 2012 and 2011, we purchased 227,298 and 6,000 shares, respectively, of our common stock, at average prices of $1.15 and $1.34, respectively.

Reclassifications

  Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or total shareholders’ equity.

Derivative Financial Instruments

We do not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, from 2008 to 2010, we issued warrants to purchase the Company’s common stock in conjunction with various debt financing transactions. At the time of issuance, four of these warrants issued contained "down round" or reset features that are subject to classification as liabilities for financial statement purposes. These liabilities are measured at fair value, with the changes in fair value at the end of each period reflected as current period income or loss. Accordingly, changes to the market price per share of our common stock underlying these warrants with "down round" or price reset features directly affect the fair value computations for these derivative financial instruments. The effect is that any increase in the market price per share of our common stock also increases the related liability, which in turn would result in a current period loss. Conversely, any decrease in the market price per share of our common stock also decreases the related liability, which in turn would result in a current period gain. We use a binomial pricing model to compute the fair value of the liabilities associated with the outstanding warrants. In computing the fair value of the warrant liabilities at the end of each period, we use significant judgments with respect to the risk free interest rate, the volatility of our stock price, and the estimated life of the warrants. The effects of these judgments, if proven incorrect, could have a significant effect on our financial statements. The warrant liabilities are included in Accounts payable and accrued expenses on our consolidated balance sheets.    On March 29, 2012 we amended three of the four warrants that contained the “down round” features to remove those specific price reset terms.  On the date of the amendment, we valued each of the three warrants using a binomial pricing model as described above.  The aggregate value of the three amended warrants of $1.1 million was then reclassified from Accounts payable to Common Stock.  The remaining warrant with the “down round” feature was not amended and was valued and recorded at March 31, 2012 using a binomial pricing model to compute the fair value, which is included in Accounts payable and accrued expenses, and will continue to be subject to quartely valuations.

Financial Covenants

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of March 31, 2012, we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt agreements contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.

Finance Receivables and Related Debt Measured at Fair Value

In September 2011 we purchased approximately $217.8 million of finance receivables from Fireside Bank. These receivables and the related acquisition debt are recorded on our balance sheet at fair value.  There are no level 1 or level 2 inputs (as described by ASC 820) available to us for measurement of such receivables, or for the related debt.   Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and debt, and are based on the best information available in the circumstances. The valuation method used to estimate fair value may produce a fair value measurement that may not be indicative of ultimate realizable value. Furthermore, while we believe our valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial instruments could result in different estimates of fair value.  Those estimated values may differ significantly from the values that would have been used had a readily available market for such receivables or debt existed, or had such receivables or debt been liquidated, and those differences could be material to the financial statements.